On July 10, the Dubai Virtual Assets Regulatory Authority (VARA) suspended BitOasis’s conditional license to engage in activities related to digital assets. This action by the Dubai regulator is representative of and lends credence to the novel approach the United Arab Emirates (UAE) and its domestic regulators have taken towards regulation of digital assets.
The UAE approach has prioritized providing regulatory clarity and guidance to entities that want to engage in activities related to digital assets – providing notice as to the types of activities are permitted and prohibited.
Bret Johanneson received his law degree from New York University and will be working as associate at a law firm in New York this fall.
In contrast, U.S. regulators, as demonstrated by the charges against Coinbase and Binance in early June, have organized around an approach that provides no advance notice to industry participants, opting instead to bring charges which rely on untested and novel legal theories. (Another example is the SEC’s action against Ripple for issuing unregistered “securities,” which concluded Thursday when the judge found that XRP is a security only in certain circumstances.)
The UAE has followed a different playbook, and the digital asset industry has taken notice. CoinDesk named two UAE cities as major crypto hubs in 2023, and to a large extent industry participants are voting with their feet. Scores of companies are either relocating wholesale to the country or opening satellite offices there.
To understand why the UAE has been able to implement such a progressive and responsive digital assets regulatory regime, look no further than the UAE form of government. In short, the UAE is made up of seven emirates, with each emirate (i.e. state) empowered to legislate on any matter not within the exclusive jurisdiction of the UAE federal government (i.e. foreign affairs, defense and security).
Each emirate is left to determine for itself how it will regulate digital assets – a situation which has fostered intrastate competition through regulation for business and investment effected through incentives, including tax breaks and designated free economic zones. Abu Dhabi and Dubai in particular have assumed leading roles in attracting digital asset industry participants to their jurisdictions.
Abu Dhabi and Dubai have each devised comprehensive regulatory frameworks for the regulation of digital assets which address many of the pitfalls of other jurisdictions’ approaches, not least of which involves defining the subject of regulation, digital assets.
For example, the Abu Dhabi Global Market (ADGM) has provided clear guidance for classification and treatment of various digital assets, clearly distinguishing between “virtual assets” like Ethereum and Bitcoin, “digital securities” and other tokens which provide different types of utility. Like the ADGM, VARA has defined digital assets with specificity, though opting for a more expansive taxonomy – defining “virtual assets” as “any digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes,” with VARA reserving the right to police the bounds of that definition at its discretion.
These policies, while different, stand in stark contrast with the U.S. approach – characterized by agency turf wars over who gets to regulate what, with industry participants stuck in the crossfire.
Another complaint lobbed by industry participants towards U.S. regulators has been lack of clarity around registration. On this front the ADGM and VARA have also distinguished themselves, providing clear roadmaps regarding registration and licensure requirements for digital asset businesses looking to engage in regulated activities.
To be authorized to carry on an ADGM-approved digital assets business, a business simply needs to apply for a Financial Services Permission and follow applicable laws. Those seeking a license to conduct business as a VARA-approved “Virtual Asset Service Provider” adhere to a similar process.
As demonstrated by VARA’s suspension of BitOasis’s condition license for the minimum viable product of its exchange, these permissive frameworks are not merely a blank check for industry participants to operate with impunity, and do have bite.
However, even with BitOasis and others’ enforcement actions in mind, ADGM and VARA’s straightforward regimes for registration are far and away preferable to complying with the SEC’s guidance on paths to registration, which is, by contrast, downright impenetrable.
The digital assets industry is in a constant state of flux, with years taking place in weeks, and norm-breaking a norm in and of itself – such an industry deserves dynamic regulation to match. The UAE seems to be on its way to achieving such a goal – whether the U.S. can match their efforts is to be determined.
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