A general introduction to the regulation of virtual currencies in Saudi Arabia

All questions

Introduction to the legal and regulatory framework

There are currently no laws in the Kingdom of Saudi Arabia (KSA) that are specific to the governance of virtual currencies. However, there are various laws in KSA that may be relevant to virtual currencies (and related activities) depending on their type, form, classification or application.

In the past, the Saudi Central Bank (previously known as the Saudi Arabian Monetary Authority) (SAMA) issued warnings against trading in virtual currencies because of their 'high risk', that they are not subject of government supervision nor approved as official currencies in KSA and that 'no persons are licensed to provide such practices' by regulators in KSA.² This was also reiterated by the Ministry of Finance stating that '[s]uch crypto currencies have been associated with fraudulent activities and attract suspicion of use in illegal and illegitimate financial activities in addition to their high-investment risks related to frequent price fluctuations'.³

Further, it is understood that banks and other financial institutions (and branches of foreign banks operating in KSA) regulated by SAMA are not permitted by SAMA to deal with virtual currencies without its approval.

By way of background, the paramount body of law in KSA is the Sharia. The Sharia is comprised of a collection of fundamental principles derived from a number of different sources, which include the Holy Qu'ran and the Sunnah (the witnessed sayings and actions of the Prophet Mohammed). In addition to the Sharia, Saudi Arabian law is also derived from enacted legislation. Legislation is enacted in various forms, the most common of which are royal orders, high orders, royal decrees, Council of Ministers' resolutions and Council of Economic and Development Affairs' resolutions and resolutions and circulars of ministries and other governmental bodies. All such laws are ultimately subject to, and may not conflict with, the Sharia and each Saudi Arabian court or other adjudicatory authority is required to interpret secular legislation accordingly. There are, therefore, numerous enacted pieces of legislation covering banking, capital markets, insurance, and funds, all of which are subject to Sharia as applied in KSA.

References to Saudi Arabian law in this chapter include the Sharia as construed and applied in KSA and all published enacted legislation referred to above and having the force of law in KSA.

Securities and investment laws

The primary legislation regulating the offering of securities in KSA is the Capital Market Law and various implementation regulations issued pursuant to the Capital Market Law. The Rules on the Offer of Securities and Continuing Obligations (among other implementing regulations) provide a legal framework governing the offering of securities in KSA.

Offering includes issuing securities, inviting the public to subscribe in securities or the direct or indirect marketing of securities, or any statement, announcement or communication that has the effect of selling, issuing or offering securities. Securities are defined to mean any of the following:

1. shares: a share of any company wherever incorporated. The definition of 'share' includes every instrument having the characteristics of equity;
2. debt instruments: a tradeable instrument creating or acknowledging indebtedness issued by companies, the government, public institutions or public organisations (but excluding: an instrument creating or acknowledging indebtedness for the consideration payable under a contract for the supply of goods or services, or for money borrowed to defray the consideration payable under a contract for the supply of goods or services; a cheque, a bill of exchange, a banker's draft or a letter of credit; a banknote, a statement showing a balance on a bank account, or a lease contract or any other evidence of disposition of property; and a contract of insurance);
3. warrants: warrants and other instruments entitling the holder to subscribe for any shares or debt instruments;
4. certificates: certificates or other instruments which confer contractual or property rights (in respect of any shares, debt instruments, warrants, being a security held by a person (other than the person on whom the rights are conferred by the certificate or instrument); and the transfer of which may be effected without the consent of that person; but excluding, in each case, any certificates or instruments which confer contractual or ownership rights of the type of the options, futures or the contracts for differences, and excluding any certificate or instrument which confers rights in respect of two or more securities issued by different persons);
5. units: the share of any owner in any fund consisting of units or a part of it. Each unit shall be treated as a common share in the net assets of the fund;⁴
6. options: any option to acquire or dispose of a security; a currency; oil, silver, gold, platinum or palladium; or an option to acquire or dispose of an option in respect of any of these;
7. futures: rights under contracts for the sale of a commodity or property of any other description under which delivery is to be made at a prospective date and at a price agreed on when the contract is made, but excluding rights under any contract which is made for commercial and not investment purposes;
8. contracts for differences: any contract for differences or any other contracts the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in: the value or price of property of any description; or an index or other factor designated for that purpose in the contract; but excluding: rights under a contract if the parties intend that the profit is to be secured or the loss avoided by one or more of the parties taking delivery of any property to which the contract relates; rights under a contract under which money is received by way of deposit on terms that any return to be paid on the sum deposited will be calculated by reference to a specific index or other factor; and rights under a contract of insurance;
9. long-term insurance contracts: any long-term insurance contract specified by the Capital Market Authority (CMA); and
10. any right to or interest in any of the above.

In addition to the offering of securities, the following activities are also regulated, and a person must not carry on such activities in KSA unless such person is an authorised person authorised by the CMA or is an exempt person as specified in the Securities Business Regulations:

1. dealing: is where a person deals in a security as principal or as agent, and dealing includes selling, buying, managing the subscription or underwriting securities;
2. arranging: is where a person introduces parties in relation to securities business, advises on corporate finance business or otherwise acts to bring about a deal in a security;
3. managing: is where a person manages a security belonging to another person in circumstances involving the exercise of discretion;
4. advising: is where a person advises a person on the merits of that person dealing in a security or exercising any right to deal conferred by a security; and
5. custody: is where a person safeguards assets belonging to another person which include a security, or arranges for another person to do so, and custody includes taking the necessary administrative measures.

As will be noted from the above, unlike certain other jurisdictions, the definition of securities is limited to those instruments that are enumerated, and neither the plain meaning of the word 'security' nor the satisfaction of a legal test such as the Howey test would be required to be considered. Further, the activities regulated by the CMA are each in respect of securities, other than in respect of custody services, the latter includes any assets belonging to another person (and not just securities). In that respect, cryptocurrencies, such as Bitcoin and Ether, are not likely to constitute securities for the purpose of Saudi Arabian law and therefore would not be within the regulatory remit of the CMA, unless custody activities are to be carried out in respect of them.

However, in respect of any initial coin offering (ICO), if such coin or token is in respect of a company (wherever incorporated) and has the characteristics of equity, then this would constitute a security for the purposes of the regulations of the CMA and fall within the remit of such regulations in respect of any of the above-mentioned activities (namely, any offering, dealing, arranging, managing, advising or custody).

Banking and money transmission

SAMA is the principal regulator in respect of banking activities, financing activities and insurance and reinsurance services⁵ in KSA. Under the applicable laws and regulations governing such activities and services, SAMA has powers, among others, to issue circulars to licensed persons providing recommendations or additional requirements to be adhered to in addition to supervising and sanctioning persons carrying out any of the regulated activities, including providing warnings, issuing fines and revoking any licences it has issued. Certain breaches of the laws and regulations may also attract imprisonment of the persons involved.

'Banking Business' is a regulated activity in KSA. Article 2 of the Banking Control Law states that no legal or natural person who is not licensed in accordance with the provisions of this law may conduct any Banking Business in the Kingdom as its core business. The law defines Banking Business as receiving funds on deposit (fixed or current), opening current accounts and letters of credit, issuing letters of guarantee and paying and collecting under cheques, drafts and other papers of value, discounting notes and bills of exchange and other commercial papers, conducting foreign exchange activities and other banking business. The reference to 'other banking business' in the definition, based on the fact that lending is generally regarded (as a matter of Saudi Arabian and international market practice) as constituting banking business, captures the provision of loans or other banking products (however they are structured) as part of a business in KSA that requires a licence under the Banking Control Law. This reference also includes other typical banking activities such as payment services and foreign currency exchange services.

Financing activities, which includes real estate finance, production asset finance, finance leasing, credit card finance, consumer finance and microfinance, are regulated activities in KSA. The Finance Companies Control Law requires that a person be licensed in accordance with the provisions of such law (and any other applicable laws) prior to engaging in any such financing activities. Licensed entities are required to engage in finance activities in a manner that does not conflict with the principles of Sharia as stipulated by the Sharia committees, whose members are selected by that entity, without prejudice to the integrity of the financial system and equity of transactions.

Operators of payment systems⁶ and providers of payment services⁷ inside and outside KSA providing services for KSA customers, are required to be licensed by SAMA under the Payments and Services Law and the Payment Services Provider Regulations before providing any such services. Payment services includes the issuance (whether by opening of e-wallets or otherwise) of electronic money, which is defined as monetary value represented by a claim on the issuer which is:

1. stored electronically (in an e-wallet or on a payment instrument), including magnetically;
2. issued on receipt of funds;
3. used for the purposes of making payment transactions; or
4. accepted as a means of payment by persons other than the issuer.

A person is deemed to carry out payment services in KSA where they invite a person in KSA to enter into a payment service agreement or market or promote any payment service to persons in KSA. In that respect, if a coin or token satisfies any of these elements, the issuer of such coin or token would be subject to SAMA's licensing requirements. However, because of the nature of most virtual currencies and their decentralised nature, it may be difficult to identify the relevant issuer.

In most cases virtual currencies are unlikely to constitute payment systems or payment services for the purpose of the Payments and Services Law and the Payment Services Provider Regulations as they are arguably not being 'carried on by way of business' by any particular person. However, if a blockchain could be considered a payment initiation service⁸ then such activity 'carried on by way of business' would fall within the remit of these regulations.

Foreign currency exchange is also regulated by SAMA and requires a licence pursuant to the Rules Regulating Money Changing Business. However, it is not clear whether a virtual currency would constitute a 'foreign currency' for the purpose of these rules. SAMA could clarify this and would have the ability to specifically include virtual currencies within the remit of the rules. SAMA can impose fines for up to 10,000 Saudi riyals for each violation by any person carrying out such activities without a licence (or otherwise violates such rules), in addition to issuing warnings and suspending such activities (among other things).