CRYPTOCURRENCY PLATFORMS IN THE UAE: ACCEPT ALL?

The price of Bitcoin, the most well-known cryptocurrency, has skyrocketed over the last 12 months with the most recent significant appreciation in its price directly caused by the approval of spot Bitcoin exchange-traded products by the U.S. Securities and Exchange Commission.

As a result, interest in cryptocurrency trading and investments, including among UAE companies, citizens, and residents, continues to grow rapidly. Presently, the easiest way to gain exposure to cryptocurrencies, such as Bitcoin and Ethereum, still seems to be the opening of an account with one of the many cryptocurrency platforms.

One important aspect to consider when selecting a cryptocurrency platform to trade on is whether the platform is licensed and regulated in the UAE to provide cryptocurrency-related services. At the very minimum, this should provide users with some comfort in knowing that the platform is connected to the UAE, has been vetted, and is overseen by the local specialised authorities. Alternatively, platform users are at risk of placing their funds with an outfit with no apparent connection to any jurisdiction and, should something go wrong, no realistic chance of retrieving their funds.

LICENSING

Since 2022, any cryptocurrency platform engaging in activities in the onshore UAE must be licensed by the Securities and Commodities Authority or a local authority in the UAE.

Dubai Law No. 4 of 2022 Concerning the Regulation of Virtual Assets (Dubai’s Virtual Asset Law) came into effect on 9 March 2022.

In the Emirate of Dubai (excluding the Dubai International Financial Centre (DIFC)), the responsibility for regulating the provision, use, and exchange of virtual assets in and from the Emirate of Dubai falls under the purview of the Virtual Assets Regulatory Authority (VARA).

According to VARA’s list of licensed ‘Virtual Assets Service Providers’ (VASP), as at the date of this article, there are 17 entities forming the public register. Yet, one must remain cautious because placement on the list is not an automatic sign of approval: 11 entities’ license status is ‘Active’, one entity’s license status is ‘Non Operational’, and five entities’ license status is ‘Pending’, i.e., remains subject to the entities’ fulfilment of specific conditions and qualifying for operational approval.

Furthermore, VASP licenses are granted for specific activities, such as custody or exchange services, and limited to, for example, servicing institutional investors and qualified investors only, i.e., finance professionals and sophisticated seasoned traders and not retail investors.

It should also be mentioned that the Dubai Financial Services Authority (DFSA), an independent regulator of financial services and related activities for the DIFC, operates a comprehensive framework for regulating financial services of DIFC-licensed companies that provide crypto tokens financial services in or from the DIFC. Two years after Dubai’s Virtual Assets Law, on 8 March 2024, DIFC’s Digital Assets Law (DIFC Law No. 2 of 2024) came into effect along with, a new Law of Security (DIFC Law No. 4 of 2024) and related amendments to select existing legislation to cater for the consequences of the new digital assets regime and revised security regime.

In the Abu Dhabi Global Market (ADGM), a similar regulatory framework is overseen by the Financial Service Regulatory Authority (FSRA) based on the ADGM’s Financial Services and Markets Regulations (FSMR) and various other related guidance.

GOVERNING LAW AND DISPUTE RESOLUTION

Another aspect to bear in mind is the actual terms and conditions that one is accepting when opening an account with a cryptocurrency platform and entrusting it with considerable amounts of money.

When reviewing the platform’s terms and conditions one should, among other things, ascertain the applicable governing law and dispute resolution mechanism offered by the platform to its users to avoid, should a dispute arise, unpleasant surprises.

Upon our recent review of standard terms and conditions of VARA-licensed cryptocurrency platforms, we noted a great variety of proposed governing laws, including British Virgin Islands, England and Wales, Hong Kong, Singapore, and UAE. Similarly, a myriad of options with respect to dispute resolution mechanisms, including, on one side, mediation/arbitration clauses referring to DIAC, DIFC-LCIA (dismantled), HKIAC, JAMS, SIAC and, on the other side, litigation clauses referencing courts of Dubai, England and Wales, and Hong Kong.

Thus, users should take care as to which governing law and dispute resolution mechanism they are willing to accept when registering with a cryptocurrency platform.

CONSUMER PROTECTION AND ARBITRABILITY

A further point that users may wish to explore (in practice, this is likely to happen when a dispute has already arisen) is the applicability of the governing law and/or legitimacy of the platform’s dispute resolution mechanism vis-à-vis consumer protection mechanisms afforded to retail investors or consumers in the UAE.

CONCLUSION

Currently, there are limited technical and practical safeguards against user mistakes, cryptocurrency accounts being compromised, and cryptocurrency platforms’ lack of care that may bring about considerable losses to the users’ account balances within moments. Accordingly, and at the very least, users should exercise some degree of due diligence when registering their accounts with the cryptocurrency platform that they select for their investments or trading.