The New Dubai Virtual Asset Regime

On 7 February 2023, the Dubai Virtual Asset Regulatory Authority (VARA), the world’s first independent regulator for virtual assets, issued the Virtual Assets and Related Activities Regulations 2023 (VARA Regulations) and accompanying Rulebooks which set out VARA’s Virtual Asset Regime for the Emirate of Dubai (including its commercial freezones, but excluding the Dubai International Financial Centre (DIFC)) in UAE.

The Virtual Asset Regime follows the implementation by the Dubai Financial Services Authority, the independent regulator of financial services in the DIFC financial freezone of the DIFC Crypto Token Regime on 1 November 2022 which will apply to crypto products and services in the DIFC.  These separate regimes have reinforced Dubai’s intention to position itself at the forefront of a regional and international hub for virtual assets and related services to develop Dubai’s digital economy.

WHAT YOU NEED TO KNOW

The Virtual Asset Regime consists of Law No (4) of 2022, the VARA Regulations, a range of Compulsory and Activity-Specific Rulebooks and an Issuance Rulebook.

Virtual assets are broadly 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 [which are a digital representation of a set of rights that can be digitally offered and traded through a virtual asset platform], and any digital representation of any other value as determined by VARA”. 

Anonymity-enhanced cryptocurrencies which prevent the tracing of transactions or record of ownership and all activities related to them are expressly prohibited under the Virtual Asset Regime, which seeks to establish a transparent and reliable market for virtual assets.

The regulated virtual asset activities (VA Activities) which will require a licence from VARA are:

• Advisory Services;
• Broker-Dealer Services;
• Custody Services;
• Exchange Services;
• Lending and Borrowing Services;
• Payments and Remittances Services; and
• VA Management and Investment Services.

Over the last twelve months, VARA has been working with established virtual asset service providers (VASPs) including Binance and Crypto.com on a minimum viable product program (MVP Program) to onboard VASPs into the jurisdiction.  To date, VARA has not yet issued any of the MVP Program participants with operating licences, however we expect that this will change shortly with the release of the VARA Regulations and the implementation of the Virtual Asset Regime.

VARA has also announced that it plans to only permit the MVP Program licensees to provide services to qualified and/or institutional investors in the initial stages,  following which the VASPs will be able to progress to a full market product licence and permission to onboard retail clients.

THINGS TO CONSIDER

Established and prospective VASPs in the UAE will need to determine whether their current or planned virtual asset business activities that take place in the Emirate of Dubai will require a licence to be issued by VARA pursuant to the new Virtual Asset Regime or under another UAE virtual asset regime (i.e., the DIFC Crypto Token Regime or the Abu Dhabi Global Market (ADGM) regime). 

Where VASPs are issuing, or seeking to issue, marketing, advertising and promotions related to virtual assets in the Emirate of Dubai they should also be aware of the VARA regulations under Administrative Order No. (1) of 2022.  Failure to comply with the rules on marketing, advertising and promotions may result in fines as set out under Administrative Order No. (2) of 2022.

In addition, entities seeking to issue virtual assets in the Emirate of Dubai in the course of a business should be aware of the obligations (including prior registration and/or approval from VARA) set out under the Virtual Asset Issuance Rulebook. 

LOOKING FORWARD

We expect that the new Virtual Asset Regime will be a popular option for new and established VASPs who are seeking to become established in a regulated jurisdiction to promote investor confidence in an industry that has previously been rocked by controversy.

The VARA Regulations follow the issuance of Cabinet Decision No (111) of 2022 on the Regulation of Virtual Assets and their Service Providers (the Cabinet Decision) under which it is prohibited for any person to engage in virtual asset activities in the UAE (excluding the ADGM and DIFC) without obtaining approval and a licence from the UAE Securities and Commodities Authority (SCA) or a local licensing authority (such as VARA).  The Cabinet Decision also provided clarity on the division of regulatory responsibility at the Federal and Emirate level which previously saw the SCA holding sole responsibility for virtual assets.

The reference to local licensing authorities implies that VARA may not be the only dedicated virtual asset regulator in the UAE going forward.  We expect that other Emirates, such as Abu Dhabi or Ras Al Khaimah, may also choose to establish their own versions of VARA and implement similar regimes, although this remains to be seen.

Please reach out to Gregory Man and Jessica White, our UAE based specialists, if you would like some guidance on the implications of VARA’s Virtual Asset Regime on your current or planned business activities in Dubai.