UAE: new regulations for stored value facilities and cryptoassets

Stored Value Facilities (SVFs)

The UAE Central Bank’s SVF Regulation (85 page / 1.9MB PDF), released in early November 2020, repeals and replaces the 2016 Regulatory Framework for Stored Values and Electronic Payment Systems (SVF Regulations). The new SVF Regulations substantially tighten up the existing regime and aim to ensure that all SVFs which are issued and operated in the UAE do so in a secure, sound and efficient manner.

Issuing and operating SVF in the UAE requires a prior license from the UAE Central Bank (CB) unless a firm is operating a single-purpose SVF.  An example of a single-purpose SVF is a prepaid telephone card, which can only be used to pay for telephone services provided by the issuer.  Marie Chowdhry, of Pinsent Masons, the law firm behind Out-Law, said: "All other exclusions have been omitted from the regulations, meaning that only upon application to the CB can a firm rely on one of the exemptions to seeking a licence under the new regulations.  This change in applicability of the rules will no doubt be more onerous on firms, as they will now need to apply to the CB, and indeed justify why, they will be able to rely on one of the exemptions from being licenced by the CB under this regime."

Whilst the SVF Regulations specifically exclude the two financial freezones – the Abu Dhabi Global Market and the Dubai International Financial Centre from being caught in scope, the CB has made it clear that freezone entities regulated by freezone authorities, referred to in the regulations as "financial institutions", will require a CB licence under the new rules. Chowdhry said: "This addition of what may appear, on first glance, to be innocuous wording, does call into question how the CB will interact with the freezone authorities and the full extent of so-called 'financial institutions' this provision will apply to."

The scope of the new SVF Regulations 2020 covers licensing, supervision and enforcement provisions applicable to entities licensed by the UAE Central Bank to provide SVF.

The SVF Regulations 2020 also prohibit issuers of unlicensed overseas SVF from promoting via an advertisement, invitation or document which is, or contains, an invitation or a solicitation to the public of the UAE, their services, or access to the SVF, in the UAE. The SVF Regulations 2020 are very specific about the type of factors which will be considered when enforcing the new regime, including matters such as advertisements in Arabic, the use of particular domain names such as a UAE domain name, the currencies accepted for the services, and having contact details in the UAE.  Such factors and criteria are not exhaustive or conclusive and the CB will use a holistic approach to judge each case on its merits and take into account the particular circumstances and all relevant facts.

The transition period for compliance is one year from the effective date of the regulation. Firms already holding an SVF licence granted under the previous regulatory framework may continue operating, but must complete the implementation of the relevant measures set out in the new SVF Regulations 2020 by the end of the transition period.

Cryptoassets

Separately, the UAE Securities and Commodities Authority (SCA) approved a draft Issuing and Offering Crypto Assets Regulation (ICAR) in October 2020.

Cryptoassets are virtual, digital assets or tokens operating on a blockchain platform and protected by cryptography. The ICAR adds to existing legislation by covering two key topics: (i) the creation, issuing and marketing of cryptoassets within the region; and (ii) the licensing of crypto markets, crypto fundraising platforms and all activities related to cryptoassets such as custody services.

The regulation’s application extends to “any other financial activity” in the UAE relating to cryptoassets and has the potential to capture cross-border activity involving persons within the UAE. The ICAR will not apply to activities conducted within the UAE’s financial free zones.

Cryptoassets licensed under the ICARS must also meet the requirements of existing regulations in relation to markets, such as security and commodity exchange, before the SCA gives its approval.

The ICAR is intended to deliver stronger protection for investors in cryptoassets, as well as monitoring anti-money laundering activities or financing of terrorism.

The regulation introduces tracing measure requirements for all transactions involving in order to establish the legitimate transaction history for any given cryptoasset. These financial crime controls include, amongst other things, using designated banks when accounts are used to deposit or withdraw fiat currencies.