VARA issues much-anticipated regulations for Dubai Virtual Asset Regime

On 7 February 2023, Dubai Virtual Asset Regulatory Authority (VARA) issued its much-anticipated Virtual Assets and Related Activities Regulations 2023 (Regulations). The Regulations finally tell us how VARA intends to deploy the regulatory authority given to it by Law No.4 of 2022 Regulating Virtual Assets in the Emirate of Dubai (VAL).

Who will be regulated?

VARA is tasked with regulating, supervising and overseeing virtual assets and the businesses that deal with them and fall within VARA’s purview (Virtual Asset Service Providers, or VASPs).

A virtual asset is described by the VAL 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, and any digital representation of any other value as determined by VARA.”

The new regulations prohibit anyone from carrying out any of the following activities (each a Virtual Asset Activity) by way of business without express authorisation and regulation from VARA, or without exempt status:

Advisory Services;
Broker-Dealer Services;
Custody Services;
Exchange Services;
Payments & Remittances Services; and
Management & Investment Services.

It is within VARA’s sole and absolute discretion to determine whether or not an entity is carrying out a Virtual Asset Activity “by way of business”. However, the following factors will be taken into consideration in carrying out its assessment:

whether the entity holds itself out as conducting a virtual asset activity by way of business;
the regularity, scale and continuing of the virtual asset activity; and
whether there is any commercial element in how the virtual asset activity is being conducted (e.g. whether the entity receives remuneration or value in kind for carrying out the activity).

Additionally, there is a mandatory registration requirement for proprietary traders in Dubai which actively invest their own virtual asset portfolios at or above USD 250,000,000 equivalent value of virtual assets during any rolling 30 calendar day period.

Exempt status will only be relevant to a limited number of entities including limbs of the government, charities, and professional advisers advising in relation to Virtual Asset Activities, such as lawyers and accountants.

VASP licence fees

Any business carrying out regulated activities will need to apply for a licence from VARA. Application fees, extension fees and annual supervision fees apply at various rates. For example an advisor services licence comes with an AED 40,000 application fee and an annual supervision fee of AED 80,000, whereas the equivalent exchange services licence fees come in at AED 100,000 and 200,000 respectively.

How will licensed VASPs be regulated?

Once an entity is licensed by VARA as a VASP, they are bound not only by the Regulations, but by VARA’s Rulebooks (and any rule making instruments issued), and by directives issued by VARA from time to time, which can apply to specific entities and may cover anything from setting liquidity requirements, to limiting exposure to related parties, to setting reporting requirements and frequency. VARA may also issue guidance from time to time, which is non-binding.

The Regulations include requirements for VASPS to comply with Federal AML regulations, and regulations which manage the marketing, advertising and promotion of Virtual Asset Activities.

Penalties and prohibitions

The regulations set out a number of prohibitions, including:

Issuing Anonymity-Enhanced Cryptocurrencies: “a type of virtual asset which prevents the tracing of transactions or record of ownership through distributed public ledgers and for which the VASP has no mitigating technologies or mechanisms to allow traceability or identification of ownership”;
Insider dealing;
Market manipulation;
Unlawful disclosure, which is the disclosure of information that might affect Virtual Asset pricing, disclosed to other entities outside of any ordinary advisory services.

Any violation of the Regulations, the directives related to market offences, or rules specifically in the Compliance and Risk Management Rulebook, or the Market Conduct Rulebook carry specific penalties including disgorgement or profits gained or losses avoided, AED 20million for individuals, AED 50million or 15% of annual revenue for VASPs, or 300% of profits gained or losses avoided if greater than the other values. There are lesser penalties for violation of the rules in other rulebooks.

Resolution of the overlap between the Securities and Commodities Authority (SCA) and VARA

Until recently, there was a lack of clear boundary between the regulatory scope of the SCA and that of VARA in relation to virtual assets. Both regulators appeared to have authority over them. This overlap has now been clarified at a federal level following Cabinet Decision No. 111 of 2022. The Decision confirms that the overall federal authority rests with the SCA. It can, however, delegate this authority. VARA’s scope of regulation appears to be an example of this. In practical terms it ought to mean that entities operating under a VARA licence will not, unless otherwise guided, need to seek further licences from the SCA. However, should there be any conflict between the SCA’s own regime and VARA, we expect it to be resolved in favour of the SCA.

Concluding Thoughts

Businesses should now have a clear idea as to when they need to apply to VARA for a licence, and as to how much this will cost them. They also understand that there is a clear hierarchy in terms of virtual asset regulation in Dubai, with the SCA at the top of the pyramid. Assuming that there are no clashes between the regulators moving forwards, we should finally start to see VARA deliver on its promise of “helping to mitigate risk and facilitate cross-border operations and innovation to enable safe market adoption and growth”.