Navigating Cryptocurrency Regulation and Accounting in the UAE

The emergence of cryptocurrency accounting in the UAE is a dynamic space filled with opportunities and challenges, as the region steps up as a global blockchain and fintech hub. Businesses and investors alike are keen to understand the accounting nuances for digital currencies such as Bitcoin, Ethereum, and other altcoins, given the distinct complexities they bring in valuation, revenue recognition, tax treatment, and reporting requirements. This blog dives into the accounting principles, regulatory insights, and best practices that entities in the UAE can leverage to navigate cryptocurrency accounting smoothly.

Cryptocurrency is a type of intangible digital asset, secured by distributed ledger technology, commonly referred to as blockchain. Unlike traditional financial assets, cryptocurrencies function as units of exchange, representations of asset ownership, or rights to specific services. Ownership is determined by possessing unique cryptographic keys, enabling owners to make entries on the blockchain and transfer ownership. However, these digital tokens themselves are not stored directly on an organization’s IT infrastructure; instead, only the cryptographic keys that permit asset access and control are retained by the entity. This unique attribute requires companies to employ careful handling and protection measures for these assets.
 

Regulation of cryptocurrency in the UAE varies by jurisdiction, encompassing Mainland UAE, Dubai outside DIFC, the Dubai International Financial Centre (DIFC), and the Abu Dhabi Global Market (ADGM). Each jurisdiction has developed specific frameworks to regulate digital assets and ensure compliance with both financial safety and investor protections.
 

The Securities and Commodities Authority (SCA) governs crypto-related financial activities in mainland UAE. Under SCA's guidance, crypto assets are classified as electronic records used for exchange, store of value, or as units of account that are transferrable electronically. Entities involved in crypto activities must acquire an SCA license, which mandates compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) standards. This regulatory approach fosters transparency and security within the crypto sector in mainland UAE.
 

Dubai has established the Virtual Asset Regulatory Authority (VARA) to oversee digital assets outside the DIFC area. Governed by Dubai Law No. 4 of 2022, VARA sets standards for licensing virtual asset providers and issues guidelines to ensure secure transactions and investor protection. Businesses must obtain pre-approval and licensing through VARA to operate within the virtual asset sector, positioning Dubai as a regulated yet progressive jurisdiction for cryptocurrency innovation.
 

In the DIFC, the Dubai Financial Services Authority (DFSA) oversees crypto activities. The DFSA's framework distinguishes between security tokens and other crypto assets, with a specific list of approved tokens, including Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC). Tokens with high anonymity or algorithmic instability are prohibited. Entities offering crypto-related financial services in DIFC must acquire DFSA licensing for advisory, custody, or trading activities, adhering to the outlined regulatory standards.
 

The ADGM Financial Services Regulatory Authority (FSRA) provides one of the UAE’s most detailed regulatory frameworks for cryptocurrency through its Spot Crypto Asset Framework. This framework categorizes crypto assets and security tokens separately and permits services such as exchange operations, custody, and advisory. ADGM also mandates rigorous AML and Counter-Terrorism Financing (CTF) measures, solidifying its status as a secure, compliant crypto business environment. Tokens not pre-approved must undergo a review, ensuring that high-risk assets are excluded.

 

The UAE recently clarified its VAT stance on cryptocurrency transactions. Cabinet Decision No. 100 of 2024, effective November 15, 2024, exempts cryptocurrency transactions from VAT, retroactively covering transactions from January 1, 2018. This rule aligns the VAT treatment of cryptocurrencies with that of traditional financial services, exempting exchange, ownership transfer, and conversion activities from the 5% VAT levy.
 

For individual investors in Dubai, cryptocurrency holdings and gains remain tax-free, thanks to the absence of personal income tax in the UAE. However, crypto businesses operating in Dubai face a 9% corporate tax on annual revenue exceeding AED 375,000, per regulations introduced in 2023. Free zone businesses may qualify for corporate tax exemptions if they comply with the respective free zone authority's guidelines. Accurate record-keeping and adherence to licensing requirements are essential to benefit from these incentives.
 

Accounting standards for cryptocurrency are still evolving, with significant insights offered by regulatory bodies and standard-setters. Generally, cryptocurrencies are recognized as a unique class of intangible assets. Here’s a closer look at key accounting considerations:
 

• Intangible Assets: Cryptocurrencies are often categorized as intangible assets due to their lack of physical form, aligning with both International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

• Inventory: For businesses holding cryptocurrencies for resale, they may be classified as inventory, commonly relevant to companies engaged in cryptocurrency trading or brokerage.
 

Cryptocurrencies are initially recognized at cost, including the purchase price and other attributable costs. Recent amendments to IAS 38, issued by the Financial Accounting Standards Board (FASB) on December 13, 2023, mandate that specific crypto assets meeting criteria (intangible, non-rights-based, blockchain-stored, cryptographically secured, fungible, and externally sourced) must be measured at fair value in each reporting period, with changes reflected in net income.
 

For businesses treating cryptocurrencies as inventory, fair value less cost to sell is used, with any valuation changes recognized in profit or loss.
 

• Balance Sheet: Cryptocurrencies appear on the balance sheet as intangible assets or inventory, based on classification.
 

• Income Statement: Changes in value, including revaluation gains/losses, impairment, and disposal, are recorded in the income statement. Inventory-related changes appear under cost of goods sold or other relevant lines.
 

• Notes to Financial Statements: Entities must disclose the nature and purpose of held cryptocurrencies, applied accounting policies, fair value basis, and any significant judgments or assumptions made for their classification and measurement.
 

Strict adherence to regulatory standards and diligent record-keeping are vital for crypto entities in Dubai. VARA requires Virtual Asset Service Providers (VASPs) to maintain detailed records, including policies to mitigate risks tied to virtual assets, and prohibits anonymity-enhanced tokens. Article 48 of the UAE security law restricts the promotion of cryptocurrency dealings without proper licensing, and non-compliance can lead to penalties.
 

While Dubai promotes blockchain and crypto innovation, investors must ensure compliance with all relevant tax and regulatory requirements to maintain seamless operations within the UAE’s dynamic cryptocurrency landscape.