UAE Licensed Crypto Firms Must Immediately Close All Regulatory Loopholes

The rapid development of financial technology has given birth to the vigorous development of the digital economy in the UAE, making it a hotspot for virtual asset transactions. Between 2020 and 2021, the country’s share of the global crypto market has grown by 500%, with transactions exceeding $25 billion.

While virtual assets offer many benefits—decentralization, faster transactions, and anonymity—these also present significant anti-money laundering (AML) challenges. In 2021, more than $14 billion worth of cryptocurrencies were illegally transferred globally.

It does emphasize the importance of a strong anti-money laundering framework in a digitally advanced economy. The question facing the UAE is how to balance its efforts to become a leader in cryptocurrencies and blockchain while developing regulations that effectively control the risks associated with financial crimes posed by virtual assets (VA).

Until recently, virtual assets including cryptocurrencies, non-fungible tokens (NFTs) and some stablecoins were largely unregulated in the UAE. Recent legislative measures demonstrate the government’s eagerness to reduce potential financial crime in this fledgling industry.

ADGM Financial Services Regulatory Authority established a regulatory framework for digital assets and VAs in 2018. The Dubai Virtual Assets Regulatory Authority (VARA) was established in 2022 under the aegis of the UAE Virtual Assets Law to provide an international standard of governance.

The most far-reaching legislation was announced by the Central Bank of the United Arab Emirates (CBUAE). It published new guidance for licensed financial institutions (LFIs) on virtual assets, anti-money laundering (AML) and combating the financing of terrorism (CFT).

Drawing on the standards of the Financial Action Task Force (FATF) – and examples from other major agencies, including the Hong Kong Monetary Authority (HKMA) – the rules apply to a wide range of LFIs, including banks, exchanges, insurance companies, payment service providers and registered hawala suppliers.

The Central Bank of the UAE is helping licensed financial entities take a risk-based approach to customer due diligence (CCD) in the VA space, guiding them on financial crimes, threats, vulnerabilities and the red flags associated with them. 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).

Going forward, LFI will follow the risk indicators of VAs and VASPs listed by the central bank and use them for its AML monitoring programme. They must analyze VA and VASP-related threats and protect their business and customers. This includes developing policies, procedures and processes to identify high-risk relationships.

LFIs must also assess VASP or VA exposed clients for AML/CFT risk at account opening, screen clients against applicable sanctions lists, and conduct client due diligence. Continuous customer due diligence is required throughout the relationship to monitor for unusual or potentially suspicious activity.

LFIs are required to file Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs) whenever relevant transactions are identified and keep records for audit purposes for at least five years.

Successful implementation of these laws could help remove the UAE from the Financial Action Task Force (FATF) gray list. The measures will help as the country has worked to implement recommendations from the International Cooperation Review Group (ICRG) action plan since joining in March 2022 to remove itself quickly.

It doesn’t want businesses to think that action is optional.

My message to any organization that touches VA is emphatic: don’t be complacent. The UAE is getting tougher on VA regulation, and these steps could have a real impact. Given the pace of technological change, this is unlikely to be the final word on this topic.

Therefore, I highly recommend working with experts who can provide dynamic solutions to ensure your compliance and security for years to come.

This should not be seen as a cost but as an opportunity for growth. By implementing these measures, I believe the UAE will position itself as an equal partner with other leading jurisdictions in the evolving VA technology.

Regulating the industry in this way encourages the UAE Central Bank to collaborate with other key national regulators. This will boost customer confidence and encourage local businesses to further embrace new trends, innovations and technologies such as VA.

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 towards tackling money laundering in the digital space, enabling the UAE to take full advantage of the VA industry and positioning itself as a global hub for VAs and VASPs.

Now is the time for businesses to prepare for this new reality.