The Crypto Asset Wallet Conundrum

The UAE is moving quickly to establish itself as one of the leading players in the region and in the world in the fintech space. To do this it needs to look at the crypto asset wallet conundrum. The UAE move into the fintech space, is evidenced by its promptitude over the last year in releasing four regulations governing distinct elements of the fintech industry. These are the Retail Payment Services and Card Schemes Regulation (RPSCS). This comes after the CBUAE released the Retail Payment Systems Regulation (RPS), the Large Value Payment Systems Regulation (LVPS) and the Stored Value Facility Regulation (SVF) earlier this year, and late last year, respectively. Interestingly, the UAE is also one of the forerunners in regulating crypto assets and related services.

This has led to interesting questions of both regulatory and academic importance, especially in relation with crypto asset wallets. For conceptual purposes, a crypto asset wallet is software which stores your crypto assets, these could be security tokens, commodity tokens and even NFTs.

Crypto asset wallets take us a step closer to the dream of decentralization since they are not provided by a singular service provider, as opposed to fiat wallets. While there are still people responsible for operating, patching and maintaining the backend code of any crypto asset wallet, as long as you have the private key to your crypto asset wallet, ideally you should be able to access your crypto assets from anywhere.

If we dig a little deeper, we learn that crypto asset wallets may either be custodial (i.e. they keep your crypto asset wallet’s private keys) or non-custodial (wherein they do not keep such private keys). A non-custodial wallet is easier to manage in that you do not risk forgetting your keys (and thereby losing all your crypto assets), but it also makes the product more centralized, and vice versa.

There are two laws we must look at in relation to crypto asset wallets. The first is the Stored Value Facilities Regulation (SVF) (SVF Regulation). The second is the Administrative Decision no. (11) of 2021 concerning Guidance for Crypto Asset Regulations (Crypto Asset Guidance) issued under the Chairman of the Authority’s Board of Directors' Decision No. (23/ Chairman) of 2020 Concerning Crypto Assets Activities Regulation (Crypto Assets Regulation).

Article 1 (27) of the SVF Regulation defines an SVF as “A facility (other than cash) for or in relation to which a Customer, or another person on the Customer’s behalf, pays a sum of money (including Money’s Worth such as values, reward points, Crypto-Assets or Virtual Assets) to the issuer, whether directly or indirectly, in exchange for: (a) the storage of the value of that money (including Money’s Worth such as values, reward points, Crypto-Assets or Virtual Assets), whether in whole or in part, on the facility; and (b) the “Relevant Undertaking”. The definitions of a Crypto-Asset, Relevant Undertaking and Money’s Worth may be found in the SVF Regulation. This definition indicates that SVFs which store Crypto-Assets could be governed by the SVF Regulation released by the CBUAE.

Further, the Crypto Assets Guidance states that “Where, under the services, the custodian takes responsibility for such safe-guarding, by way of holding private keys, maintaining wallets for investors or otherwise, a custody license should be required. Where an investor is provided with the technological means to store its own Crypto Assets, a license as a custodian to provide such tech will generally not be needed”.

This indicates that custodial crypto asset wallets will be governed by the Crypto Assets Guidance released by the Securities and Commodities Authority, the securities regulator of the UAE.

This poses some interesting questions. First, a bare reading of the law would indicate that a custodial crypto asset wallet would require two licenses – one as an SVF from the CBUAE, and one as a custodian from the SCA. This is unlikely to be the legislative intent of the UAE government, since such double licensing would make launching a custodial crypto asset wallet from the UAE prohibitively onerous and expensive.

Second, there are likely to be questions around how industry players will balance the compliance requirements stated in the two distinct regulations. Third, the definitions of Crypto Assets in the SVF Regulations and the Crypto Asset Regulation are different, leading to questions around the interpretation of the law.

We are happy to see these questions come up, since they indicate regulatory proactivity, the drive for regulatory clarity and the desire to be a global leader in the fintech and blockchain space. And KARM Legal Consultants is committed to working tirelessly with regulators to make this dream come true.

Authored by: Ratul Roshan Karm Legal