DubaiUnderstanding Dubai’s New Virtual Asset Law released by VARA: A Comprehensive Guide

https://x5v6w2n8.rocketcdn.me/wp-content/uploads/2023/07/pexels-aleksandar-pasaric-325193-1.jpg
  • Dubai, the financial center of the United Arab Emirates, is emerging as a popular destination for virtual asset businesses. Its rapid transformation over the past decade can be attributed to its advantageous location, business-friendly atmosphere, modern infrastructure, and commitment to technological innovation. Dubai’s location at the intersection of Asia, Europe, and Africa offers access to an extensive and growing market, making it an appealing option for businesses seeking to expand. The emirate’s pro-business environment, including low taxes, free zones, and streamlined Dubai virtual assets regulation law, has also contributed to its appeal to entrepreneurs and investors.
  • Dubai’s support for technological advancement has fostered an ecosystem that promotes the growth of virtual asset and blockchain-related companies. The city’s investment in cutting-edge technologies like artificial intelligence, cloud computing, and the Internet of Things has helped build a dynamic and diverse startup ecosystem. Dubai’s government has also launched initiatives such as the Dubai Blockchain Strategy, which aims to make Dubai the first city fully powered by blockchain by 2020, highlighting its commitment to encouraging innovation in the virtual asset industry.
  • Moreover, Dubai’s regulatory framework for virtual assets is robust, ensuring a safe and transparent environment for businesses to operate. The recent adoption of the Virtual Assets and Related Activities Regulations by the Dubai Virtual Assets Regulation Authority (VARA) has further solidified Dubai’s position as a top location for virtual asset businesses. The regulations provide a comprehensive framework for the regulation of virtual assets, virtual asset service providers, and related activities, instilling confidence and assurance in businesses.
  • Finally, Dubai’s focus on sustainability and environmental initiatives, such as the Dubai Clean Energy Strategy 2050, underscores the emirate’s forward-thinking approach and commitment to creating a sustainable and innovative economy. These factors combined have made Dubai a thriving hub for virtual asset businesses and a trailblazer in the blockchain space.

Background of Virtual Assets and Related Activities Regulations 2023

  • In a significant development for the regulation of virtual assets and related activities in Dubai, the Dubai Virtual Assets Regulation Authority (VARA) adopted the Virtual Assets and Related Activities Regulations 2023 on February 7, 2023. The regulations were introduced following the enactment of Dubai Law No. 4 of March 11, 2022, which granted VARA powers to regulate activities related to virtual assets in Dubai, excluding the Dubai International Financial Center (DIFC).
  • The new Dubai virtual assets regulation law applies to all virtual assets and related activities in Dubai, including those in special development zones and free zones other than the DIFC. Any entity carrying out or promoting virtual asset activities as part of its business operations in Dubai must be authorized or licensed by VARA. VARA retains sole discretion to determine whether an entity is carrying out virtual asset activities by way of business in Dubai, taking into account factors such as the frequency, scale, and continuity of relevant operations.
  • Offshore providers of virtual asset activities must obtain VARA’s approval before marketing their services and must demonstrate that they hold all relevant licenses in their home jurisdiction. Adopting these regulations represents Dubai’s commitment to the safe and secure development of virtual asset businesses and creating a favorable environment for investors in this rapidly growing sector.

Role of an autonomous regulatory body – Virtual Assets Regulatory Authority (VARA)

  • The Virtual Assets Regulatory Authority (VARA) in Dubai will function as an autonomous entity with legal status, financial independence, and the power to protect and regulate stakeholders in virtual asset services. VARA will oversee the issuance, offering, and disclosure of virtual assets and non-fungible tokens (NFTs) and collaborate with other federal agencies, including the Central Bank of the UAE, to create a code of ethics, general policy, and strategic plans.
  • VARA will not regulate virtual asset services on a federal level, but it will enforce the Virtual Asset Law (VAL), and any entity that violates the new Dubai virtual assets regulation law may face penalties and fines, including the suspension of VARA’s authorization for six months. Anyone seeking to offer virtual asset services must obtain a license from VARA, operate within the Emirate of Dubai, and possess a trade license from the relevant commercial authority.
  • VARA’s responsibility includes monitoring trading activities in virtual asset services, preventing price manipulation, and ensuring the protection of personal data. The authority is expected to issue implementing decisions on relevant activities, exempted virtual assets, licensing procedures, and associated fees and charges, as well as regulate virtual asset custodians, digital wallets, and tokenization and trading. VARA will be affiliated with the Dubai World Trade Centre (DWTC) Authority.
  • The Dubai virtual assets regulation law grants VARA the authority to take various actions and measures, such as suspending authorizations, activities of virtual asset service providers, and dealings with virtual assets in specific situations. The DWTC Authority’s Board of Directors will define the actions that constitute a violation of the law and the corresponding penalties.
  • In addition to any imposed penalties, VARA may suspend authorization for up to six months or revoke it entirely. It may also collaborate with the relevant commercial licensing authority in Dubai to cancel the entity’s trade license. Violating the Virtual Assets Law may lead to significant sanctions and far-reaching consequences.

Scope of Virtual Asset and Virtual Asset Activities 

Virtual Asset: The definition of virtual assets under the Dubai Virtual Assets Law, as stated in Article 2, is “a digital representation of value that can be traded, transferred, or used for exchange, payment, or investment purposes. This encompasses all forms of digital value representation as determined by VARA, including virtual tokens.”

  • Furthermore, the law provides a distinct definition for virtual tokens, also outlined in Article 2, as a digital representation of a collection of rights that can be traded and offered digitally through a Virtual Asset Platform.

Virtual Asset Activities: Different VA activities covered by the remaining rulebooks under VARA in Dubai, along with a brief description:

  1. Advisory services: This involves offering or providing advisory services to individuals or businesses in relation to actions or transactions involving virtual assets. This includes providing advice on the acquisition, disposal, or management of virtual assets.
  2. Broker-dealer services: This covers activities related to facilitating the buying and selling of virtual assets, such as arranging orders, matching transactions, and acting as a dealer or market maker. It also includes providing placement, distribution, or other issuance-related services to clients issuing virtual assets.
  3. Custody services: This refers to the safekeeping of virtual assets on behalf of others and acting only on verified instructions from those individuals or entities. It includes storing and safeguarding virtual assets, as well as managing access and authentication controls.
  4. Exchange services: This involves conducting an exchange or trade between virtual assets, or between virtual assets and fiat currency. It also includes matching orders between buyers and sellers and maintaining an order book in relation to these transactions.
  5. Lending and borrowing services: This covers carrying out contracts where virtual assets are transferred or lent from one party to another. The borrower commits to return the same at the request of the lender, either during or at the end of the agreed-upon period.
  6. Payment and remittance services: This covers receiving virtual assets for the purpose of transmitting or transferring them from one person to another or from one virtual asset wallet, address, or location to another.
  7. Management and investment services: This involves acting on behalf of a person as an agent or fiduciary, or taking responsibility for the management, administration, or disposition of that person’s virtual assets. This includes services such as investment management or asset management, as well as staking to earn fees for validators or node operators of a proof-of-stake distributed ledger technology (DLT).
  • VARA allows companies that are not classified under any of the VA activity categories to register voluntarily. Such companies include providers of technology services that utilize Distributed Ledger Technology (DLT) for other businesses and those that invest their portfolio in Virtual Assets (VAs).

Dubai Virtual Asset Law and Rulebooks

  • Under VARA, Virtual Asset Service Providers (VASPs) who are licensed are obligated to comply with the Regulations and the corresponding rulebooks. The rulebooks comprise Compulsory Rulebooks such as Company, Compliance & Risk Management, Technology & Information, and Market Conduct. All VASPs are required to comply with these Compulsory Rulebooks.
  • Additionally, there are Activity Specific Rulebooks, one for each of the seven licensed activities mentioned above. VASPs must comply with the relevant Activity Specific Rulebook to the extent that it relates to the activity(ies) they are licensed to carry out.
  • Furthermore, there is the Virtual Asset Issuance Rulebook, which lays out the rules for the issuance and other related activities of virtual assets. Those who are already involved in financial services in the Abu Dhabi Global Market or the DIFC may be familiar with these types of rulebooks.

Territorial scope of regulation

  • The geographic scope covers all virtual assets (VAs) and VA activities within Dubai, including special development zones and free zones, excluding the DIFC. As per Part III of the Regulations, any entity conducting or promoting a VA activity as a business in Dubai must obtain authorization or a license from VARA, unless there is an exemption applicable to a specific VA activity or the entity holds Exempt Entity status (refer to details below). 

Key takeaways from the regulation

General prohibition on VA activities: No entity is permitted to engage in any Virtual Asset Activity as a business or promote offer, or claim to do so within Dubai unless it falls under one of the following categories:

  1. Authorized and licensed by VARA for the specific Virtual Asset Activity.
  2. An employee who conducts or facilitates such activities on behalf of their employer, which holds a VARA license.
  • VARA holds the sole and absolute discretion to determine if an entity is conducting a Virtual Asset Activity “by way of business.” This determination considers factors such as the entity’s representation as a Virtual Asset Activity provider, the regularity, scale, and continuity of the activity, as well as whether the entity receives compensation or other commercial benefits from carrying out the Virtual Asset Activity.

Exempted Entities and VA Activities: The Regulations provide for exemptions from the licensing requirement, including:

  1. Exempt Entities: UAE government entities and their public, non-profit, not-for-profit, and charitable organizations are exempt from the licensing requirement but must notify VARA of their activities and obtain non-objection confirmations.
  2. Certain VA Activities: Provision of advisory services such as legal, accounting, and other professional advice that is wholly incidental to professional practice are exempt from the licensing requirement subject to certain conditions, including that the exempted person is duly licensed in Dubai.
  3. Registration for large investors: VASPs that invest in their own portfolio in virtual assets, where the investment volume equals or exceeds USD 250 Million (or equivalent value in virtual assets) during any rolling thirty-day period, must register with VARA before investing or within three working days from the date of the investment volume. Proprietary traders are not permitted to accept or trade virtual assets of a third party. If VASPs do not meet the registration criteria, they may choose to voluntarily register with VARA. However, it is important to note that registration with VARA does not authorize proprietary trading entities to provide regulated services.
  4. Company structure: VARA’s Company Rulebook outlines the requirements for the company structure of Virtual Asset Service Providers (VASPs). The specific corporate governance needs of each VASP will depend on its unique structure and business operations. VARA requires that a VASP maintains a clear and transparent company structure that allows for effective oversight, ensures the sound and efficient operation of the business (including VA activities), and promotes fair and orderly functioning in any market involving VAs.
  • Additionally, VASPs must have a legal entity registered in Dubai in one of the approved legal forms, as determined by a company registrar or corporate licensing authority. While VARA is affiliated with the DWTC Authority, which encourages VA businesses to establish entities within the DWTC free zone, other free zones, such as DMCC, have also positioned themselves as viable alternatives for VASPs.
  • It is important for VASPs to maintain a clear chain of ownership and voting powers to enable VARA to identify any controlling entities and ultimate beneficial owners (UBOs). If a VASP adopts a complex company structure, including trusts and nominee arrangements, or structures involving DAOs or other decentralized governance models, the VASP must provide additional information to VARA during the licensing process. This information includes the reasons for adopting such complex structures, the relationship between the VASP and relevant DAOs, the potential adverse impacts on the VASP’s compliance with regulations, and the legal recognition of the relevant DAOs in other jurisdictions.
  • VARA acknowledges that VA businesses may use complex legal structures that extend beyond the geographical limits of the UAE and that these structures may not be currently available under the UAE legal system. VARA aims to be a forward-thinking and sector-focused regulator and has attempted to accommodate companies with a DAO governance structure while still ensuring that they provide adequate information for efficient regulation in Dubai.
  • Finally, VASPs must obtain written approval from VARA before making any material changes to their company structure, controlling entities, UBOs, or adopting decentralized governance models for their VA activities. This requirement ensures that VARA is informed of any changes that may impact the VASP’s compliance with regulations.

Functional requirements: An entity planning to apply for a Dubai VASP license under Virtual Asset and Related Activities 2023 is required to adhere to the corporate governance rules when incorporating a company. This the entity need to have: 

  • Board of directors (of at least 2 to be the resident of UAE)
  • At least 2 Responsible officers for overseeing compliance with the legal and regulatory obligations 
  • Compliance officer/ MLRO (can be a foreign national)
  • Company Secretary 
  • Tetra Consultants team can assist with the provision of nominee director services as well as assist with the recruitment of compliance officers. 
  1. Capital requirement and net asset: VASPs are required to meet specific capital requirements that differ for each regulated activity and the number of activities they undertake. The minimum capital requirement ranges from AED100,000 to AED 1,500,000 or may depend on their fixed annual overheads.
  • VASPs must maintain sufficient current liquid assets to ensure their surplus over current liabilities is at least 1.2 times their monthly operating expenses. Additionally, they must hold reserve assets equivalent to 100% of their clients’ liabilities for all virtual asset activities. These reserve assets must be held in the same virtual asset that the liabilities are owed.
  • VASPs are obligated to maintain multiple types of insurance, including professional indemnity insurance, directors’ and officers’ insurance, commercial crime insurance, or similar types of insurance for all virtual assets stored in hot wallets. VARA may also direct VASPs to maintain any other type of insurance as necessary.

2. AML/CFT compliances: VARA is designated as the supervisory authority in the Emirate for all Virtual Asset Service Providers (VASPs) and Virtual Asset Activities. Its role encompasses the regulation of anti-money laundering (AML) measures and combating the financing of terrorism (CFT) within the Emirate for all VASPs and Virtual Asset Activities. VARA possesses the authority to oversee and ensure compliance with relevant federal AML/CFT laws within the Emirate.

3. Marketing: Regarding marketing and promotion, it is mandatory for all market participants, irrespective of whether they hold a VARA license or not, to adhere to the regulations governing marketing, advertising, and promotional activities.

4. Licensing process: The licensing process for Virtual Asset Service Providers (VASPs) in Dubai is a critical and responsible task that requires careful attention. It involves a tiered approval structure, which includes the following steps: 

  • Step 1 – Obtaining a temporary permit
  • Step 2 – Submitting documents for a preliminary license for a minimum viable product (MVP)
  • Step 3 – Obtaining an MVP operating license
  • Step 4 – Obtaining a Full Product License (FMP)
  • However, it is essential to note that the rules and regulations governing the licensing and regulation of virtual assets have recently been updated. As a result, only a few companies have received licenses, and the transition phase has just begun, leading to an increase in the number of potential applicants. It is crucial for company representatives to be aware that, to date, VARA licenses have only been issued at the first and second stages, namely, Temporary Permit and MVP.
  • VARA has announced that to obtain an appointment at the fourth stage, the applicant must pass rigorous checks within the established regime. Furthermore, any VASP that has received an MVP license must comply with the terms of the MVP license. The licensing process may appear simple, but it requires a responsible approach and careful attention to detail.

How can Tetra Consultants help?

  • Dubai has emerged as a trailblazer in the realm of digital economy and virtual assets. The forthcoming issue of the VARA Regulations, coupled with the increasing number of regulations governing virtual assets in the Dubai free zones, has stimulated a surge in businesses seeking to enter the virtual assets sector in the UAE. 
  • The VARA Regulations, which are unprecedented in the world, have the potential to set a benchmark for the industry and encourage other nations to prepare their own equivalent rules and regulations. If you or your business is considering dealing with virtual assets in the UAE, it is crucial to be aware of the requisite approvals/licenses to avoid the risk of incurring penalties. 
  • As a business consulting company with a strong presence in Dubai and in-depth knowledge of the UAE’s legal and regulatory landscape, Tetra Consultants can assist businesses looking to navigate Dubai’s virtual asset laws and obtain a VASP license. Our team of experts can provide guidance and support to businesses throughout the process, ensuring that they meet all necessary requirements and comply with regulatory obligations.
  • Our consultancy services include advising businesses on the various requirements of the VASP framework, such as compliance and due diligence requirements, as well as the licensing process. We can assist with the drafting of legal documents, liaising with relevant authorities for registration, and providing ongoing compliance support. Our team can also provide guidance on the most appropriate legal entity structure for a business and advise on the various legal and regulatory requirements and procedures involved to register company in Dubai.
  • Obtaining a VASP license in Dubai can be a complex and time-consuming process, which is why we offer comprehensive support to businesses throughout the application process. Our services include the process of registering a company in Dubai mainland or Dubai Free Zones, preparing and submitting the VASP license application and supporting documentation, liaising with regulatory authorities, corporate bank account opening, provision of nominee director services, and providing ongoing support and guidance to ensure compliance with all necessary requirements. Understanding the need of different businesses our experts for offshore financial licenses also provide assistance with the process of applying for a cryptocurrency license in Dubai free zones. 
  • By leveraging our expertise and experience, businesses can ensure a smooth and efficient VASP license application process, avoid any potential penalties or compliance issues, and establish a legally compliant and successful virtual asset business in Dubai. We are committed to providing our clients with the highest level of service and support and helping them achieve their business goals in the UAE’s virtual asset market. So, what are you waiting for? 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. 

Tetra Consultants

Tetra Consultants is the consulting firm that works as your advisor and trusted partner in your business expansion. We tell our clients what they need to know, instead of what they want to hear. Most importantly, we are known for being a one-stop solution for our valued clients. Contact us now at enquiry@tetraconsultants.com for a non-obligatory free consultation. Our team of experts will be in touch with you within the next 24 hours.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related articles and guides