Regulatory Compliance for Safe Custody of Virtual Assets in the UAE

Regulatory Compliance for Safe Custody of Virtual Assets in the UAE

The Securities and Commodities Authority (SCA) of the UAE has issued comprehensive guidelines regulating Virtual Assets (VAs) and Virtual Assets Service Providers (VASPs). This article provides a detailed overview of the regulatory requirements, operational obligations, and compliance measures for entities providing safe custody of virtual assets under the SCA guidelines.

Introduction

Safe custody of virtual assets involves the holding and management of virtual assets on behalf of clients, ensuring their security, proper management, and safekeeping. The SCA’s guidelines, developed under the Cabinet Resolution No. (111) of 2022 and the Chairman of the SCA’s Board of Directors’ Decision No. (26/Chairman) of 2023, provide a robust framework for the operation of entities providing safe custody services.

Licensing Requirements

1. Obtaining a License: Entities must apply for and obtain a license from the SCA to provide safe custody of virtual assets. The licensing process involves demonstrating compliance with the SCA’s Rulebook, which encompasses multiple regulatory modules.
2. Capital Requirements: A minimum paid-up capital of AED 4 million is required for entities providing safe custody services. Entities must also maintain sufficient operating capital to cover six months of operational expenses.

Operational Requirements

1. Custody and Management of Assets: Custodians must establish robust systems for the secure holding and management of client assets. Detailed records of all assets held must be maintained, including transaction histories and asset movements.
2. Transparency and Client Reporting: Custodians must provide regular reports to clients detailing the status and movements of their assets. Transparency in asset management and custody practices is essential to maintain client trust.

Technology and Security Measures

1. Secure Systems and Controls: Custodians must implement multi-layered security protections to safeguard client assets. This includes the use of encrypted keys, secure wallet storage, and comprehensive cybersecurity measures.
2. Regular Audits and Assessments: Regular internal and third-party audits must be conducted to assess the security and integrity of custody systems. Any vulnerabilities identified must be promptly addressed to prevent breaches and ensure continuous protection.

Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

1. Compliance with AML/CFT Regulations:  Custodians must adhere to the AML/CFT regulations as detailed in Module 5 of the SCA’s Rulebook. Effective internal systems must be implemented to detect and report suspicious activities related to money laundering and terrorist financing.
2. Ongoing Training and Monitoring: Continuous training on AML/CFT policies for all staff is mandatory. Regular monitoring and updates to AML/CFT measures must be conducted to align with evolving regulatory requirements.

Consumer Protection and Risk Disclosure

1. Disclosure of Risks: Custodians must provide comprehensive disclosures of all material risks associated with virtual assets to clients before any transactions. This includes risks related to market volatility, technological vulnerabilities, and regulatory changes.
2. Continuous Risk Updates: Custodians are required to continuously update risk disclosures to reflect current market conditions and emerging threats. Clients must be fully informed about the potential risks involved in holding virtual assets.

Market Conduct and Reporting

1. Preventing Market Abuse: Measures must be implemented to prevent market abuse, including insider trading and market manipulation. Custodians must ensure fair practices and compliance with all relevant market conduct regulations.
2. Transaction Reporting: Custodians are obligated to report transaction details to the SCA in real-time and periodically. Comprehensive records of all asset movements and transactions must be maintained and made available to the SCA upon request.

Client Fund Protection

1. Segregation of Client Funds: Custodians must establish measures to protect client funds and virtual assets, ensuring they are segregated from the custodian’s own assets. This includes maintaining separate accounts for client funds and implementing robust custody arrangements.
2. Regular Reconciliation and Reporting: Regular reconciliation of client accounts is mandatory to ensure accuracy and transparency. Any discrepancies must be promptly reported to the SCA, along with actions taken to resolve them.

Conclusion

Providing safe custody of virtual assets in the UAE requires strict adherence to the SCA’s regulatory framework. By complying with these guidelines, custodians can ensure the security and integrity of client assets, protect client interests, and contribute to the overall stability and security of the virtual asset market in the UAE.

Entities seeking to provide safe custody services must thoroughly review and implement the SCA’s requirements to obtain and maintain their licenses. Continuous compliance, robust operational controls, and transparent practices are essential to succeed in this regulated environment.

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DISCLAIMER.

The article is provided solely for educational and informational purposes and does not, under any circumstances, constitute legal, financial, or tax advice. The information herein is not intended to serve as a substitute for professional consultation. Readers are strongly encouraged to engage the services of competent professionals in the legal, financial, or tax fields to obtain advice pertinent to their specific situation before undertaking any action based on the content of this article.