Dubai Issues a Clear Set of Virtual Assets Regulation Framework
On 7 February 2023, the Dubai Virtual Asset Regulatory Authority (VARA), the regulatory board overseeing the virtual asset space within the Dubai Emirate in the United Arab Emirates (UAE), issued a set of guidelines to provide clarity to market participants interested in setting up virtual asset businesses in the Emirate.
The new framework, called the Virtual Assets and Related Activities Regulations 2023 (VA), is issued in accordance with Law No (4) of 2023: Regulating Virtual Assets in the Emirate of Dubai, which established VARA as the virtual asset regulator for Dubai In 1Q2023.
What is in the New Framework
The new VA framework compels all market participants to adhere to a “gold-standard” in risk assurance, anti-money laundering (AML) and terrorist financing (TF) protocols. It prohibits any person from engaging 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.
VARA is the world's only independent and specialist regulator for virtual assets tailored for the nurturing of next-gen innovation. The updating of the new framework only one year after VARA’s formation underscores Dubai’s commitment towards accelerating its New Economy Agenda at becoming the leading capital of the Future Economy, which will be anchored by the Metaverse, Artificial Intelligence, Web3.0, and Blockchain.
Under the new VA framework, there will be seven comprehensive categories of activities that need to be individually assessed for Full Market Product (FMP) licensing. These are:
Advisory services,
Broker-Dealer services,
Custodial services,
Exchange services,
Lending-Borrowing services,
Payments and Remittances services,
Virtual Asset Management and Investment services.
Seven activity-specific Rulebooks applicable to each category above have also been issued. These are rulebooks setting out guidances for the issuance of virtual assets such as digital tokens, NFT’s and so forth. This invariably means the issuing of digital tokens within the Emirate will become a regulated activity under the purview of VARA.
Additionally, four more Compulsory Rulebooks, which set out the mandatory obligations for Virtual Asset Service Providers (VASPs) wishing to conduct each regulated activity within the Emirate to need to comply with, have been issued. These are: Company rulebook, Compliance & Risk Management rulebook, Technology & Information rulebook, and Market Conduct rulebook. These new rulebooks will, together with the previously published Marketing Guidelines, lay the foundation for a clear and well directed regulatory regime to accelerate the growth of the virtual asset industry within the Emirate.
VARA Clarifies Position of Existing VASPs
With the release of the new VA framework, VARA has also clarified the status of existing VASPs currently operating in the Emirate. The regulatory authority requires all VASPs currently offering virtual asset services to the Dubai market prior to the publication of this new framework to register with VARA and become fully compliant. These VASPs, together with all new market entrants, will be provided with a route towards the eventual obtainment of FMP licensing, subject to them fulfilling the requirements.
With this, VARA highlighted that no firms currently operating in Dubai is holding the FMP licence – only a select few are holding the provisional Minimum Viable Product (MVP) Preparatory License, which will allow them to set up businesses in the Emirate and work towards obtaining the FMP licence when all the regulations have been put in place by VARA.
Obtaining the FMP licence is a four-stage tiered-approval process that allows VARA to evaluate, observe and assess applicants at every step of the way and only then authorise suitably qualified entities to undertake market servicing activities under its licensing regime. This stringent approach will allow only the most qualified VASPs to service the community in the Emirate and thereby safeguard their interests.
One important directive laid out by VARA is that applicants operating under the MVP licence may only provide services to qualified and/or institutional investors and not to mass retail market consumers until their FMP licence has been issued.
The FMP licence will only be issued after a full set of market regulations is being released by VARA. These regulations will focus on securely enabling borderless economic opportunity across the global virtual asset industry, while not compromising on security and cross-border compliance. For instance, rules that govern the custody and segregation of client money, and other prudential requirements like insurance and liquidity cover of the VASP, FATF compliance, market manipulation and/or abuse prevention, are directives that VARA is currently working on enacting to protect investors and market participants within the Emirate.
For more information regarding the new framework and its associated rulebooks, please refer to: https://www.vara.ae/en/#varaLatestNews_6.
