The United Arab Emirates (UAE) has emerged as a thriving hub for virtual asset transactions due to the rapid growth of financial technologies, leading to the establishment of a robust digital economy. The country’s share in the global crypto market witnessed an astounding 500 per cent increase between 2020 and 2021, with transaction values exceeding $25 billion.
While virtual assets offer advantages such as decentralization, faster transactions, and anonymity, they also present significant challenges in terms of anti-money laundering (AML). In 2021 alone, illicit cryptocurrency movements worldwide amounted to over $14 billion.
In light of the digital advancements and the importance of countering financial crime risks associated with virtual assets, the UAE has taken steps to strike a balance between being a leader in crypto and blockchain and implementing regulations that effectively mitigate these risks.
Until recently, virtual assets, including cryptocurrencies, Non-Fungible Tokens (NFTs), and certain stablecoins, remained largely unregulated in the UAE. However, recent legislative measures demonstrate the government’s commitment to reducing potential financial crime within this nascent industry.
In 2018, Abu Dhabi Global Market’s Financial Services Regulatory Authority established a regulatory framework for digital assets and virtual assets. In 2022, Dubai’s Virtual Assets Regulatory Authority (VARA) was established under the UAE’s Virtual Asset Law to ensure adherence to international governance standards.
The Central Bank of the UAE (CBUAE) announced the most comprehensive legislation, issuing new guidance for licensed financial institutions (LFIs) on virtual assets regarding anti-money laundering (AML) and combating the financing of terrorism (CFT).
Based on standards set by the Financial Action Task Force (FATF) and leading authorities like the Hong Kong Monetary Authority (HKMA), the rules apply to various LFIs, including banks, exchange houses, insurance companies, payment service providers, and registered hawala providers.
The UAE Central Bank is assisting licensed financial entities in adopting a risk-based approach to Customer Due Diligence (CDD) in the virtual asset space. It guides financial crime, associated threats, vulnerabilities, and red flags. This new legislation will help LFIs understand their AML/CFT obligations while highlighting the risks involved in dealing with virtual assets and virtual asset service providers (VASPs).
LFIs are now required to incorporate risk indicators for virtual assets and VASPs outlined by the Central Bank into their AML monitoring programs. They must analyze threats related to virtual assets and VASPs to protect their businesses and customers. This involves establishing policies, procedures, and processes to identify higher-risk relationships.
These regulatory measures demonstrate the UAE’s commitment to fostering a secure and transparent environment for virtual asset transactions while effectively combatting financial crimes in the digital economy.
