This piece was coauthored by Vlad Maly and Renate Prinz, partners at McDermott, Will & Emery.
Continuing developments in the crypto regulatory sphere have significantly increased the attractiveness of Dubai and Abu Dhabi for crypto firms with global ambitions. Firms should remember, however, that they may also need to comply with the EU or UK crypto
regulatory regimes, especially when engaging with clients or investors from these jurisdictions.
In this article, we summarise recent crypto developments in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), and discuss the pitfalls crypto firms should avoid when dealing with EU or UK clients.
Recent crypto developments in Dubai and Abu Dhabi
Both DIFC and ADGM have historically been very active in the crypto sphere.
Most recently, on 13 March 2024, DIFC released its DIFC Law No. 2 of 2024 (Digital Assets Law) providing for a comprehensive set of rules relating to crypto-assets. Among other things, the Digital Assets Law defined a ‘Digital Asset’ as an asset which:
“(a) exists as a notional quantitative unit manifested through the combination of the active operation of software by a network of participants and network-created data;
(b) exists independently of any particular person and legal system; and
(c) is not duplicable and the use or consumption of the thing by one person or a specific group of persons necessarily prejudices the use or consumption of the thing by one or more other persons”.
In response to diverging case law on how crypto-assets should be qualified, the Digital Assets Law clarified that they should be considered as intangible property that is neither a thing in possession nor a thing in action.
Specific rules have been introduced relating to the change of control, the transfer of legal title, the exercise of rights upon insolvency and the recovery of crypto-assets.
On the ADGM side, on 18 December 2023, its Financial Services Regulatory Authority released updated
Guidance on Regulation of Virtual Asset Activities (Guidance). Among other things, the Guidance sets out the
legal framework for crypto firms willing to operate as multilateral trading facilities for crypto-assets, which have recently proven to be increasingly popular amongst investors.
Providing crypto services to EU clients
Dubai and Abu Dhabi-based firms willing to engage with clients based in the EU should carefully assess the applicable regulatory regime. Depending on the type of crypto products and services they offer, firms may fall within the scope of EU Regulation 2023/1114
on markets in crypto-assets (MiCA) or under the regime of EU Directive 2014/65/EU (MiFID II).
Under
MiCA, non-EU firms providing crypto products or services to EU clients will require an authorisation unless such products or services are provided at the own initiative of the EU client.
As clarified by the
European Securities and Markets Authority (ESMA), this so-called “reverse solicitation” exemption is, however, “very narrowly framed and as such must be regarded as the exception; and it cannot be assumed, nor exploited to circumvent MiCA.”
Indeed, the reverse solicitation rule under the MiCA regime is much stricter than in other regulations so far. In addition,
ESMA reiterated that (in practice usually used) standardised contractual clauses or disclaimers in which clients declare that the products or services are provided at their own initiative are not relevant for assessing whether the activity falls within
the scope of exemption or not.
For the purposes of MiCA, “solicitation” includes the promotion, advertisement or offer of crypto-assets or services by any means, including social media platforms or mobile applications as well as “promotions, advertisements and offers of a general nature
and addressed to the public (with a broad and large reach) such as, for instance, brand advertisements by way of sponsorship deals.”
This also includes the promotion of a crypto product or service by a third party, which may also be attributed to the provider and accordingly requires a license. Additionally, the reverse solicitation exception also no longer applies to pre-existing customers
of the crypto service provider. This means that the (also individual) offering of products and services to pre-existing EU customers requires permission, as does the offering of services to the market in general.
Learn more by watching our webinar, Are You Ready for MiCAR?
Providing crypto services to UK clients
Crypto firms should assess the applicable regulatory regime even more carefully when engaging with UK clients, given that they will unlikely be able to rely on the “reverse solicitation” exemption.
Under the Financial Services and Markets Act 2000, non-UK firms may not provide regulated services to clients based in the UK unless they are authorised, or rely on an exclusion. Although the UK Government is still working on how to incorporate crypto-assets
into the existing UK financial regulatory regime (noting that derivatives referencing crypto-assets are already covered by
specific rules), it has indicated that the
Overseas Persons Exclusion (which is the UK equivalent of the “reverse solicitation” exemption) will not be available to non-UK firms providing crypto services to UK clients.9
Non-UK firms may not engage in the marketing of investment activity relating to specific crypto-assets to UK clients without an authorisation, approval of such marketing by an authorised person, or reliance on an exemption. Here, although the
Overseas Communicator Exemptions (which are the UK equivalents of the “reverse solicitation” exemption for marketing activities) would generally be available, a number of other exemptions will
not be available to non-UK crypto firms (such as the high-net-worth individuals or self-certified sophisticated investors exemptions).