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Dubai Regulator Issues Guidance on Digital Assets

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Dubai's Virtual Asset Regulatory Authority (VARA) published a new set of rulebooks this week that lays out extensive requirements for cryptocurrency firms.

All crypto-related activities and firms fall under the supervision of the Virtual Assets Regulatory Authority, which was set up last year to regulate the nascent crypto sector as Dubai seeks to attract crypto and blockchain companies.

Since then, VARA has published some guidelines for certain crypto-related activities, with the latest rules published on Tuesday covering licensing requirements, issuance of virtual assets, anti-money laundering obligations, risk-management standards, marketing protocols, and a ban on anonymity-enhanced cryptocurrencies.

“With bespoke rules and guidelines designed to provide clarity, assure certainty, and mitigate market risks, VARA seeks to develop a model framework for global economic sustainability within an innovation-centric environment that is truly borderless, technology agnostic, and future-focused,” the regulator said on February 7.

Virtual assets in Dubai are defined as “digital representations of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes, including virtual tokens.” This broad definition gives VARA a degree of discretion as far as the applicability of the law is concerned.

The UAE is also committed to addressing global risks of money laundering and terrorist financing arising from the potential misuse of new technologies. Towards this goal, the regulator has set out this comprehensive virtual asset framework, which is built on principles of economic sustainability and cross-border financial security.

According to VARA, the regulations will curb money laundering and terrorist financing while providing the market with greater clarity on the expected level of operator responsibility.

Covering Dubai and Special Development & Free Zones

The United Arab Emirates (UAE) consists of seven emirates, and its four main judicial authorities are Dubai, Abu Dhabi, Ras Al Khaimah, and the federal agency that governs four regions.

Each emirate within the UAE has its own laws and regulations to cover those areas where there is no federal law. Furthermore, the region contains over 40 multidisciplinary economic free zones, each with its own sets of rules.

There are four financial and capital markets regulators in the UAE, and they are:

(1) The Central Bank of the UAE (CBUAE)

(2) The Securities and Commodities Authority (SCA)

(3) The Dubai Financial Services Authority (DFSA)

(4) The Financial Services Regulatory Authority (FSRA)

However, for digital assets, Dubai has a single dedicated regulator called the Virtual Assets Regulatory Authority (VARA). It is an autonomous public entity linked to the Dubai World Trade Centre Authority (DWTCA).

VARA has defined virtual assets broadly to include crypto tokens, security tokens, utility tokens, non-fungible tokens, and other token types.

Early last year, Dubai issued Law No. 4 of 2022, “Regulating Virtual Assets in the Emirate of Dubai,” also known as the Virtual Assets Law, which was enacted in March of the same year. This law proposed legal definitions for digital assets, established a licensing regime, stipulated penalties for firms found operating against its policies and established VARA.

The law applies to services related to virtual assets not only within Dubai but also to its special development and free zones, with the exception of the Dubai International Financial Centre, whose main regulator is the Dubai Financial Services Authority (DFSA).

With this law, Dubai's main objective has been to position Dubai as a global hub of virtual asset innovation.

International Hub for Virtual Assets

Ever since the crash of virtual assets exchange FTX and TerraUSD stablecoin, among many other crypto firms, regulators worldwide have been scrambling to catch up with the crypto industry. For instance, following last year's market crash, the European Union is all set to approve its own licensing regime, with other jurisdictions quickly forming their own frameworks as well.

Dubai, the most populous emirate in the UAE, has now released its new framework, whose regulatory objective is to position Dubai as a regional and international hub for virtual assets and to boost its competitive edge. However, it still needs final approval before it is implemented.

“Dubai's D33 Economic Plan has outlined our mission to establish the Emirate as the capital of the future economy anchored by metaverse, AI, Web 3.0, and blockchain,” said Helal Saeed Almarri, Chairman of VARA's Executive Board.

Almarri stated that in Q1 of 2022, they launched VARA as “the world's only independent and specialist regulator for virtual assets to serve as the accelerator for a truly borderless digital economy.”

Now, ahead of its first anniversary, VARA has launched what he says is “the first-of-its-kind virtual asset framework structured to accelerate our new economy agenda, augmenting secure and sustainable ‘global' market growth.”

This custom-designed crypto asset framework not only builds responsible safeguards but also reflects a progressive VA ecosystem to nurture next-gen innovation.

UAE has been working on becoming the world's top crypto hub for some time. Just last July, the Dubai government announced their plans to make the emirate home to more than 1000 companies in the blockchain and metaverse sector, contributing $500 million to the national economy.

These efforts haven't been in vain either, as according to the data released by the Dubai Multi Commodities Centre (DMCC), out of 3,049 new businesses registered in Dubai in 2022, more than 500 businesses were crypto start-ups.

Additionally, the UAE's share in the global crypto market increased by 500% between July 2020 and June 2021 and climbed over US$25 billion in transaction value in Dec. 2022. This puts UAE regionally in the third position by transaction volume behind Turkey ($132 billion) and Lebanon ($26 billion).

Licensing Requirements

Dubai's crypto-friendly efforts mean several crypto companies, including the now-defunct FTX and the leading cryptocurrency exchange Binance has the necessary licenses to operate within the Emirate.

Binance inked an agreement with the Dubai World Trade Centre Authority (DWTCA) in December 2021 to establish a hub that will help other blockchain-related companies in obtaining a license in Dubai. Kraken, Coinbase, Bybit, Crypto.com, and HTX also operate in Dubai.

However, in January, a UAE lawmaker told, while speaking at the 2023 World Economic Forum panel, that no crypto companies have licenses from the watchdog yet.

According to the jurisdiction's “Virtual Assets and Related Activities Regulations 2023”, crypto firms are now required to obtain authorization and relevant licenses to operate in Dubai. The regulations also mandate gold-standard risk assurance and anti-money laundering standards to be applied by licensed entities within the Emirate.

Existing Minimum Viable Product (MVP) operational license applicants, as well as holders of either the provisional or preparatory MVP licenses along with new market entrants and legacy UAE-based Virtual Asset Service-Providers (VASPs), all, will be provided with a way to get Full Market Product (FMP) licensing.

All the VASPs that have been offering their services in the Dubai market before the publication of the FMP regulations will be required to register with VARA and become fully compliant with the final rules. And those who do not will be subject to regulatory action.

Besides virtual asset businesses, large proprietary traders investing a minimum of $250 million in cryptocurrencies must also register with the authority, as per the regulations.

The authority, meanwhile, carries the power to revoke licenses for a variety of reasons, including violation of any law, rule, directive, or insolvency, as per the latest guidelines. In Tuesday's guidelines, it has been mentioned that VARA has revoked FTX Exchange FZE's approval and suspended its MVP license.

As for the penalties for violating the VARA regulations, it includes fines of up to $5.4 million for individuals and $13.6 million for businesses.

Fees have also been set for services such as advisory, licensing, and yearly monitoring of custody, exchanges, broker-dealers, and loan. Depending on the specifics of the services, the fees can range from $11,000 to $55,000.

Licensed Activities

Under the new regulations, VARA covers seven licensed virtual asset activities in separate rulebooks. These activities include advisory services, broker-dealer services, custodial services, exchange services, lending-borrowing services, payments, and remittances services, and virtual asset management and investment services.

Additionally, Dubai has covered issuance as a regulated activity under the VARA regime in order to allow consumers to make a more informed decision on newly launched tokens and the associated obligations of the issuer. The issuer of the virtual asset will have to register the whitepaper with VARA at least seven days before its publication, accompanied by a declaration signed by the Issuer.

In its new virtual asset rulebooks, Dubai completely prohibits privacy coins like Monero (XMR) and Zcash (ZEC) and all activity related to them in the Emirate due to the anonymous nature of these cryptos.

Anonymity-enhancing cryptocurrencies are defined as “a type of virtual asset that hinders the tracing of transactions or ownership through its use of distributed public ledgers, and for which there are currently no available technologies or mechanisms for service providers to trace or identify ownership.”

However, Dubai is not alone in making such a move, as in 2018, the Japanese authorities also prohibited the usage of privacy coins over concerns about their usage in illicit operations.

VARA also stated in 2023 guidelines that the new anti-money laundering regulations prohibit insider trading, unlawful disclosure, market manipulation, and the financing of terrorism and other unlawful organizations.

The Dubai regulator further emphasized that all market players, whether or not they are VARA-licensed, must follow laws for marketing, advertising, and promotions in addition to the rulebooks. Violators will be fined between $5,500 and $55,000, and repeat offenders can face a fine of up to $135,000.

A Progressive Move

The UAE is pretty progressive in terms of crypto adoption, as airlines like Emirates and Etihad Airways, real estate firms such as DAMAC Properties, Ellington Properties, and Aston Property Ventures, and grocery delivery companies like Yalla Market now accept payments in crypto. And this wouldn't have been possible without the government's active support of crypto technology and the ecosystem as a whole.

With its comprehensive and advanced regulatory framework, Dubai can now attract global crypto asset companies looking for compliant global expansion.

Local businesses, too, see this step as a progressive step in UAE, as they believe such advanced regulations will help make Dubai attractive in the eyes of global digital asset companies seeking to make a move into the international market.

Local media have also praised the government's efforts saying that this move will further facilitate the building of compliant blockchain applications to fuel mainstream adoption and economic growth in the region.

Dubai's efforts towards providing regulatory clarity show that it is committed to establishing itself as a leading destination for virtual assets, offering a supportive regulatory framework to attract businesses to the city. The latest policy clarity will also attract top global industry talents from various regions, helping the country become the global hub for Web3.

By ensuring that virtual asset businesses operate transparently and securely, Dubai is set to attract more investments and drive innovation in the crypto space.

Gaurav started trading cryptocurrencies in 2017 and has fallen in love with the crypto space ever since. His interest in everything crypto turned him into a writer specializing in cryptocurrencies and blockchain. Soon he found himself working with crypto companies and media outlets. He is also a big-time Batman fan.