Non-Fungible Tokens (NFT) in UAE.
- Samridhi Singh
- at Trade and Commodities
- on Aug 16, 2022 - 10:29
What is an NFT?
If we put it simply, then NFT is an acronym for “non-fungible token” which refers to a digital asset with unique characteristics, that cannot be replaced by another digital asset. It exists typically on a blockchain, i.e., the technology that underpins crypto assets including cryptocurrencies. Although, NFTs as cryptographic tokens are not mutually interchangeable and hence, are not fungible, unlike cryptocurrencies such as Ether and Bitcoin. This makes each NFT a “one-of-a-kind” asset in the digital world that can be purchased and sold like any other piece of property, but it has no tangible form of its own. Because of this feature, it is seen to be commonly used as a digital certificate of authenticity representing ownership in an associated digital or physical asset including audio, video, images, paintwork etc.
For the budding musicians, artists and other creatives to capture a wider audience and commercialise their work, the digitisation of these assets has proved to be a good avenue and its traction which is gained by the popularity from the financial services industries as well, in the terms of the potential of an investment. Thus, the concerns regarding the need for financial regulation of such tokens. Here, some of the considerations are explained that may need to be considered from a regulatory standpoint, both from a financial and technical perspective while considering dealing with NFTs by the ways of business in the United Arab Emirates and also from the UAE.
Are NFTs regulated in the UAE?
It depends on whether NFTs are regulated in the UAE. In the UAE, generally, the crypto assets are not characterised by way of their intended use, to determine the regulatory approach. Instead, the process of determining it is generally based on the actual use.
For example, a crypto asset may by its very nature be meant to be a utility token (and thus, potentially not regulated as a financial product) but it is in fact, given its popularity, traded for investment purposes. Such a crypto asset is likely to be treated as a financial product and will be subject to the relevant UAE securities regulation. Therefore, it is critical to consider the actual use of the crypto asset to be able to determine whether such an asset would be subject to any financial regulations.
Accordingly, there are no regulations that specifically regulate NFTs but each of the UAE mainlands, i.e., Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) have their respective regulations around crypto or virtual assets which regulate such assets, depending on the actual use of such an asset, by way of business.
Abu Dhabi Global Market, which is a financial-free zone within the geographical boundaries of the Emirate of Abu Dhabi, is one of the first jurisdictions in the world to regulate crypto assets that fall within its definition of virtual assets. The term “virtual assets” is defined within its regulations to be any “digital representation of value that can be digitally traded and functions as:
1. a medium of exchange,
2. a unit of account,
3. a store of value,
But in any jurisdiction, it does not have legal tender status. A Virtual Asset is:
1. Neither issued nor guaranteed by any jurisdiction and fulfils the above functions only by agreement within the community of users of the Virtual Asset.
2. Distinguished from Fiat Currency and E-money.
Since, the definition of virtual assets is broad enough to include crypto assets, which potentially could mean NFTs as well, the financial regulator i.e., the Financial Services Regulatory Authority clarified by the way of guidance that its regulations are limited to stablecoins, cryptocurrencies, digital assets, and derivatives/funds (including any ancillary activities conducted with them) and does not extend to utility tokens, which do not exhibit the features and characteristics of regulated investment/instrument.
Following the regulations issued by the ADGM on virtual assets, the UAE mainland regulators, the Central Bank and the Securities and Commodities Authority (SCA) issued regulations on dealing with crypto assets and broadly explained crypto assets as cryptographically secured digital representations of value or contractual rights that use a form of distributed ledger technology and can be transferred, stored, or traded electronically. Therefore, potentially capturing NFTs. Although the Central Bank, being the currency regulator limited its regulations to crypto assets, those are being used as stored value facilities for storing currency or payment tokens (e.g., stable coins or other tokens back by fiat currency). Therefore, they do not apply to NFTs. SCA, on the other hand, clarified that its regulations apply to most forms of crypto assets whether securities or otherwise, which are listed and available for trading on an organized market, with exception of those being regulated by the Central Bank.
The regulations which were issued by the regulators in the ADGM, the Central Bank and the SCA were followed by the Dubai International Financial Centre’s (DIFC) regulatory framework on the investment tokens. The such regulatory framework is currently aimed at regulating:
1. Securities and derivatives in the form of a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using distributed ledger technology or other similar technology; and
2. A cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology and:
i. Confers rights and obligations that are substantially similar to those conferred by security or derivative; or
ii. Has a substantially similar purpose or effect to security or derivative.
Accordingly, since, by its very nature, the NFTs may not qualify in being a financial product, they may still be subject to financial regulations in the United Arab Emirates, when it is dealt with by the way of the business, depending upon its original use and the jurisdiction, under which it is being dealt with.
The technology and the media laws in the UAE apply to NFTs as crypto assets.
Being a recent development, NFTs are not addressed as per the current UAE media and content law. Although, that does not take away the consideration from a legal standpoint when considering these laws.
National Media Council is now replaced by the Ministry of Culture and Youth (MCY)and it regulates media activities through its Media Regulatory Office. The National Media Council (NMC) issued laws applicable to UAE mainland and free zone, which define the term:
1. “Media content” as “any explicit or implicit, direct or indirect information or messages included in or mentioned by the publishing or the printed matter of whatsoever kind or mode whether they are transmitted live or recorded and then transmitted, retransmitted or conveyed to the audience again by any mode, including but not limited to performance, presentation, show, movies, drama, advertisements, etc.”
2. “Advertisement” is “any means intended to inform all people about a certain commodity or purpose, whether by presentation or publication in writing, drawing, image, symbol, sound or other means of expression”, which in theory extends to both the content and advertising of crypto assets, especially the NFTs, i.e., a crypto asset that is primarily based on content.
The NMC laws provide guidelines and standards concerning content and advertising, including the dos and don’ts, which need to be taken into consideration while creating or promoting an asset in the UAE. For example, the use of the UAE national flag and national emblem for commercial purposes is generally prohibited under the laws.
Along with this, the UAE recently issued Federal Decree Law No. 34 of 2021 Concerning the Fight Against Rumours and Cybercrime, including provisions for offering and promotion of non-recognized crypto assets. Particularly, the law restricts all the people who use the internet or technology for “promotion, advertisement, mediation or dealing in any form or encouraging the dealing in a virtual currency, cryptocurrency, stored value unit or any payments unit not officially recognized in the UAE or without being licensed by the competent body”.
Therefore, similar to the creation and the promotion of other digital assets, vetting is necessary for the content and advertising of the NFT before creating and offering them in the UAE.
The UAE Airlines Emirates issues NFTs
Emirates headquartered in Dubai unveiled its plans to launch NFTs and exciting immersive experiences in the metaverse for its customers and employees. The airline explained its plans to build signature brand experiences in the metaverse, including both collectable and utility-based NFTs. The launch aligns with UAE’s digital economy and virtual assets initiatives. The airline has started the work on the first projects. According to the airliner, the move aligns with advances in the country’s virtual assets-related initiatives as well as with the UAE’s digital economy.
The Emirates disclosed the following goals and ways to achieve them:
• Emirates has earned a reputation for its innovative products and customer-centric services.
• The airline has shown its commitment to investing significant resources and finances in the advanced digital space of metaverse and NFTs which can escalate revenue, and improve brand experience, and business efficiencies.
• To create a conducive environment for airlines’ future-focused projects like Web3, metaverse and NFT projects, the Emirates Pavilion at Expo 2020 Dubai will be reoriented into a centre for innovation.
• The Emirate has taken a step in this direction, in concordance with Dubai and the UAE’s recent decisive measures in developing its digital economy, and initiatives relating to artificial intelligence, virtual assets, and the recently developed technologies in the business environment and for the consumer services.
• Emirates had earlier also adopted the new digital technology.
UAE’s Vision for Digital Economy
To help set Emirates on a path towards achieving these goals, the CEO said that the airliner’s future-themed Emirates Pavilion at Expo 2020 which got over in March 2022 had been repurposed as a hub to develop cutting-edge future experiences aligned with the UAE’s vision for the digital economy.
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