An extract from The Virtual Currency Regulation Review - 2nd edition
Introduction to the legal and regulatory framework
The United Arab Emirates (UAE) has a developing legal system that has rapidly modernised in recent years. The overall legal system is a civil law system influenced by shariah (Islamic law), of which the major legal codes include the Civil Transactions Law, the Commercial Transactions Law, the Penal Code and the Commercial Companies Code. In addition to UAE federal law, each of the seven emirates of the UAE (Dubai, Abu Dhabi, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah) have their own laws and regulations in areas where there is no federal law. In the field of financial and capital markets, the UAE Central Bank and the Securities and Commodities Authority (SCA) are, however, the federal regulators.
Each emirate also has its own free zones, which have limited independence from the emirate and federal law that applies to foreign investment restrictions and customs. There are, however, two financial free zones established pursuant to the UAE Constitution and federal law that are entirely separate jurisdictions in the sense that they have a regime of civil and commercial laws separate from the remainder of the UAE. The two free zones are the Dubai International Financial Centre (DIFC), where the regulator is the Dubai Financial Services Authority (DFSA), and the Abu Dhabi Global Market (ADGM), where the regulator is the Financial Services Regulatory Authority (FSRA). The DIFC applies a common law system modelled on English common law, while the ADGM applies English common law itself. UAE federal criminal laws do, however, apply in the DIFC and the ADGM (e.g., the federal anti-money laundering laws). Where necessary, the onshore UAE, the DIFC and the ADGM are dealt with separately in this chapter.
Although distributed ledger technology is presented as a government priority, the regulation of virtual currencies in the UAE remains limited, apart from in the ADGM, which has recently issued extensive regulation and consequently attracted significant interest by industry players. Although virtual currencies are not prohibited, the SCA and the DFSA have issued circulars to caution investors on virtual currencies, without, however, taking a firm regulatory position.
A major topic in the UAE is the different regulatory positions that will be adopted by the UAE federal regulators (the Central Bank and SCA) and free zone regulators (the DFSA and FSRA). With the usage of cryptocurrencies and tokens becoming more popular in the Middle East, and the aspiration of the UAE to be at the forefront of new business regulations, we anticipate that the UAE will seek to adopt regulatory measures that are perceived as being pro-business. Regulators in the UAE are most likely to follow standards developed by international best practices and are likely to follow the recent FATF guidelines on cryptocurrencies.
The SCA has announced the formation of a fintech team for the purpose of implementing fintech initiatives and updating the SCA with the latest fintech developments. The SCA stated that it would issue ICO regulations in autumn 2018, but as at 25 June 2019 no regulations have been issued. Moreover, the Dubai government has launched the Dubai Blockchain Strategy, under which blockchain technology is being studied and assessed to put all transactions with governmental authorities onto a blockchain by 2020. Using such technology may, in suitable instances, be cost-effective and more efficient for all the parties involved. In 2018, it was announced that the DIFC was exploring ways to transform into a blockchain-powered judiciary. In June 2019, the Dubai Land Department announced that it had signed an memorandum of understanding with Du, one of the state's telecoms operators, to launch blockchain-based real estate services, on a Du-developed blockchain said to be interoperable with both the Hyperledger and Ethereum blockchains. As the government's main goal is a high level of customer satisfaction across the board, it will prioritise exploring this technology, which will trigger the need to develop respective regulations.