7 May 2023
Virtual Asset Regulations in Dubai: How to Stay on the Good Side of VARA
The crypto asset regulations in Dubai require hefty fees for licensing and authorization. Said regulations are also quite comprehensive in nature. In contrast, the rest of the UAE, while still remaining comprehensive and covering various types of crypto assets, has a more relaxed approach to virtual assets. However, because of the location of the Emirate and its connection to MENA, the investment and legal requirements may still be worth the investment. Read on to find out more.
Current Regulations in the UAE
Dubai is one of the seven Emirates that make up the UAE. The legal system in the UAE is rather complex in all areas, not just the ones that regulate crypto.
There are some laws at the federal level. The CBUAE (Central Bank of the UAE) and the SCA (Securities and Commodities Authorities) are generally involved in regulating capital and overseeing the markets of the UAE.
The seven Emirates have come to the consensus that drafting laws regarding crypto assets is a positive step towards diversifying the economy in the UAE, as well as gaining a competitive edge in the global market. Therefore, the UAE, legally speaking, has become a crypto-friendly space.
The CBUAE started regulating crypto as early as 2017. In that year, it passed a law stipulating that every transaction involving digital assets was to be made through authorized exchanges. It also stated that these transactions must comply with AML regulations that this central bank detailed.
The SCA also passed its own law in 2020, called the SCA’s Decision No. 23 of 2020 Concerning Crypto Assets in Activities Regulations (CAAR for short). This document regulates the issuing, offering, listing, and trading of crypto assets.
This decision notably includes ICOs, security, and derivative tokens, as well as marketplaces, virtual asset platforms, custodian services, crypto trading platforms, and other relevant crypto middlemen and related businesses. However, digital assets regulated by the CBUAE, including fiat currencies, virtual currencies, and digital currencies, fall out of the scope of CAAR.
It is important to note that the CBUAE has not given any sort of crypto asset the state of legal tender, or even licensed them as currency. The CAAR does not cover these assets, so it does not even have the regulatory power to give them said status.
Another crucial bit of information is that the CBUAE has implicitly stated that investing in crypto is not illegal.
With these implicit and explicit regulations in place, there are no prohibitions whatsoever around crypto assets. Citizens within the UAE are free to own cryptocurrency and other crypto assets, as well as participate in exchanges, and invest in various types of cryptocurrency and crypto assets. Those with legal residency in the UAE may do the same.
The UAE has also issued the UAE Blockchain Strategy in 2021. As a whole, this jurisdiction is considered to have a relaxed regulatory approach and successfully attracts crypto firms. However, we should look at the case of Dubai more closely, as the regulations there can be a bit stricter than in the rest of the Emirates.
The Case of Dubai
After the crypto market went through a crisis in 2022, regulators everywhere started to take a second look at their crypto laws and started to make adjustments. This is so because, worldwide, companies and investors felt uncertainty around the future of crypto.
Dubai was no exception. After the revision of the current laws it made in that year, VARA (Virtual Assets Regulatory Authority), a regulatory body exclusively devoted to crypto assets and cryptocurrency, was set up. The creation of VARA, as well as other relevant stipulations, come from the Virtual Assets Law.
The definition of the crypto asset itself generally has great repercussions on which regulatory body has the prerogative to get involved. You already know this if you have read our blog posts that detail what the regulations look like in other jurisdictions. The Virtual Assets Law defines a virtual asset as a “digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes.”
Under the scope of this law, BTC, crypto assets, and NFTs are all considered virtual assets. In contrast to the approach of MiCA and UK regulations, the law did not focus on stablecoins or tokenized assets, though these are referred to in some specific documents.
The Requirements
This legal framework stipulates that all entities wishing to participate in all sorts of transactions involving digital assets and crypto assets must seek authorization and licenses from VARA. Service providers must refer to four compulsory rulebooks, as well as seven rulebooks that detail specific requirements depending on the type of service offered. These rulebooks require that a whitepaper be made public and state what said document, which must be registered with VARA, must state.
How Does VARA Work, Exactly?
Well, it may take action against virtual asset service providers if they consider they are putting the economy of the Emirate or the whole UAE at risk. These actions include but are not limited to, suspending the issuance of authorizations, ceasing the dealing, and overall suspending their activities. It may cooperate with the CBUAE to implement certain measures.
One of the main concerns of VARA is that of anonymity in crypto transactions, which are strictly forbidden. According to VARA’s rulebooks, technologies and mechanisms that make traceability easier will be treated as exceptional cases when it comes to costs and documentation required. However, what these exceptions look like has not been made clear.
It is important to note that, to operate in Dubai, authorization from VARA is not enough. Companies and startups must also secure appropriate licenses from the appropriate UAE regulatory body (the CBUAE and/or the SCA).
The cost of applying for a license has been criticized as being only reasonable for bigger corporations, and making the playing field tougher for startups. The application fee is 100,000 UAE dirham (27,200 US dollars) and doesn’t guarantee approval. In addition to this, they must pay an annual supervision fee of double that amount. Additional services like custody, lending, or payments require additional licenses, although these are offered at a 50% discount. Additional supervision fees are added if this is the case. For comparison, another Emirate, Abu Dhabi, charges a similar application fee (the equivalent of 20,000 US dollars), but the annual fees are much cheaper at 15,000 US dollars per annum.
The legislators in Dubai argue that, despite the rather elevated cost of these fees, the investment is worthwhile because it guarantees startups access to what is referred to as MENA (the grouping of Middle East and North African countries). This is considered to be a lucrative sector of the global market.
If your crypto business is located in Dubai or you’re looking to branch out there, we’re here to help! Contact us for customized analysis and legal advice.
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