Virtual Assets, commonly referred to as crypto assets, draw a lot of attention of both companies and private individuals. Dealing with virtual assets calls for an understanding of the regulatory environment to allow investors and operators alike to assess opportunities. In light of the opportunities and with a more proactive approach, the Government of Dubai established the world’s first independent regulator for virtual assets – the Virtual Assets Regulatory Authority (VARA) in March 2022.
Dubai’s Virtual Assets Regulatory Authority (VARA) was founded under the aegis of the UAE’s Virtual Assets Law. VARA is an independent regulator for regulation, governance and licensing of cryptocurrencies, Non Fungible Tokens (NFT’s) and other virtual assets in Dubai. This was established with authority over the virtual asset market across the Emirate of Dubai, including the Free Zones except the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM). VARA seeks to collaborate with global Virtual Asset Service Providers (VASPs) and international regulatory authorities.
VARA – The Virtual Assets Law:
The UAE with the enactment of the Virtual Assets Law and establishment of VARA has been trying to create an environment for the growth of crypto industry whilst being keen to reduce the potential financial crime risk in this nascent industry.
Law No 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai defines the following terms used by the Regulator, to describe virtual assets quite broadly which allows for adaptability and flexibility as virtual assets:
• ‘Virtual Asset’ – defined as digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes. This includes Virtual Tokens and any digital representation of any other value as determined by VARA.
• ‘Virtual Token’ – defined as a digital representation of a set of rights that can be digitally offered and traded through a Virtual Asset Platform.
These definitions broaden the common understanding of regulated crypto activities such as trading of crypto currencies and allowing VARA to create specific rules for increasing the range of virtual assets as they are created such as NFT’s and utility tokens.
License Application process in the mainland:
Under the Regulations, any firm seeking to engage in virtual asset activities in Dubai must obtain a Virtual Asset Service Provider (VASP) license. The application process for obtaining such license consists of two stages namely:
1. Obtaining an initial approval by submitting a preliminary disclosure questionnaire provided by VARA, supporting documentation such as a business plan, details of the beneficial owners and senior management to obtain initial approvals.
2. Once initial approval is obtained and after finalizing the incorporation and operational setup of the entity, the final approval is obtained and VASP license is issued to the firm to engage in the licensed virtual assets activities.
VASP license is issued for one year and must be renewed annually. It is to be noted that the VASP licensing process is separate from and supplemental to the incorporation of the entity before the Dubai Department of Economy and Tourism (for mainland entities) or the relevant Free Zone Authority for entities incorporated in the Free Zones in Dubai other than the DIFC.
DIFC – Digital Assets Law:
Independent of the Dubai wide regulatory regime, described above, the DIFC recently introduced the Digital Assets Law No 2 of 2024 (“Digital Assets Law”) on March 8, 2024. This law sets out the characteristics of digital assets and establishes how they may be controlled, transferred and dealt with by the interested parties.
The Digital Assets Law clearly defines ‘Digital Asset’ as an asset that:
• Exists as a virtual unit and manifested by the operation of software and network generated data;
• Exists independently of any particular person and legal system;
• Is not able to be copied;
• Once used or consumed by a person or specific group of persons, is not able to be used or consumed by another person.
• Is an intangible property
In addition to defining the attributes of digital assets, as highlighted above, The Digital Asset Law sets out the conditions required for a person to have control of a digital asset and how the title can pass.
Within the DIFC, firms who require to provide financial services in relation to digital assets will need to obtain the appropriate license from Dubai Financial Services Authority (DFSA).
License Application process in the DIFC:
The Free Zones follow an activity based licensing framework and therefore virtual asset activities are treated in the same manner as the other financial service businesses and have more tailored rules with specific regulations for virtual assets.
1. A letter of intent is required to be submitted and an initial informal review with DFSA to be scheduled. Application shall be submitted along with a regulatory business plan. Initial approval to be obtained from DFSA.
2. Registration with DIFC Registrar of Companies is to be initiated after receiving the initial approval from DFSA. A local bank account to be opened, provide proof of remittance of capital and secure office space from where it will conduct its activities. Upon successful compliance of all requirements, license shall be issued.
A snapshot of the UAE Virtual Asset Regulation:
Federal Level Regulation
o Securities and Commodities Authority o UAE Central Bank
Financial Free Zones
o Abu Dhabi Global Market (ADGM)
o Dubai International Financial Centre (DIFC)
Dubai Regulator
o Virtual Asset Regulatory Authority (VARA)
Federal Level Regulation
o Securities and Commodities Authority
UAE CENTRAL BANK
The UAE Central Bank is the sole regulator for the ‘central bank digital currencies’.
Virtual Asset service providers are treated like designated non – financial businesses and professionals must comply to the required AML compliances.
Registration with Financial Intelligence unit is required along with the submissions of ‘suspicious transactions reports’ which is required from time to time.
Looking Ahead:
The future of virtual currency in the UAE requires considerably less speculation than in other jurisdictions owing to the robust VA framework present. The UAE Central Bank launched its strategy for ‘The Digital Dirham’ on 23 March 2023. Phase One comprises three major pillars- the soft launch of mBridge to facilitate real value cross -border transactions for international trade settlement, proof of concept work for bilateral bridges with India, one of the UAE’s top trading partners and soft launch for domestic Central Bank digital currency issuance covering wholesale and retail usage.