10 Oct 2022
As a global leader in creating and regulating cutting-edge technology, The Government of Dubai has enacted new legislation to promote the growth and development of businesses operating in the virtual asset sphere. The Dubai Virtual Assets Regulatory Authority (VARA), which was established under this new law, is committed to creating a regulatory framework for any business that operates in the field of virtual assets in Dubai. VARA will aim to protect investors and provide services that meet global standards while encouraging healthy competition and innovation within the blockchain industry. As the world’s leading Global Financial Hub serving one billion customers across the Middle East, Africa, and South Asia (MEASA), Dubai prides itself on being a progressive market open to new technologies and innovation. With its FinTech industry well established and home to a growing community of innovative start-ups shaping the future of finance. The Virtual Assets Regulatory Authority (VARA), constituted by the UAE, will start to regulate operations involving crypto assets and award licenses to crypto companies wishing to establish a business in Dubai. It is dedicated to creating a regulatory environment for the expansion of the domestic cryptocurrency market. There is evidence that regulation is not always a deterrent, and the announcement has already attracted major cryptocurrency companies to Dubai, including Kraken, Binance, and Bybit.
The Activities Governed under VARA
Virtual Assets are a new asset class that has the potential to change how business is conducted, and what we do on a daily basis. With the increasing influence of Virtual Assets such as Cryptocurrencies and NFTs, as well as the increased prominence of blockchain technology across a wide range of industries worldwide, the potential for the Virtual Assets industry’s growth is immense. The Virtual Asset industry is set to build on Dubai’s well-established position as a hyper-connected pro-business city and its continued drive as an ever-evolving business capital, serving the needs of today's next-generation economy. The DWTC (Dubai World Trade Centre) Authority's regulatory and competitive operating environment, as a relatively new free zone established in 2015, is established to enable the growth of Dubai's Virtual Assets ecosystem.
- services for operating and administering platforms for virtual assets;
- services for currency exchange between virtual assets and local or international currencies;
- a service exchange between two or more types of virtual assets;
- services for virtual asset transfer,
- virtual asset custody and management,
- virtual asset portfolio services,
- virtual token offering and trading are all examples of virtual asset services.
Additionally, according to the DVAL, anyone intending to perform the Activities in Dubai must be registered there using one of the legal structures suggested by their most trusted legal experts that have been approved by the pertinent Dubai commercial licensing authorities.
Separate Implementing Decisions will be published in due time and are anticipated to offer additional information on the DVAL's purview, the licensing process, and the function of the VARA. Interested parties will need to sign a memorandum of understanding (the "MoU") with the DWTCA prior to the publication of the Implementing Decisions and the creation of the VARA. According to what we understand, the MoU will outline the broad strokes of the proposed legal framework for the regulation of the Activities. It is anticipated to include, among other things, provisions relating to collaboration and information sharing with the DWTCA, transaction monitoring, and the creation of a fully operational legal entity with an adequate "economic presence" within the free zone at the Dubai World Trade Center.
The Broad Scope of the Virtual Asset Prohibition
Given the VAL (Virtual Asset Law) Prohibition's ostensibly broad scope, it's possible that everyone who wants to offer virtual asset services in Dubai—including those who already hold a federal license from the United Arab Emirates ("UAE") and those who offer services across international borders—will still need to obtain a separate authorization from the VARA. If the VAL (Virtual Asset Law) Prohibition is applied and enforced in such a broad way, companies that are already established in the UAE outside of Dubai but wish to serve clients residing in Dubai may face serious difficulties.
The Licensing Requirements For The Activities Are Regulated By The VARA.
Following the issue of the pertinent Implementing Decisions, the specific licensing criteria for the activities covered by the VARA will be laid out. However, we anticipate that the VARA will at the very least inquire an applicant for authorization under the VAL the following questions:
- completion of an application form as directed;
- providing an organizational chart
- composing a business strategy;
- signing the agreement with (Dubai World Trade Center Authority);
- ongoing adherence to a yet-to-be-released code of professional ethics; and
- payment of any fees connected with the VARA's authorization request.
Federal Regulations And Their Association:
Securities and commodities authority
There are significant overlaps between the operations that the Securities and Commodities Authority ("SCA") and the Central Bank of the UAE ("CBUAE") are responsible for overseeing under current federal legislation in the UAE and the activities that the VARA will supervise under the VAL.
Securities and Commodities Authority (SCA)
Any person conducting certain financial activities (referred to as "Financial Activities") inside the UAE is not permitted unless they have a license or approval from the SCA, according to the Financial Activities Rulebook (the "SCA Rulebook"), which was published by the SCA in 2021. We understand that the definition of Financial Activities may soon include;
- virtual brokerage;
- virtual holding and
- virtual service provider services.
Central Bank Of UAE
The Retail Payment Services and Card Schemes Regulation, or "RPSCS Regulation," was published by the CBUAE in 2021 and governs transactions involving payment tokens (also known as stable coins) in the UAE. The Stored Value Facilities Regulation (also known as the "SVF Regulation"), which was published by the CBUAE in 2020, governs companies that create or run a stored value facility in the United Arab Emirates where cryptocurrencies and virtual assets may also be acknowledged in return for the storage of value. Even though the DVAL declares that any regulations that are incompatible with or contradict its provisions "must be repealed," we should recall that in the UAE, federal laws take precedence over those made by individual emirates. Since the DVAL is not a federal legislation of the UAE, we anticipate that, unless specifically indicated otherwise by the relevant federal organizations, any regulations issued by the SCA and the CBUAE will continue to be applicable. Therefore, it is unknown how, if at all, the DVAL would interact with the current federal legislation of the UAE issued by the SCA and the CBUAE as described above.
Syncing Up with Contemporary Regulators
The VARA will work in conjunction with the CBUAE "in all subjects to maintain the safety and soundness of the financial system" in Dubai, the VAL emphasizes, and will be connected to the DWTCA. Separately, we are aware that an MoU was signed in September 2021 by the SCA and the DWTCA to enable the offering, regulation, issuance, and trading of virtual assets within the DWTCA's free zone.
It is still unclear just how closely connected the VARA is to the DWTCA, the SCA, and the CBUAE. At this point, it is also unclear how the VARA will work with the SCA and the CBUAE to coordinate the regulation of the operations, as well as if Dubai's virtual asset activities will be subject to separate or combined licensing regimes.
Conclusion:
The Virtual Asset Law's introduction is a step in the right direction for the UAE's goal of being the world's center for blockchain and digital asset technologies. Businesses will be able to take advantage of the virtual asset regime and establish themselves in the UAE's constantly welcoming and rapidly expanding digital technology sector in the near future. There will still be important questions to be addressed;
- how the virtual assets law interacts with current federal law,
- how the VARA, the DWTCA, the SCA, and the CBUAE are intended to work together, and;
- how the virtual asset law authorization obligation will affect the offering and provision of cross-border goods and services in the UAE.