The rapid growth of financial technologies has given rise to a burgeoning digital economy in the UAE, making it a hotspot for virtual asset transactions. The country’s share in the global crypto market increased 500 per cent between 2020 and 2021, taking it over $25 billion in transactions value.
While virtual assets offer numerous benefits - decentralization, faster transactions, and anonymity - these also pose substantial anti-money laundering (AML) challenges. Over $14 billion worth of cryptocurrency was moved illicitly worldwide in 2021.
It does underscore the importance of a robust AML framework in a digitally advanced economy. The question for the UAE is how to balance its drive to being a leader in crypto and blockchain, while having regulations that meaningfully control the risks related to financial crime that virtual assets (VAs) pose.
What the rules say
Until recently, VAs, including cryptos, Non-Fungible Tokens (NFTs) and some stablecoins were largely unregulated in the UAE. Recent legislative measures have shown the government’s keenness to reduce potential financial crime in this nascent industry.
Abu Dhabi Global Market’s Financial Services Regulatory Authority established a regulatory framework in 2018 for digital assets and VAs. Dubai’s Virtual Assets Regulatory Authority (VARA) was founded in 2022, under the aegis of the UAE’s Virtual Asset Law, to provide international standards of governance.
The most far-reaching legislation was announced by the Central Bank of the UAE (CBUAE). It issued new guidance for licensed financial institutions (LFIs) on virtual assets, regarding anti-money laundering (AML) and combating the financing of terrorism (CFT).
Drawing from Financial Action Task Force (FATF) standards - and the example of other leading authorities, including the Hong Kong Monetary Authority (HKMA) - the rules apply to a wide range of LFIs, including banks, exchange houses, insurance companies, payment service providers, and registered hawala providers.
The UAE Central Bank is helping licensed financial entities to take a risk-based approach to Customer Due Diligence (CCD) in the VA space, guiding them on financial crime, threats, vulnerabilities, and red flags associated with these. The new legislation will help LFIs understand their AML/CFT obligations, while also outlining the risks of dealing with VAs and virtual asset service providers (VASPs).
Moving forward, LFIs are to follow the risk indicators for VAs and VASPs listed by the Central Bank and use them in their AML monitoring program. They must analyze VAs and VASPs related threats and safeguard their businesses and customers. This includes the establishment of policies, procedures, and processes to identify higher-risk relationships.
LFIs must also assess the AML/CFT risks of VASP or VA-exposed customers at account opening, screening customers against the applicable sanction lists, and conducting CDD. Ongoing customer due diligence throughout the relationship is required to monitor for unusual or potentially suspicious activity.
LFIs must file a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) whenever relevant transaction has been identified, and maintain records for at least five years for audit purposes.
Regulation with teeth
The successful implementation of these laws could facilitate the UAE being removed from the Financial Act Task Force’s (FATF) Grey List. Since being added in March 2022, the country has committed to implementing the recommendations of the International Cooperation Review Group’s (ICRG) Action Plan to remove itself swiftly and these measures will help.
It will not want businesses to think action is optional.
My message to any organization that has exposure to VAs is emphatic: do not be complacent. The UAE is getting tough on VA regulation and these measures are likely to have real teeth. And this is not likely to be the last word on the subject, given the speed of technological change.
As such, I would strongly advise partnering with an expert who can provide dynamic solutions that will ensure your compliance and safety for the coming years.
This shouldn’t be seen as a cost but rather an opportunity for growth. By implementing these measures, I believe the UAE will position itself as a partner of equals with other leading jurisdictions regarding evolving VA technologies.
Regulating the sector in this way has encouraged the UAE Central Bank to collaborate with other leading national regulators. This will boost customer confidence and encourage local businesses to further embrace the new trends, innovation, and technologies such as VAs.
It will also ensure the development of a harmonious global framework, while contributing to a fairer society.
I believe these regulations will go a long way to addressing the issue of money laundering in the digital realm, allowing the UAE to fully harness the benefits of the VA industry and position itself as a global hub for VAs and VASPs.
It is now up to businesses to prepare for this new reality.
