Dubai’s VARA issues Regulations for Dubai Virtual Asset Regime

On 7 February 2023, the Dubai Virtual Asset Regulatory Authority (VARA) issued the Virtual Assets and Related Activities Regulations 2023 (the Regulations), an all-encompassing virtual asset regulatory framework applicable to all Virtual Asset Service Providers (VASPs) in Dubai (excluding the Dubai International Financial Centre (DIFC)).

VARA is the entity in charge of regulating, supervising and overseeing Virtual Assets[1] and related activities in all zones across the Emirate of Dubai (including Special Development Zones and Free Zones but excluding the DIFC).

The Regulations provide some much-anticipated regulatory certainty which in turn, should promote protection for investors, sustainable market growth, and stability in the virtual assets sector. 

The Regulations and Rulebooks

The Regulations cover seven licensed virtual asset activities (each a Virtual Asset Activity):

• Advisory services
• Broker-Dealer services
• Custody services
• Exchange services
• Lending and Borrowing services
• Payments and Remittances services
• Management and Investment services

VASPs licensed by VARA are required to comply with the Regulations as well as the relevant rulebooks which accompany the Regulations, comprising of:

• Compulsory Rulebooks (Company; Compliance & Risk Management; Technology & Information; and Market Conduct) which all VASPs must comply with;
• Activity Specific Rulebooks (one for each of the seven licensed activities listed above) which VASPs must comply with to the extent related to the activity(ies) which it is licensed to carry on; and
• The Virtual Asset Issuance Rulebook, which provides the rules for the issuance and related activities of virtual assets.

These kinds of rulebooks will be familiar for those already conducting financial services in the Abu Dhabi Global Market or the DIFC.

Key Highlights

We set out below a brief overview of the elements of the Regulations which we consider to be of key importance and relevance to those dealing with Virtual Assets in Dubai.

Classification of Virtual Assets and Licensing

VARA has the sole and absolute discretion to classify, or otherwise provide clarification or opinion, on: any Virtual Asset as being prohibited in Dubai; any Virtual Asset as being regulated by the Central Bank of the UAE; or VARA’s interpretation, classification or regulatory treatment of any Virtual Asset or type of Virtual Asset.[2]

General Prohibition

No entity may carry out any Virtual Asset Activity by way of business or promote, offer, or purport to do so, in Dubai, unless it is:

1. authorised and licensed by VARA for such activity;
2. an employee carrying on or otherwise facilitating such an activity on behalf of its employer that is licensed by VARA: or
3. an Exempt Entity.[3]

VARA has sole and absolute discretion to determine whether an entity is conducting a Virtual Asset Activity ‘by way of business’, taking into account whether such entity holds itself out to be conducting a Virtual Asset Activity, the regularity, scale and continuity of such Virtual Asset Activity, and whether the entity receives remuneration or other commercial benefit by virtue of carrying out the Virtual Asset Activity.

Exempt Entities

Exempt Entities will not subject to the licensing requirements under VARA.

Exempt Entities includes those entities which have notified VARA and obtained confirmation of its Exempt Entity status in the form of a no-objection confirmation (which may come with certain restrictions or conditions) prior to undertaking any Virtual Asset activities in Dubai.

Professional Exemption

The Regulations expressly provide for duly registered practising lawyers, accountants and other professionally licensed business consultants carrying on Virtual Asset Activities incidental to their respective professions to be exempt from obtaining a VARA licence, providing that such professionals remain at all times authorised by their respective professional bodies and maintain professional indemnity insurance as applicable to their profession.

Anti-Money Laundering and Combating the Financing of Terrorism

VARA is designated as a supervisory authority for the Emirate in respect of all VASPs and Virtual Asset Activities.  It is responsible for regulation in relation to money laundering in the Emirate in respect of all VASPs and Virtual Asset Activities and has the power to supervise compliance with relevant federal AML / CFT Laws in the Emirate.

Marketing and Promotion

All market participants (whether licensed by VARA or not) must comply with the regulations for marketing, advertising and promotions.[4]

Licensing

Unlike other regulatory regimes which usually prescribe categories of licenses which determine the application of the rules to that license category (i.e. where one category tends to be more onerous in terms of capital and prudential requirements than another), the Regulations do not prescribe any category licences per se and instead, entities can apply for each Virtual Asset Activity they wish to provide. 

A fee is payable at the time of the application for each Virtual Asset Activity applied for. Where an entity wishes to undertake more than one Virtual Asset Activity, a license application fee is payable for each additional Virtual Asset Activity at a 50% discount of the lower licence application fee. 

Thereafter, VASPs must pay an annual supervision fee for each licensed Virtual Asset Activity prior to conducting such activities. 

When deciding to grant the license to an applicant, VARA has the authority to:

• incorporate limitation in the licence as it considers appropriate; 
• specify a narrower or wider description of a Virtual Asset Activity than that to which a licensing application relates; and/or 
• grant a licence for the carrying on of a Virtual Asset Activity only for a specified time.

Registration 

Any entity in Dubai which actively invests its own portfolio in Virtual Assets at USD 250,000,000 or more (or equivalent value of Virtual Assets) during any rolling thirty-day period shall be deemed ‘Large Proprietary Traders’ and must register with VARA.

In addition, market participants who are not undertaking Virtual Asset Activities yet, or entities seeking to obtain a commercial or free zone license in Dubai to carry out the following business activities may voluntarily register with VARA:

• providers of technology services relating to or utilising Distributed Ledger Technology to other businesses; or
• entities that actively invest their own portfolio in Virtual Assets.

Such registration does not permit that entity to carry out any Virtual Asset Activities in Dubai and/or constitute any authorisation or licence from VARA for any business activities that entity carries out.

Fines and Penalties

Violation of the Regulations, or rules in the Compliance and Risk Management Rulebook, Market Conduct Rulebook, or Directives related to Market Offences can attract one or more of the following penalties (per violation):

• disgorgement of the profits gained or losses avoided;
• up to AED 20,000,000 for any individual;
• up to AED 50,000,000 or 15% annual revenue of any VASP; or
• 300% of the profits gained or losses avoided (if greater than the above values).

Violation of the rules in all other Rulebooks can attract one or more of the following penalties (per violation):

• up to AED 8,000,000 for an individual;
• up to AED 20,000,000 or 5% annual revenue for a VASP; or
• 200% of the profits gained or losses avoided (if greater than the above values).

Anti-Money Laundering / Combating the Financing of Terrorism related offences will be subject to the penalties imposed under the applicable local and federal laws.

What does this mean for you?

The UAE continues to prove itself as a leader in digital economy and virtual assets and as a result of the anticipated issuance of the VARA Regulations and the growing number of regulations governing virtual assets in the UAE (including the financial free zones) in recent times, we are seeing an increase in businesses looking to enter the virtual assets sector in the UAE.

The Regulations are a world-first and could set a standard for the industry and encourage other countries to prepare their own equivalent rules and regulations.

If you or your business intend to deal with virtual assets in the UAE, then it is important you know what approvals / licences may be required in order to avoid the risk of penalty. 

If you would like to discuss the regulation of your virtual assets business, or the issuance of the VARA Regulations and the impact they may have on your business, please contact Lucy Nash or Vyasna Mahadevey.

^{[1] “Virtual Assets” are defined as “a 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”. (Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai).}

^{[2] Part II.B.1 of the Regulations}

^{[3] Part III.A.1 of the Regulations}

^{[4] Administrative Order No.01 of 2022 Relating to Regulation of Marketing, Advertising and Promotions Related to Virtual Assets.}