On 15 October 2020, the Securities and Commodities Authority (SCA) published a draft of its Regulation for Issuing and Offering Crypto-Assets (the ICARs). The draft ICARs are designed to regulate key aspects of dealing in crypto assets, from issuance and promotion, to licensing and conduct of business for custodians, exchanges, and "fundraising" platforms. In this article, we provide a high-level overview of the ICARs.

The draft ICARs are published, in English only, on the SCA's website. We note the short consultation window which ends on 29 October 2020, which could prevent stakeholders from reviewing the ICARs in sufficient detail to provide meaningful comments.

The draft ICARs are an important milestone for regulating dealing in crypto assets in the UAE.

Scope of application

The ICARs apply to any person who (among other things):

• Promotes, offers or issues crypto assets to persons in the UAE, or carries on any of these activities in the UAE. This has the potential to capture promotions and offers made on a cross-border basis (i.e. which target persons in the UAE from outside the country)
• Provides custody services, operates an exchange for crypto assets or operates a platform used for "fundraising" for crypto assets issuances in the UAE
• Carries on any "other Financial Activities" in the UAE in relation to crypto assets. The term "Financial Activities" is defined to include a list of 26 SCA-regulated activities

Exclusions

The following types of assets are excluded from the scope of the ICARs:

• Crypto assets issued by the federal and local Governments, Government institutions and authorities or any companies which are wholly owned by all the preceding
• Currencies, virtual currencies, units of stored value or any other instruments approved or required to be approved by the UAE Central Bank
• Securities held in dematerialised form in a clearing or settlement system, which are not issued as crypto assets but administered using an electronic record keeping method controlled by the issuer or its approved registrar (unless such securities satisfy any other criteria to qualify as a crypto asset)

The ICARs also expressly exclude activities which are carried on "within" the UAE financial free zones (FFZs). We understand this would exclude all firms licensed in the FFZs.

Furthermore, offers of crypto assets to Qualified Investors, or by way of a documented reverse solicitation, in the conduct of "fundraising" activities (i.e. for initial token offerings on a crypto fundraising platform), would be excluded from the ICARs.

Key definitions

The ICARs contain a number of helpful definitions for key concepts which would hopefully provide a certain degree of regulatory certainty, such as "crypto asset", "crypto asset exchange", "crypto asset custody services", and "crypto asset fundraising platform". We note that the ICARs do not provide a prescriptive definition of a "security token", and instead generically refer to securities which are "issued, transferred or traded" using crypto assets, or crypto assets which would be deemed a security by the SCA (SCA to issue its guidance in that regard).

However, one notable deviation from the definitions used in the other SCA regulations and the SCA's draft rulebook is the ICARs definition of "qualified investor" which is not the same as the one in the SCA's Promotions and Introductions Regulations (PIRs). The ICARs' definition includes individuals who meet a certain asset test or who are represented by an SCA-licensed investment manager (in line with the PIRs' older definition).

Promotion and offer of security tokens

The ICARs expressly provide that security tokens may be promoted in the UAE in accordance with the PIRs. Consequently, we understand that the exclusions contained in the PIRs would also apply for the promotion of Security Tokens in the UAE.

Security Tokens may only be offered or issued in the UAE by an offeror incorporated in the UAE, or in an FFZ, or "with an establishment in the State" (this is not clear, however it may refer to foreign companies which have a presence in the UAE, i.e. a subsidiary or a branch).

Offers to "qualified investors" only require the submission of a notification to the SCA (along with the offer documentation). However, the SCA's approval would be required for offers to all other types of investors.

Recognition of crypto currencies

Pursuant to the ICARs, the SCA will maintain a register of recognised crypto currencies to which "Commodity Tokens" (i.e. any crypto asset which is not a Security Token) can be admitted upon request. The SCA will provide guidance on its assessment for the recognition of crypto currencies.

Crypto asset exchanges

The ICARs expressly apply the SCA's regulations on conventional exchanges to crypto asset exchanges (to the extent applicable), in addition to the provisions contained in the ICARs. The ICARs require the SCA's prior approval before operating a crypto exchange which is accessible to investors who do not meet the criteria to be deemed Qualified Investors (i.e. if open to the public). This seems to implicitly exempt exchanges which exclusively cater to Qualified Investors from the SCA's approval.

Crypto asset exchanges are also subject to the market abuse laws and regulations that would generally apply to trading on an exchange.

Crypto fundraising platforms

The ICARs also regulate crypto fundraising platforms which we understand to be similar to equity-based crowdfunding platforms which allow investors to subscribe to crypto assets (such as in an initial token offering). There is a subscription limit of AED 50,000 per issuance (it is not clear whether this limit is calculated on an aggregate basis, and/or for a certain time period).

A crypto fundraising platform may not offer trading services to investors unless licensed by the SCA as a crypto asset exchange.

Financial crime

The ICARs introduce specified requirements to help mitigate the risk of financial crime. One such requirement is that SCA-licensed crypto asset firms should assign a high risk rating to clients who deal in crypto assets.

Tracing measures requirement

Furthermore, tracing measures would be required for all transactions involving crypto assets, to help establish the legitimate transaction history for any given crypto asset. Dealing in crypto assets which do not allow tracing would not be allowed.

The SCA casts its regulatory net over crypto assets

The draft ICARs are a welcome development that seeks to develop and effectively regulate dealings in crypto assets in the UAE. This should provide the regulatory certainty for crypto businesses to consider "onshore" UAE an attractive jurisdiction for basing their regional crypto platform.