The pandemic hastened the digitisation of the financial sector, and with that came a rising interest in cryptocurrencies.
Traditionally met with distrust and dislike by the status quo, cryptocurrencies – impossible to counterfeit and anonymous – are now gaining worldwide traction, and we've all seen the meteoric rise and fall (and rise again) of the likes of Bitcoin. Other key benefits include the speed at which secure, anonymous transactions can be made. Instability and volatility in cryptocurrency trading are now being replaced by durability and reliability.
As a global financial centre, it's no surprise Dubai's lawmakers have been carefully monitoring the rise of cryptocurrencies, and the forward-thinking city-state has now announced ambitious plans to become a leading crypto hub by 2025.
Keeping pace with the sector's growing maturity, Dubai-headquartered BitOasis, the MENA region's largest cryptocurrency exchange, recently reported cryptocurrency transaction volumes in excess of US$3 billion in the first half of 2021 alone.
If we agree virtual assets are here to stay, it's gratifying to know that Dubai and the UAE are creating a legal and regulatory framework to protect everyone and ensure transparency in what has traditionally been viewed as something of an unregulated, secretive sector.
Crypto Centre heralds new era
Already a work in progress, the Securities and Commodities Authority (SCA) is looking into licensing of crypto sector companies in the UAE, with guidelines set to be released imminently.
Those looking to set up in the UAE as a (regulated) crypto exchange operator, custodian, broker or advisor will need to obtain a No Objection Certificate (NOC) from the SCA. These regulated activities require an NOC to proceed with any company licence application. Details are still being ironed out at the time of writing (December 2021).
First important steps for the region have been taken. In spring 2021, the Dubai Multi Commodities Free Zone (DMCC) as well as Dubai Airport Free zone (DAFZA), signed an agreement with the SCA, allowing cryptocurrency trading with established regulations.
Free zone DMCC launched a Crypto Centre in May 2021, in collaboration with blockchain start-up co-working space provider CV Labs. As the first regional free zone to offer government-issued licenses to trade in crypto-commodities, the new centre is already being hailed as the UAE's leading ecosystem for cryptographic, blockchain, and distributed ledger technologies. Simply put, the Crypto Centre is designed to champion cryptographic and blockchain technologies in Dubai.This hub, created to help foster the success of future innovators, entrepreneurs and pioneers, will offer a wide variety of services and activities, including capital, co-working space, incubation, events and education.
As Ahmed Bin Sulayem, Executive Chairman and Chief Executive Officer, DMCC, said at the Crypto Centre launch: "With a progressive and supportive regulatory environment, a strong pool of industry talent, and an ecosystem that provides access to capital, resources and opportunities to crypto firms, the DMCC Crypto Centre is perfectly placed the support crypto businesses and advance global trade."
Its currently perfectly legal to set up as a fully licensed crypto-commodity trader in the UAE, but only in trading your own (business) funds for your own (business) gain – as opposed to acting as a broker or currency exchange.
An existing UAE company cannot add crypto trading as an additional activity to its existing trade licence; but if you already own a UAE business, it's possible to add cryptocurrency trading as a business activity under a separate trade licence – subject to SCA approval.
Exploring the licenses
But investors and entrepreneurs can now set up in the crypto sector in Dubai under two (unregulated) business sector license options, either as a company undertaking "Proprietary trading in Crypto-commodities", or "Distributed Ledger Technology Services".
There are, however, some hurdles. Both licences involve ensuring your company has relevant Anti Money Laundering provisions and a Combating the Financing of Terrorism policy in place. The business must show a formal accounting system and agree to provide audited financial statements on an annual basis.
Proprietary trading in crypto-commodities is described as including: "the buying and selling (Proprietary Trading) of crypto-commodities developed on distributed ledger technology applications. This activity does not include acting as an exchange, providing brokerage services, financial services, banking services, payment processing or storage services."
For proprietary trading activity as well as own-fund trading, it's worth knowing that trading can also take place between the shareholders' funds, up to 50 shareholders are allowed – and these can be individuals, corporate entities or a mix of both.Distributed Ledger Technology Services are described by DMCC as including: "providing database management solutions and ancillary services based on distributed ledger technologies, such as Blockchain. Companies with these activities are not permitted to trade in, or set-up an exchange for, currencies or crypto currencies/commodities or provide any financial activity services, brokerage or payment processing."
And while DMCC is leading the crypto charge, the local financial sector hasn't quite caught up. Our experience shows it's difficult to open a bank account (which is a requirement for company set-up, where the requisite share capital must reside), especially given the burgeoning regulatory landscape in the region. With this in mind, CV Labs – the DMCC Crypto Centre partner – has developed a strong relationship with a private Swiss bank, SEBA, which is planning to open an UAE branch. UAE-based financial institutions are set to pivot to the new business licence requirements, and as ever, Swiss Group is carefully monitoring this emerging situation.
It is also apparent that as a proprietary cryptocurrency trader at DMCC, you can apply for a 'flexi-desk' set up, allowing the most flexible business set up, with access to three staff and family visas.
Cost options vary, but be aware that minimum paid-up capital deposits currently range from AED1m to AED5m.
More recently, the SCA made an agreement with the Dubai World Trade Centre Authority free zone supporting the regulation, offering, issuance, listing and trading of crypto assets and related financial activities within that free zone.
Swiss Group is ready to assist you in setting up appropriate, compliant cryptocurrency operations in the UAE, and we will continue paying close attention to this exciting, dynamic market sector.