UAE Financial Law Earthquake! DeFi Fully Regulated, Violations Fined 270 Million Dollars

The new financial law in the UAE is about to regulate DeFi and the broader Web3 industry, marking a significant shift in the sector. Federal Decree No. 6 of 2025 will be published in the official gazette and will take legal effect, aiming to regulate financial institutions, insurance businesses, and digital asset activities. Penalties for unlicensed operations include fines of up to 1 billion dirhams (approximately 272.3 million USD) and potential criminal sanctions, with a transition period until September 2026.

Article 62's Iron Fist: 'It's just code' is no longer an excuse

(Source: Central Bank of the UAE)

Key provisions of UAE Federal Decree No. 6, Articles 61 and 62, list activities that require the permission of the Central Bank of the UAE (CBUAE), including cryptocurrency payments and digital wallets. “Article 62 states that any person who conducts, offers, issues, or assists in obtaining permission for financial activities through any means, medium, or technology falls under the regulatory scope of the Central Bank of the UAE,” Heaver said.

The wording of this clause is extremely broad, meaning that almost all DeFi protocols involved in financial activities could be subject to regulation. “If protocols, DeFi platforms, middleware, or even infrastructure providers can offer activities such as payment, trading, lending, custody, or investment services, then they will all fall under regulatory scope,” Heaver said.

The lawyer stated that DeFi projects can no longer evade regulation by claiming to be “just code” and added that the argument of “decentralization” does not exempt protocols from compliance. This stance fundamentally dismantles the long-standing defense logic of the cryptocurrency industry. Many DeFi projects claim to be merely open-source code with no central operators, and therefore should not be subject to traditional financial regulations. The new law in the UAE explicitly denies this narrative.

Heaver stated that protocols supporting stablecoins, real-world assets (RWA), decentralized exchange (DEX) functions, bridging or liquidity routing “may require a license.” This almost covers all major types of the Decentralized Finance ecosystem, from lending protocols like Aave and Compound, to DEXs like Uniswap and Curve, to cross-chain bridges like Wormhole and LayerZero, all of which could be affected.

Types of DeFi Activities Requiring UAE Approval

Payment and Transfer Services: Stablecoin Protocols, Cross-Chain Bridging, Payment Channels

Trading Services: Decentralized Exchange (DEX), Automated Market Maker (AMM), Aggregator

Lending Services: Lending Agreements, Liquidity Mining Platforms, Yield Aggregators

Custodial Services: Multi-signature Wallets, Smart Contract Custody, Decentralized Finance Vaults

Investment Services: Synthetic Assets, Derivative Protocols, Asset Management Protocols

1 billion dirham penalty and deadline in September 2026

The deterrent effect of the law comes from its severe penalties. Law enforcement actions have begun, with penalties for unlicensed operations including fines of up to 1 billion dirhams (approximately 272.3 million USD) and potential criminal sanctions. This level of punishment is considered extremely strict in the global cryptocurrency regulation landscape, demonstrating the UAE's firm stance on compliance.

A fine of 272.3 million USD is enough to destroy most Decentralized Finance projects. Even large protocols with a market capitalization of billions of dollars would face serious financial difficulties if subjected to such a level of fine. More importantly, criminal sanctions mean that project founders and operators may face imprisonment, and this personal risk will force many projects to choose compliance or withdraw from the UAE market.

The transition period is set for September 2026. Heaver stated that Web3 projects being built or operated in the UAE should view this as a critical regulatory milestone and adjust their systems before the transition deadline. This gives projects approximately one year to complete compliance transformations, including applying for licenses, establishing compliance teams, implementing KYC/AML procedures, and adjusting technical architectures.

This relatively lenient transition period demonstrates the UAE's pursuit of a balance between strict regulation and innovation promotion. Immediate enforcement could lead to a hasty withdrawal of many projects, jeopardizing the UAE's position as a crypto hub. The one-year transition period provides projects with sufficient time to adapt and gives regulators time to refine the implementation details.

However, this also means that September 2026 will become the “Judgment Day” for the UAE DeFi ecosystem. At that time, unlicensed projects will face enforcement actions, while licensed projects will need to undergo ongoing regulatory scrutiny. This binary outcome will fundamentally change the UAE's crypto ecosystem, potentially leading to the exit of some projects, but it may also attract more institutional projects seeking a compliant environment.

Regulatory Controversies and Clarifications of Self-Custody Wallets

(Source: Central Bank of the UAE)

Karm Legal Consultants' founder and managing partner Kokila Alagh stated that the new Central Bank law in the UAE is directly related to the provision of “stored value services,” and thus this legislation may affect cryptocurrency wallet providers. According to Alagh, there is currently “considerable confusion” about whether this law affects self-custody wallets or non-custodial wallets (which are designed to allow users to store their assets independently of any third party).

Some industry observers believe that the law is essentially equivalent to the UAE “banning” cryptocurrencies and self-custody wallet applications. Mikko Ohtamaa from Trading Strategy even publicly criticized UAE lawyers for “confusing the facts” to protect their business interests. He argued: “For independent law firms, anything that makes the UAE less attractive for cryptocurrencies will lead to a loss of revenue.”

However, both Alagh and Heaver stated that this is not the case. “The law does not prohibit individuals from self-custody, nor does it restrict individuals from using their own wallets,” Alagh said, adding that the law “only expands” the scope of regulation for companies. She noted that “if wallet providers offer payment, transfer, or other regulated financial services to UAE users, they may need to comply with licensing requirements.”

This clarification is crucial. It means that individual users can still freely use non-custodial wallets such as MetaMask, Trust Wallet, etc., but companies providing these wallet services need to obtain a license if they operate in the UAE. This distinction aligns with the regulatory logic of most jurisdictions: regulating business entities rather than individual behavior.

Alagh mentioned that Karm Legal has received a large number of inquiries regarding this issue and added, “With the implementation of the law, the central bank is expected to provide further clarification, but for now, individuals are still unaffected, while companies should assess whether their activities fall under regulatory scope.”

Turning Point of UAE's Crypto Hub Status

This new law marks a significant turning point in the UAE's cryptocurrency strategy. Over the past few years, the UAE, particularly Dubai, has actively worked to establish itself as a global cryptocurrency hub. The relaxed regulatory environment, zero tax policies, and open business atmosphere have attracted a large influx of cryptocurrency companies and capital. Major exchanges such as Binance, FTX (before its collapse), and Bybit have all set up regional headquarters in the UAE.

However, this loose environment also brings risks. The collapse of FTX and multiple crypto fraud cases have made regulators realize that the unregulated crypto market could become a breeding ground for financial risks. The introduction of new laws shows that the UAE is shifting from “attracting traffic” to “quality regulation,” hoping to establish a more robust regulatory framework while maintaining an innovation-friendly environment.

This transition may have a positive impact on the long-term development of the UAE. The establishment of a compliance framework will attract more institutional players, enhancing the overall quality of the market. However, in the short term, it may lead to some projects seeking regulatory arbitrage to leave and turn to other crypto-friendly jurisdictions such as Singapore, Hong Kong, or Switzerland.

Alagh from Karm Legal stated that the company is actively following up on the matter and communicating with the Central Bank of the UAE (CBUAE), but the institution has not yet determined when it will provide clarification. This uncertainty is currently the biggest issue. Many projects are unclear about whether they need a license and do not know the application process and approval standards. The central bank needs to release the implementation rules as soon as possible to provide clear guidance for the industry.