VARA: all you need to know about crypto regulation in Dubai

Intro

In 2022, a new law regulating virtual assets was adopted at the federal level in the UAE. This law establishes the initial regulatory framework for the cryptocurrency space in the country and serves as the foundation for local rules in different emirates, including the recently adopted VARA, Virtual Assets Regulatory Authority.

VARA has released comprehensive guidelines called the FMP (Full Market Product) Rules, which pertain to the regulation of virtual assets and related activities in Dubai. These rules, established in accordance with the Law on the Regulation of Virtual Assets, aim to protect consumers and maintain market integrity. They are also meant to ensure VARA's sustainability and effectiveness and promote innovation.

For instance, VARA has recently suspended BitOasis' conditional license and initiated enforcement action just three months after issuing one, stating the cryptocurrency exchange had failed to meet certain conditions. 

Given the current tightening of regulations and the growing popularity of the hub, we want to clarify Dubai’s approach to crypto regulation.

What is VARA?

VARA serves as a transparent and trusted guiding authority for the emerging world of virtual assets. VARA aims to take its mission to the global level by creating an easily replicable framework for industry regulation. 

VARA focuses on the following objectives:

1. Promote Dubai as a regional and international hub for Virtual Assets and related services, boost the competitive edge of the Emirate at the local and international levels, and develop its digital economy.
2. Increase awareness of investment in the Virtual Asset services and product sector while encouraging innovation.
3. Contribute to attracting investments and encourage companies operating in the Virtual Asset field to base their businesses in the Emirate.
4. Develop the regulations required for the protection of Virtual Asset investors and dealers and endeavor to curb illegal practices in coordination with the concerned entities.
5. Develop the regulations, rules, and standards required for governing, supervising, and overseeing Virtual Asset Platforms, Virtual Asset Service Providers, and all other matters related to Virtual Assets.

You can find more information about VARA functions here.

Key points of VARA regulations

Any organization wishing to carry out activities and services related to virtual assets in the Emirate of Dubai or beyond must apply for an FMP license. There are no nationality restrictions when applying for a license. VASPs (Virtual Asset Service Providers) are required to comply with various rulebooks, including those pertaining to company regulations, compliance and risk management, technology and information, and market conduct. 

The license is annual and can be extended for 12 months. The renewal notification will be sent 90 days in advance, and companies must pay an annual supervision fee. VARA requires VASPs to be physically present in Dubai to conduct transactions with virtual assets from Dubai. 

VASPs shall maintain a company structure with a clear chain of ownership, delegated authority, and all associated voting powers that VARA can clearly identify, including any Controlling Entity(ies) and the Ultimate Beneficial Owners (UBOs). 

VASPs shall appoint two individuals (aka Responsible Individuals) of sufficient seniority to be responsible for the VASP’s compliance with all legal and regulatory obligations. Each Responsible Individual should be:

Virtual Assets

VARA must approve all Virtual Assets before an Entity can start issuing them in the Emirate, and the Entity will be required to provide all relevant information in the approval process. An Issuer with VARA’s approval that wants to change any material must confirm it with VARA first.

The following Virtual Assets do not require issuing approval from VARA, but remain subject to the registration (Permitted VAs):

1. Free and non-transferable Virtual Assets;
2. Non-redeemable and non-transferable Virtual Assets;
3. Redeemable closed-loop and non-transferable Virtual Assets.

As for any Virtual Asset which has already been issued or in the process of being issued, VARA may ask an Issuer to suspend the issuing or issuing further, if it believes that any part of the process does not comply with VA Issuance Rulebook in any way. VARA may also impose additional conditions and/or take further enforcement action within its power, including imposing fines or penalties.

Other requirements for Virtual assets are here.

Specific rulebooks

Additionally, VARA has issued specific rulebooks for various licensed activities, such as consulting services, broker-dealer services, depository services, exchange services, lending and borrowing services, payment and money transfers, VA management and investment services. 

Entities that issue Virtual Assets (for example, new token releases, or minting of NFTs) must seek approval from VARA. No VA (Virtual asset) activity is ‘exempt’ from regulatory supervision; any VA service or activity requires a VARA license, registration, or No Objection Certificate.

If a VASP carries out any VA Activity licensed by VARA (to carry out in the Emirate in any jurisdiction outside the Emirate), it must comply with all regulations, rules, and directives as a minimum standard.

        VARA may:

1. Incorporate in the license such limitations and stipulations as it considers appropriate, for example, circumstances in which a VA Activity may, or may not, be carried out.
2. Specify a narrower or wider description of a VA Activity than that to which a licensing application relates; and/or grant a license for the carrying on of a VA Activity only for a specified time.
3. In determining whether to grant a license, VARA may have regard to any judgment, opinion, or actions taken by any other regulator or authority, inside or outside of the Emirate, that it deems relevant to such licensing application.

Entities will be required to hold a VARA License or Acknowledgment of Application Notice (AAN) if they carry out any of the following VA activities:

• VA Advisory Services
• VA Broker-Dealer Services
• VA Custody Services
• VA Exchange Services
• VA Lending and Borrowing Services
• VA Management and Investment Services
• VA Transfer and Settlement Services

The rulebooks for each activity are here.

Marketing

VASPs that do not have a VARA license can still carry out marketing activities in Dubai or outside of it. Please note that unlicensed VASPs are not allowed to use Dubai residents as customers, and any marketing materials must contain information clearly indicating that their products or services are not available to Dubai residents.

All Marketing relating to VA and/or VA activities in the Emirate must meet the following requirements:

1. Be fair, clear, not misleading and identifiable as marketing or promotional in nature. 
2. Do not mislead regarding the real or perceived advantages of VA. 
3. Include a prominent disclaimer that the value of VA is variable [up and/or down], is not guaranteed, and can be highly volatile. 
4. Do not advocate that investments are safe, low risk or that returns are guaranteed. Do not imply that investment decisions are trivial, simple, or suitable for all [without due diligence]. 
5. Do not imply that past investment performance is an effective guide for or guarantee of a future return; any investment decision must be strictly based on a consumer’s independent evaluation. 
6. Do not imply an urgency to buy VA in anticipation of future gains, or create a fear of missing out on future gains by not buying now.
7. Do not advocate the purchase of VA using credit or other interest accruing facilities; ensure that any targeted marketing is undertaken responsibly by suitably licensed Entities to present only appropriate products or services to the audience. Such services may include defined criteria for investor qualification, and event attendance and comply with all applicable laws, regulations, guidelines, or other rules of the United Arab Emirates (the UAE) and specific to the Emirate, including those relating to Marketing, data protection, and consumer protection.

Please, check the regulation on marketing over here.

Responsibility

Enforcement measures will include termination and abstinence orders, reprimands, warnings, fines, and penalties (for example, suspension of a license, restriction of the volume of services, or the market).

Violation of regulations, rules, or directives is punishable by fines for: 

 The details about fines can be found here.

VARA will monitor the virtual asset market in the Emirate using network and off-chain methods to ensure compliance with VARA rules and rulebooks. Failure to comply with the requirements may result in significant punitive measures, including substantial fines and penalties (such as the possible closure of the enterprise).

All relevant actions are coordinated with the relevant state and commercial licensing authorities.

The bottom line

The VARA regulation brings much-needed stability and structure to an evolving and previously unregulated market. Businesses should carefully evaluate whether they fall under the purview of the FMP Rules and take appropriate steps accordingly.

However, not only Dubai has its own regulations in the UAE. We sent a request to another VA authority concerning its regulation of VA services in Abu Dhabi, and they kindly shared the information. You can find it here.

The Dubai authorities are tightening the verification of cryptocurrency companies that want to get a license to work in the region. Therefore, it is important to understand the need to comply with the rules of the VARA Regulations and monitor any changes.

References

https://www.pwc.com/m1/en/services/tax/me-tax-legal-news/2023/virtual-assets-related-activities-regulations-2023.html

https://garant.ae/en/insights/virtual-assets-and-related-activities-regulations-in-dubai-2023

https://rulebooks.vara.ae/node/337

https://www.vara.ae/en/regulations/regulations-and-guidelines/

https://media.umbraco.io/dev-dwtc/xsrdoyze/company-rulebook.pdf

https://dlp.dubai.gov.ae/Legislation%20Reference/2022/Law%20No.%20(4)%20of%202022%20Regulating%20Virtual%20Assets.html

https://www.vara.ae/en/