Virtual asset adoption has moved from the fringes of finance to taking centre stage in recent months, driven by vibrant virtual asset ecosystems, growing interest from institutional investors and financial institutions, and increasing clarity on regulations—thereby strategically positioning the virtual assets market to capitalise on a dynamic phase of growth.
The Dubai Virtual Assets Regulatory Authority (VARA) and its comprehensive licensing framework for virtual asset service providers (VASPs) are exemplars of this global trend, ushering in a wave of highly-anticipated regulatory oversight in this burgeoning industry. As the world’s first authority solely for the regulation of virtual assets (VAs) and VA-related activities, VARA’s regulatory regime enables VASPs to conduct business in a robust environment underpinned by clear rules, regulations and guidelines.
How to transition into VARA remit
Established under Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai, VARA is affiliated to the Dubai World Trade Centre Authority (DWTCA) and covers virtual assets and VA activities in all zones across Dubai except the Dubai International Financial Centre (DIFC). New VASPs seeking to offer virtual asset services within the VARA jurisdiction in Dubai must first apply for a regulatory licence from VARA. Below is a detailed overview of the application process and key features of the licencing framework.
Overview of licenced activities
VASPs must obtain a VARA licence before offering a well-defined array of services and comply with the rulebooks outlined below.
VA advisory services
Providers offering, providing or agreeing to provide a personal recommendation to a client, either upon the client’s request or on the initiative of the provider, in respect of one or more actions or transactions relating to any virtual asset, must follow the Advisory Services Rulebook.
Broker-dealer services
This is applicable for VASPs arranging orders for the purchase and sale of Virtual Assets between two entities; soliciting or accepting orders for Virtual Assets and accepting fiat currency, or other Virtual Assets, for such orders; facilitating the matching of transactions in Virtual Assets between buyers and sellers; making a market in Virtual Assets using client assets; or entering into Virtual Asset transactions as a dealer on behalf of the entity for its own account. All categories must follow the Broker-Dealer Services Rulebook. The category is also applicable for providing placement, distribution, or other issuance-related services to clients issuing virtual assets, under which the entity must comply with the VA Issuance Rulebook.
VA custody services
This refers to safekeeping virtual assets for or on behalf of a client and acting only on verified instructions from/on behalf of the client. As per VARA rules, all VASPs are subject to rules regarding the storage and custody of clients’ virtual assets, and only VASPs which segregate each client’s assets in separate VA Wallets will qualify for a Custody Services Licence. They must follow the Custody Services Rulebook.
VA exchange services
This involves VASPs conducting an exchange, trade, or conversion between virtual assets and currency or one or more virtual assets. The Exchange Services Rulebook applies to all such providers.
VA lending and borrowing services
This refers to carrying out a contract under which a virtual asset gets transferred or lent from one or more parties to one or more other party. Such contracts are governed by the Lending and Borrowing Services Rulebook.
VA management and investment services
This refers to acting on behalf of an entity as an agent, fiduciary, or otherwise taking responsibility for the management, administration or disposition of that Entity’s Virtual Assets. This could include, for example, taking responsibility for staking Virtual Assets to earn fees or other amounts paid to validators and/or node operators of a proof-of-stake Distributed Ledger Technology. The VA Management and Investment Services Rulebook applies in all cases.
VA transfer and settlement services
This includes firms engaged in transmitting or transferring virtual assets from one entity to another or from one entity to another VA wallet, address, or location. Providers must follow the VA Transfer Settlements Rulebook for these services.
VA issuance category 1
This applies to, among other things, Fiat-Referenced Virtual Assets (FRVAs) and covers VASPs acting on behalf of a client or otherwise taking responsibility for the management of the entity’s VAs. Providers must follow the VA Issuance Rulebook for this service.
All entities seeking to obtain a licence from VARA under the above categories must also adhere to the compulsory rulebooks: the Company Rulebook, the Compliance and Risk Management Rulebook, the Technology and Information Rulebook, and the Market Conduct Rulebook.
How does the licencing process work?
Given the detailed licence activities, interested parties must submit their application through relevant commercial licensors, such as the Department of Economy and Tourism (DET) or any free zone in Dubai, excluding the DIFC.
In stage one of the process, companies will secure an Initial Approval (IA) after submitting an initial disclosure questionnaire and paying initial fees to the relevant commercial licensor. They will then receive an IA to finalise the firm’s legal incorporation and to complete the operational set-up.
At this point, the firm is not permitted to carry on VA activities.
In stage two, companies with IA must submit documentation in accordance with VARA guidance, keeping in mind corporate structure and governance, risk and compliance, technology and other parameters. After satisfying any feedback from VARA, entities must pay the remaining licence fees and first year’s supervision fees and receive a VARA licence, which may be subject to operational conditions.
Practical considerations for VARA applicants
Companies involved in the licence application must be diligent when submitting documents and ensure compliance with all requirements in laws, regulations and rulebooks. Stage two of the licencing process, for instance, is usually the longest part of the application, as it relies on the strength and quality of the submission. A thorough gap analysis of policies and procedures, in accordance with requirements in rulebooks, will thus ensure the process moves forward without any hindrance.
Similarly, if a VASP’s business model includes outsourcing some operations, it must adopt a proper plan and act on it even before getting a licence. Service providers must also demonstrate proactive collaboration with their VARA licencing point of contact.
By following the above guidance and process, service providers can not only become an integral part of the virtual asset ecosystem in Dubai but also contribute to developing the emirate’s digital economy.