Comprehensive Overview of the Securities and Commodities Authority (SCA) and Regulated Virtual Assets Activities in the UAE

Introduction

The Securities and Commodities Authority (SCA) is a pivotal regulatory body in the UAE responsible for overseeing the securities and commodities markets, ensuring fair and transparent trading practices, and protecting investor interests. This article provides a detailed overview of the SCA’s role, its regulatory framework, and the specific virtual assets activities that fall under its supervision, excluding the financial free zones of Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC).

The Role of the Securities and Commodities Authority (SCA)

The SCA was established to foster the development of an efficient, transparent, and fair securities and commodities market in the UAE. Its primary objectives include:

  1. Regulation and Supervision:
  1. Establishing and enforcing regulations to ensure the integrity of the securities and commodities markets.
  2. Supervising market participants, including brokers, dealers, and other financial intermediaries, to ensure compliance with regulatory standards.
  3. Market Development:
  1. Promoting the development of the UAE’s financial markets to enhance their competitiveness and attract domestic and international investors.
  2. Implementing initiatives to improve market infrastructure and introduce innovative financial instruments.
  1. Investor Protection:
  1. Ensuring that market participants adhere to fair trading practices to protect investors from fraudulent activities and market manipulation.
  2. Providing education and resources to investors to enhance their understanding of the market and their rights.
  3. Enforcement:
  1. Investigating and taking enforcement actions against entities or individuals that violate securities laws and regulations.
  2. Imposing penalties and sanctions to maintain market discipline and deter misconduct.

Regulated Virtual Assets Activities

The SCA’s regulatory framework for virtual assets aims to create a secure and transparent environment for virtual asset transactions. The SCA supervises several virtual asset activities, each with specific definitions and capital requirements. Below are the key regulated activities:

  1. Virtual Asset Platform Operator:
  1. Definition: An entity responsible for operating and managing a platform where virtual assets can be traded. This includes ensuring market integrity, transparency, fair trading practices, and the safe custody of virtual assets.
  2. Capital Requirement: A minimum paid-up capital of AED 1 million if only operating the platform. If combined with other VASP activities, the required paid-up capital is AED 5 million.
  1. Safe Custody of Virtual Assets:
  1. Definition: A service where an entity holds and manages virtual assets on behalf of clients, ensuring their security, proper management, and safekeeping. This includes robust security measures for storing cryptographic keys and wallets.
  2. Capital Requirement: A minimum paid-up capital of AED 4 million.
  1. Financial Consulting in Virtual Assets:
  1. Definition: Offering advisory services related to virtual assets, including providing insights and advice on the investment potential, risks, and regulatory compliance associated with virtual assets.
  2. Capital Requirement: A minimum paid-up capital of AED 500,000.
  1. Managing Portfolio of Virtual Assets:
  1. Definition: The management of a portfolio of virtual assets on behalf of clients, involving making investment decisions, executing transactions, and managing the overall performance and risk of the portfolio.
  2. Capital Requirement: A minimum paid-up capital of AED 3 million.
  1. Virtual Asset Broker:
  1. Definition: An intermediary who facilitates the buying and selling of virtual assets between parties. This includes executing orders, providing market insights, and ensuring compliance with regulatory requirements.
  2. Capital Requirement: A minimum paid-up capital of AED 2 million.
  1. Virtual Asset Dealer:
  1. Definition: An entity that buys and sells virtual assets for its own account. This involves holding an inventory of virtual assets, providing liquidity to the market, and engaging in proprietary trading activities.
  2. Capital Requirement: A minimum paid-up capital of AED 30 million.

Key Responsibilities and Requirements for Regulated Activities

Entities engaging in the above virtual asset activities under the supervision of the SCA must adhere to stringent regulatory requirements, including:

  1. Licensing and Accreditation: Entities must obtain a license from the SCA to operate legally. The licensing process involves demonstrating compliance with the SCA’s Rulebook, which encompasses multiple regulatory modules.
  2. Technology Governance and Security: Entities must implement robust technology systems and security measures, including multi-layered security protections, encrypted keys, and secure wallet storage. Regular internal and third-party audits are required to ensure compliance and security.
  3. Operational and Compliance Requirements: Entities must ensure business continuity, disaster recovery, and compliance with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. Clear policies for system maintenance, handling of planned and unplanned outages, and personnel management are mandatory.
  4. Consumer Protection and Risk Disclosure: Entities must disclose all material risks associated with virtual assets to clients before transactions. Continuous updates on risk disclosures are required to reflect market changes and new risks.
  5. Market Conduct and Reporting: Entities must implement measures to prevent market abuse, report transactions in real-time, and ensure transparency in trading activities. Regular reports to the SCA on trading activities and adherence to anti-market abuse provisions are required.
  6. Client Fund Protection: Entities must establish measures to protect client funds and virtual assets, ensuring they are segregated from the entity’s own assets. Regular reconciliation of client accounts and prompt reporting of any discrepancies to the SCA are mandatory.

Conclusion

The SCA plays a critical role in regulating the virtual asset market in the UAE, ensuring that all activities are conducted with the highest standards of transparency, security, and fairness. By adhering to the SCA’s guidelines, entities can operate within a well-regulated environment that promotes market integrity and investor protection.

Entities seeking to engage in virtual asset activities must thoroughly understand and comply with the SCA’s regulatory framework, including obtaining the necessary licences and meeting capital requirements. Continuous compliance, robust operational controls, and transparent practices are essential for success 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.

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