Middle East-based crypto attorney Irina Heaver wrote the following guest post:
2022 has been an eventful year for Web3 founders, crypto lawyers and financial regulators. The industry has witnessed multiple bankruptcy and fraud claims that make Madoff look like an angel. Some of the most high-profile influencers and sports stars have been tracked by regulators for illegally promoting their tokens. Developers of open software code have been jailed and DAOs have been sued.
I’ve been practicing law for 20 years, and if you ask me, this was too much regulatory action in one year.
But some things are now certain. Regulators will come furiously after Web3 and crypto projects. Gone are the days of happily avoiding them by hiding in offshore jurisdictions.
Smart long-term founders realize that in order to raise money from Tier 1 funds and openly onboard users, the project must meet certain regulatory requirements to the extent possible today. I was.
As such, several countries around the world have openly declared their ambition to lead regulatory efforts in the Web3 and crypto space to provide consumers, founders and investors with the desired certainty.
The United Arab Emirates is certainly leading the way, offering ample choice of economic and financial free zones and attracting founders with “crypto licenses” of all shapes and sizes.
Let’s explore UAE’s choice of jurisdiction for Web3 and Crypto founders and investors.
United Arab Emirates Financial Regulations
Financial regulators regulate financial services activities in the UAE. So let’s say your Web3 project incorporates traditional financial activities such as banking, brokerage, custody, payment services, or investment management. If so, it may come under the jurisdiction of the UAE financial regulators.
United Arab Emirates Corporate Jurisdiction:
- mainland or land – A company registered with the Department of Economic Affairs of Le, one of the seven emirates. Dubai Department of Economic Affairs (DED), Abu Dhabi Department of Economic Development (ADDED).
- economic free zone – There are over 40 free zones in the United Arab Emirates and over 30 in Dubai alone.
- DMCC is the most famous and has a flagship crypto center that currently hosts over 500 crypto and web3 companies.
- financial free zone – There are two financial free zones: Abu Dhabi Global Market (ADGM) and Dubai International Financial Center (DIFC).
- offshore jurisdiction – Two economic free zones provide offshore jurisdiction for incorporation. Jebel Ali Free Zone and RAK International Corporate Center.
The UAE has two financial regulators.”main land‘ Also ‘land‘:
- (a) The Emirates Securities and Commodities Authority (ESCA), which regulates the issuance of securities in the UAE mainland and UAE Free Zones (excluding Financial Free Zones: DIFC and ADGM).
- (B) The UAE Central Bank is the body that supervises and regulates the activities of the UAE’s banking and insurance sector.
two specialties debteconomical debtLee Z.thing United Arab Emirates with its own financial regulator:
(a) the Dubai Financial Services Authority (DFSA), which regulates financial activities in the Dubai International Financial Center (DIFC), a financial free zone in Dubai independent of the onshore UAE;When
(b) The Financial Services Regulatory Authority (FSRA) regulates financial activities in the Abu Dhabi Global Markets (ADGM), a financial free zone in Abu Dhabi independent of the land-based UAE.
In addition to mainland jurisdictions and two financial free zones, the UAE has over 40 economic free zones. Each has varying degrees of autonomy in obtaining licenses for various business activities.
And to confuse those still paying attention, two economic free zones offer offshore jurisdictions to incorporate legal structures suitable for family trusts and foundations.
In the United Arab Emirates, when a company is formed, it is issued a trade license called “Company Formation Document” in English to reflect its nature, which is a misleading term.
Sometimes called a “license” for short, it is often confused with regulatory approval and oversight by financial regulators. “My girlfriend’s Web3 VC fund has an airport free zone license” is something I often hear from newbies. First, the Airport Free Zone is not a financial regulator and cannot issue licenses for venture funds. Then there are “company formation documents” which contain “business activities” which are loosely similar to investment activities.
This point is important for investors to understand and not misunderstand that they are investing in unregulated entities.
Crypto regulations in the United Arab Emirates
ESCA has issued Decision No. 23 of 2020 on Regulation of Cryptocurrency Activities ( Crypto asset regulation) aims to regulate the offering, issuance, listing, trading and related financial activities of crypto assets in the United Arab Emirates.
As informed by the ESCA following our recent conversation with the ESCA, the crypto-assets regulations have yet to come into force.
Two years later, on March 9, 2022, Dubai Law No. 4 of 2022 on the Regulation of Virtual Assets established a brand new Dubai Regulator known as the Virtual Assets Regulatory Authority (VARA). VARA’s mandate includes regulating virtual asset service providers (i.e. crypto exchanges, crypto VC funds, NFT platforms, etc.) in the Emirate of Dubai only, with the exception of DIFC, a financial free zone with its own financial regulator. will be .
VARA has not yet published regulations to regulate such virtual asset service providers. However, we have already issued multiple MVP endorsements. The most notable one was issued to the infamous FTX.
Financial Services and Markets Regulations 2015 (FSMR) establishes the legislative and regulatory framework for financial services in ADGM. In 2018, ADGM amended his FSMR to regulate “cryptographic activity.” Several companies have been granted licenses to operate cryptocurrency exchanges and cryptocurrency custody services. The most important one is Binance Custody.
- Regulated Web3 VC funding
- crypto storage provider
- A holding company that invests in shares of the Web3 project
The Dubai Financial Services Authority (DFSA) recently implemented a “Crypto Token Scheme” at the DIFC.
The Crypto Token Scheme has expanded the scope of many existing financial services activities to apply to the offering of products and services related to “crypto tokens”. It then limited the use of cryptographic tokens to those “approved” by the DFSA. DFSA currently recognizes Bitcoin, Ethereum, and Litecoin cryptographic tokens.
utility and non-fungible tokens (NFTs) are specifically excluded from financial regulation. My favorite privacy coin (because privacy is a human right) is banned in his DIFC.
Also, who will tell the DIFC that Bitcoin is not a crypto token? Not me.
- Regulated hedge funds investing in cryptocurrencies
- family office
- Traditional financial services activities including investment advice, trading/arranging investments, trading and custody expanded to include some very limited crypto activities
- People who think bitcoin is a crypto token
Economy F.Lee Z.thing
Recently, there are three non-financial economic free zones that have started establishing non-financial enterprises to conduct crypto-related business activities, announced the “Crypto Center” and signed an MOU for non-public content with ESCA.
- DMCC – Dubai Multi Commodity Center
- DWTC – Dubai World Trade Center
- IFZA – International Free Zone Authority
The economic free zones mentioned above have announced various partnerships with major web3 and crypto projects and are otherwise busy with marketing efforts, engaging in friendly commercial competition with each other.
DMCC is a very interesting use case. They set up a thriving crypto center with over 500 companies already registered. This is all thanks to the leadership of Executive Chairman Ahmed bin Sulayem and Head of the Crypto Center Gustavo Figueroa.
If you want to be part of a vibrant crypto community, the DMCC Crypto Center could be your choice.
- Starting a Web3, Metaverse, or NFT project
- A private holding company that manages own cryptocurrency holdings or investments for experienced crypto entrepreneurs and high net worth individuals
- single family office
Perfect weather 9 out of 12 months, tax free life, political stability and perfect infrastructure for family and business life make UAE the preferred jurisdiction for Web3 and crypto founders It is not surprising that it is becoming
However, there are still some activities for which the UAE is not an appropriate jurisdiction: utility token issuance. In such cases, corporate structuring is required if the tokens are launched in other appropriate jurisdictions with a legal opinion that the tokens are utility tokens and are outside the scope of financial services regulation. . The same applies to governance tokens when building decentralized autonomous organizations.
In the above case, a well-structured investor-facing project would maintain a UAE presence and leverage everything that the appropriate UAE jurisdiction has to offer, while structuring token issuance in another jurisdiction.
Ahlan wa Sahlan, welcome to UAE!