The advent and rise of cryptocurrency have been a disruptor to the traditional currency system. Even outside the virtual aspect of the currency, the concept is novel due to its accessibility and the level of anonymity available to its users and the swiftness with which a large amount of money can be transferred to any part of the world. But this very aspect of cryptocurrency makes it a tool that can be used to commit illegal activities and transactions with considerable ease.
Cryptocurrency is the most prevalent example of virtual assets, but it is merely one of the many virtual assets that are currently accessible to us. With swift growth and innovations in the digital world, one may witness other forms of virtual assets in the future. But for the purpose of this article, only virtual assets that is used for trading purposes, i.e., in the form of currencies, will be addressed here.
VIRTUAL ASSETS
As per article 1 of Federal Decree-Law No. (20) of 2018 on Anti-Money Laundering (“AML”) and Combatting the Financing of Terrorism (“CFT”), virtual assets are defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes but does not include paper currency or other funds in digital form.
As per the AML/CFT Law, virtual asset service providers (VASPs) are entities that conduct the following activities:
- Exchange of virtual assets with fiat currencies and vice versa
- Exchange between different forms of virtual assets.
- Transfer of virtual assets.
- Storage and operation of virtual assets and virtual assets platforms
- Financial services related to offer and sale of virtual assets
THREATS ASSOCIATED WITH VIRTUAL ASSETS
Due to the accessibility and the anonymity that is provided by cryptocurrencies, they have been used widely for the purchase of illegal substances and services over the deep web, such as for the purchase of narcotic substances, weapons and even for human trafficking. It is also used in cybercrimes, ransomware attacks and all related criminal transactions.
Even if one were to not engage in illicit activities, there may be other potential threats to virtual assets, including theft of the assets by hacking into the servers that hold the cryptocurrencies, and crypto scams wherein consumers are misled to buy currencies of artificially inflated value.
Money laundering is another major criminal activity that is assisted by cryptocurrencies. The volatility of its value, accompanied by the technical complexity of the underlying blockchain infrastructure, makes it particularly easy to hide the origin of the currency.
LICENSING AND REGULATING VASPS
The UAE has been at the forefront in embracing and legislating laws to regulate the trade and use of cryptocurrencies and other virtual assets. The UAE's anti-money laundering and CFT (countering the finance of terrorism) framework is comprised of numerous regulatory and supervisory agencies including:
- the UAE Securities and Commodities Authority (“SCA”), which serves as the licensing and primary regulatory authority for VASPs at the Federal level and for the UAE’s Commercial Free Zones;
- the Virtual Asset Regulatory Authority (“VARA”), which serves as the regulator of VASPs in Dubai;
- the Financial Services Regulatory Authority (“FSRA”), which regulates VASPs in the Abu Dhabi Global Market (“ADGM”);
- the Dubai Financial Services Authority (“DFSA”) which regulates VASPs in the Dubai International Financial Centre (“DIFC”) and
- the Central bank of UAE (“CBUAE”), which supervises Licensed Financial Institutions and Registered Hawala Providers, including in their capacity as financial service providers to VASPs and to non-VASP customers that may engage in virtual asset (“VA”) transactions.
MITIGATING MONEY LAUNDERING AND TERRORISM FINANCING RISKS
Article 8 of the Cabinet Resolution No. 111 of 2022 Regulating Virtual Assets and the Related Service Providers states that VASPs in the UAE must comply with all legislation in relation to money laundering and the financing of terrorism and illegal organisations. Article 5 of the law provides for the licensing and registration of all VASPs as per the competent law.
As per article 4 of Federal Decree-Law No. 20 of 2018 On Combating Money Laundering Crimes, the Financing of Terrorism and the Financing of Unlawful Organisations (“ML/CF Law”), a legal person, including companies, will be responsible for crimes committed in its name or for its benefit intentionally, without affecting the individual criminal liability of the offender and the administrative punishments stipulated by law.
SUSPICIOUS TRANSACTION REPORTING
Under article 9 of Federal Decree-Law No. 20 of 2018, Virtual Asset Service Providers must report all Suspicious Transactions and related information to the independent “Financial Intelligence Unit” established by the Central Bank of UAE.
These reports will be examined and sent to the competent government authorities. Articles 13 and 14 states that supervisory authorities appointed under this law will be authorized to assess the risks of VASPs, conduct inspections and supervisory operations, and impose administrative penalties on VASPs for violations of applicable laws and regulations. Furthermore, a national committee will be established under this law, to develop strategies, coordinate information and propose regulations to combat money laundering and terrorism financing activities. Severe penalties in the form of fines and imprisonment are laid out for people involved in such activities.
CUSTOMER DUE DILIGENCE
As per Article 5 of Cabinet Decision No. 10/2019 on the Implementing Regulation of Federal Decree-Law No. 20/2018, VASPs and other financial institutions must conduct customer due diligence before entering into any business relation or before executing a financial transaction, as per the prescribed law. The law also states that VASPs must promptly apply any directives issued by the United Nations Security Council, in relation to targeted financial sanctions. Sanctioned accounts must be promptly frozen to ensure the discontinuation of further illegal transactions and their corresponding illicit activities.
In conclusion, countering money laundering through virtual assets requires a multifaceted approach, with multiple segments working in coordination with each other. All the segments must be trained in understanding the threats imposed by the unregulated use of virtual assets, and the means to detect suspicious activities. Consulting with a financial crime lawyer in Dubai ensures organizations stay ahead of legal requirements while tackling the challenges with virtual assets. Upon detection of any suspicious activity, organizations from various jurisdictions and sectors—private, public, and international—will be required to collaborate in order to identify, halt, and apprehend those accountable for the unlawful operations.
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About the Author
Dr. Hassan Elhais publishes analysis of UAE banking law matters, including banking relationships, finance disputes and financial obligations. For readers researching a banking lawyer in Dubai, his writing offers insight into the legal questions surrounding these topics. Explore his published work and practice-area information for further context.
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