- Dubai’s Virtual Asset Regulatory Authority (VARA) recently unveiled the Virtual Assets and Related Activities Regulations 2023, which aims to establish a comprehensive framework for virtual assets (VAs). This framework is based on principles of economic sustainability and cross-border financial security. The United Arab Emirates (UAE) is fully committed to facilitating these drivers while updating its oversight and regulatory approach to mitigate global risks such as money laundering (ML) and terrorist financing (TF) arising from the potential misuse of emerging technologies.
- The new Dubai virtual asset law provides regulatory certainty, offering the market clear guidance on the expected level of operator responsibility. It also mandates the implementation of robust risk assurance and Anti-Money Laundering (AML) standards by licensed entities operating within the Emirate. VARA was launched in Q1-2022 as the world’s only independent and specialized regulator for Virtual Assets. Serving as an accelerator for a truly borderless Digital Economy, VARA is now commemorating its first anniversary since its establishment by introducing the groundbreaking virtual asset regulation. This framework is designed to expedite the New Economy agenda, promoting secure and sustainable global market growth. It reflects the UAE’s unwavering commitment to building responsible safeguards and Dubai’s confidence in creating a dynamic VA ecosystem that fosters next-generation innovation.
- As the designated authority responsible for overseeing virtual assets (VAs) throughout Dubai, excluding the Dubai International Financial Centre (DIFC), VARA plays a crucial role in promoting economic stability, safeguarding investors, and ensuring jurisdictional resilience. The newly introduced regulations cover a wide range of seven licensed VA activities, including Advisory services, Broker-Dealer services, Custodial services, Exchange services, Lending-Borrowing services, Payments, and Remittances services, and VA Management and Investment Services. Moreover, the issuance of tokens is also subject to regulation under the VARA framework, enabling consumers to make well-informed decisions regarding newly launched tokens in Dubai, while imposing corresponding obligations on issuers.
- Understanding the opportunities and challenges presented by the new Dubai virtual asset law introduced by VARA is crucial for various stakeholders in the virtual asset ecosystem. Firstly, for businesses and investors, knowing the opportunities provided by the law allows them to assess the potential for growth and innovation in the Dubai market. It enables them to identify areas where they can participate and leverage the regulatory framework to develop and expand their virtual asset operations. Additionally, comprehending the challenges associated with the law is essential for businesses to proactively address compliance requirements, mitigate risks, and ensure long-term sustainability in the evolving regulatory landscape.
Opportunities and Challenges for Businesses by VARA
Opportunities: The implementation of Dubai’s new virtual asset law offers new opportunities for businesses contemplating starting a business in the virtual asset sector.
- Attractive regulatory landscape: The United Arab Emirates (UAE) has demonstrated considerable progress in embracing cryptocurrency adoption. Major companies, including Emirates and Etihad Airways, real estate firms such as DAMAC Properties, Ellington Properties, and Aston Property Ventures, and grocery delivery services like Yalla Market, now accept cryptocurrency payments. This achievement has been made possible due to the government’s active support for crypto technology and the overall ecosystem.
- Dubai, with its comprehensive and advanced regulatory framework, has positioned itself as an attractive destination for global crypto asset companies seeking compliant global expansion. Local businesses view this as a forward-thinking step for the UAE, as they believe that these progressive regulations will make Dubai an appealing choice for global digital asset companies looking to enter the international market. The local media has lauded the government’s efforts, recognizing that this move will facilitate the development of compliant blockchain applications, promoting mainstream adoption and economic growth in the region.
- Dubai’s commitment to providing regulatory clarity signifies its determination to establish itself as a prominent hub for virtual assets, offering a supportive regulatory environment to attract businesses to the city. The recent policy clarity will also entice top talent from around the world, enabling the country to become a global hub for Web3 technologies. By ensuring transparent and secure operations for virtual asset businesses, Dubai is poised to attract increased investments and foster innovation in the cryptocurrency space.
- Autonomous and Cooperative Regulator: The primary objective of this law was to establish the Dubai Virtual Asset Regulatory Authority (VARA) as the first independent authority responsible for overseeing virtual asset activities in Dubai. VARA has the crucial role of regulating and licensing financial activities associated with virtual assets. While VARA is designated as an independent authority, there is a strong collaboration and cooperation between VARA and other onshore financial regulators, such as the UAE Central Bank and the Securities and Commodities Authority (SCA).
- VARA’s role in licensing and regulating financial activities related to virtual assets brings a level of legitimacy and trust to the sector. By ensuring that businesses operating virtual asset platforms and providing exchange services are licensed and regulated, VARA helps establish a secure and transparent environment for investors and consumers. This, in turn, enhances the credibility of businesses in the eyes of potential customers, leading to increased confidence and participation in the virtual asset market.
- Furthermore, the close cooperation between VARA and other onshore financial regulators creates a harmonized regulatory approach. This cooperation helps prevent regulatory overlaps and inconsistencies, making it easier for businesses to navigate multiple regulatory requirements and streamline their compliance efforts. It also signals a commitment from the authorities to work together to address any potential risks associated with virtual asset activities, fostering a stable and resilient business environment.
2. Institutional participation: Virtual asset laws play a crucial role in encouraging institutional investors to enter the market. Institutions such as banks, hedge funds, and pension funds often have strict compliance requirements. Clear virtual asset laws and regulations provide these entities with the necessary confidence to engage with virtual assets. Increased institutional participation can bring substantial liquidity to the market, enhancing price stability and enabling larger-scale investments. Moreover, institutional involvement can contribute to the professionalization of the virtual asset industry, further attracting mainstream adoption and unlocking new opportunities for businesses and investors.
3. Regulatory Sandboxes: The Dubai virtual asset law includes provisions for regulatory sandboxes, which provide a controlled environment for businesses to test innovative virtual asset solutions. Participating in a regulatory sandbox allows businesses to validate their products or services, receive feedback from regulators, and refine their offerings. This can accelerate time-to-market, mitigate risks, and increase the chances of successful deployment.
4. Technological Advancements: Dubai Virtual asset laws incentivize research and development in the blockchain and cryptocurrency sectors. By providing a regulatory framework, businesses and investors gain clarity on the legal boundaries and requirements for their innovative projects. This clarity can encourage technological advancements, such as the development of new blockchain solutions, smart contracts, and decentralized applications. These technological advancements can benefit businesses and investors by offering improved efficiency, reduced costs, and enhanced security. Furthermore, the growth of the blockchain and cryptocurrency ecosystem can spur innovation in other sectors, as businesses leverage these advancements for their own operations, leading to broader economic benefits.
Challenges: The implementation of the new Dubai Virtual Asset law introduced by VARA poses several challenges for businesses operating in the virtual asset sector. These challenges include:
6. Compliance Burden: The law imposes stringent compliance requirements on businesses. This includes implementing robust anti-money laundering (AML) and know-your-customer (KYC) procedures, conducting regular audits, and maintaining comprehensive records. Meeting these obligations can be complex, time-consuming, and resource-intensive for businesses.
7. Regulatory Adaptation: With the implementation of the new law, businesses need to adapt their operations and practices to comply with specific regulatory requirements. This may involve making changes to existing processes, technologies, and policies to ensure alignment with the law’s provisions. Adjusting to the new regulatory framework can be a challenging and iterative process for businesses.
8. Licensing and Authorization: The law introduces a licensing regime, requiring businesses to obtain the necessary licenses and authorizations to operate legally in the virtual asset sector. Obtaining these licenses may involve navigating a thorough application process, meeting specific criteria, and providing documentation to demonstrate compliance. The licensing process can be time-consuming and may require businesses to allocate additional resources.
9. Ongoing Compliance Monitoring: The implementation of the new law necessitates continuous monitoring and adherence to regulatory requirements. Businesses must establish internal systems and controls to ensure ongoing compliance with the law’s provisions, including regular reporting, audits, and updates to policies and procedures. Maintaining compliance on an ongoing basis requires dedicated resources and a commitment to staying up-to-date with regulatory changes.
10. Impact on Business Models: The new virtual asset law has implications for existing VASPs and the ones that are still in the process of applying for Dubai VASPs license under the new Virtual Asset Law. Entities need to reassess their strategies, operations, and revenue streams to ensure compliance with the law while remaining competitive. Adjusting business models to align with the regulatory framework can pose challenges, especially for businesses that need to balance compliance with innovation and growth. Existing entities are guided to take steps in a below-mentioned manner:
11. Covering all VASPs which started the MVP Licensing process with VARA before 7th Feb: Applicants will need to perform detailed gap assessments against the new requirements to ensure compliance and address any gaps if they want to obtain a Full Market Product License (FMP) to operate without restrictions.
- Covering all VASPs operating in the Emirate of Dubai (excl. DIFC) before 7th Feb, not yet engaged with VARA: (i) VASPs will need to perform a detailed gap assessment against the new requirements, to determine applicability to their current and planned businesses. (ii) VASPs will need to submit an Information Disclosure Questionnaire (IDQ) with self-identification of VA activities to VARA by 31st March 2023. Otherwise, entities need to wind down operations in Dubai by 31st May 2023.
- All VASPs which are yet to start operations in the Emirate of Dubai (excl. DIFC): (i) VASPs will need to perform a detailed gap assessment against the new requirements, to determine applicability to their planned businesses. (ii) VASPs are required to obtain a no-objection certification from VARA or an FMP to operate. (iii) VASPs will need to submit an initial IDQ to VARA as a first step to initiate the licensing process
- Further, All Financial Institutions with existing or planned relationships with VASPs in the Emirate of Dubai (e.g., global and local banks offering client money services) are required to analyze and incorporate the new requirements into suitable due diligence and risk frameworks to avoid regulatory, compliance, and reputational risks.
- To address these challenges, businesses should invest in a comprehensive understanding of the new law, seek legal and regulatory guidance, allocate sufficient resources for compliance efforts, and establish robust internal processes to monitor and ensure ongoing adherence to regulatory requirements. Additionally, staying updated on regulatory developments and fostering a culture of compliance within the organization is essential for successfully navigating the implementation of the new Dubai virtual asset law.
How Tetra Consultants can assist with the process of applying for a Dubai VASP License?
- Tetra Consultants is an international consultancy firm that offers clients with comprehensive business-setup support including the process of incorporating offshore company incorporation, nominee director services, corporate bank account opening, regulatory compliance consulting as well as the process of applying for various offshore financial licenses.
Step 1: Strategy and Regulatory Advisory
- Tetra Consultants will help you develop a suitable strategy and operating model for offering virtual asset services in the Dubai region. For applicants with no local presence in the country, we assist with the steps to register company in Dubai mainland or Dubai Free Zones. Wherein, we expect to complete the process of registering a local company with the Dubai Registrar of Companies within 2 weeks.
- We thoroughly analyze various entry options and identify the necessary regulatory frameworks and licenses for your business. Our licensing experts guide you through the various licensing regime relevant to your virtual asset business. Our team also assists with securing a cryptocurrency license in Dubai from specific free zones. Our business setup experts ensure compliance with regulatory standards while optimizing your operational efficiency. Our comprehensive service package includes assistance with the provision of a local agent/ company secretary, local registered address, corporate bank account opening as well as the nominee director services to ensure smooth registration of your entity.
Step 2: Pre-Application Package Development
- Once you have selected the most appropriate licensing path, we provide support in preparing all the required corporate documents, business plans as well as AML/CFT, and other policies like an insurance policy, risk assessment, etc.
- Our consultants ensure that your application package meets regulatory expectations and aligns with global industry best practices.
- We guide you through the entire process, increasing the likelihood of a successful licensing outcome.
Step 3: Regulatory Interaction
- Under our regulatory compliance consulting services, our team offers invaluable assistance in responding to regulatory queries and fulfilling additional requirements as requested by regulators.
- With our proven track record of effective communication with regulatory bodies, we act as your liaison, freeing up your time to focus on core business operations.
- We handle regulatory interactions on your behalf, ensuring compliance and regulatory satisfaction.
Step 4: Fulfiling pre-license application compliance requirements
- We assist in operationalizing your VASP license by ensuring compliance with the necessary systems, policies, and processes. Our business consulting firm offers tailored requirements and managed services across control functions and daily operations. We provide loan staffing arrangements to support key control functions within your organization.
- Our consultants help set up or reorganize key control functions, including risk management, compliance, and internal audit, aligned with your business and governance model. Tetra Consultants’ HR team can provide assistance with the recruitment of a Compliance Officer.
- Once the above steps are completed, our licensing experts proceed with the filing of the license application with VARA. We further ensure to respond to any regulatory queries that may be posed during the licensing procedure
Step 5: Operational Phase
- Furthermore, we offer project management support and expert guidance with the accounting and tax aspects of your entity as well as execute any transformation or regulatory projects undertaken by your entity.
- By engaging our business consulting firm for assistance with the Dubai VASP license application process, you can benefit from our expertise, minimize complexities, and ensure a smoother and more successful licensing journey.
- Contact us to find out more about how to obtain a Dubai VASP License, and our dedicated and experienced team will respond within the next 24 hours.