Any company wishing to conduct virtual asset activities in Dubai (excluding DIFC) or from Dubai must obtain a VASP before commencing operations.

Authored by: Manquan Blockchain Legal Services

The Dubai government has long provided comprehensive support to the blockchain and Web3 industries, laying a solid foundation for digital opportunities through initiatives such as the Dubai Blockchain Strategy launched in 2016, the UAE Fourth Industrial Revolution Center established in 2019 by the Dubai Future Foundation in collaboration with the World Economic Forum, and the Dubai Metaverse Strategy in 2022.

The ambitious government strategy and world-class business-friendly environment support Dubai's attractiveness as a hub for digital innovation, especially for entrepreneurs and investors in the blockchain and Web3 industries. The Virtual Asset Service Providers (VASP) system in Dubai has gained a reputation for its clear and precise regulatory framework, professional regulatory standards, approachable regulatory attitude, and a regulatory policy that encourages innovation and risk prevention, continuously attracting a steady stream of blockchain and Web3 entrepreneurs and investors from around the world, as well as industry giants, to set up camp here.

Dubai Virtual Asset Regulatory Authority and its Regulatory Framework

According to the "Law No.(4)of 2022 Regulating Virtual Assets in the Emirate of Dubai" of the Emirate of Dubai in 2022, the Dubai Virtual Assets Regulatory Authority (VARA), the regulatory authority for virtual assets and virtual asset activities in all regions of the Emirate of Dubai (including special development zones and free zones, but excluding the Dubai International Financial Center), was established in March 2022. VARA plays a central role in creating an advanced legal framework in Dubai to protect investors, establish international standards for governing the virtual asset industry, and support the vision of a borderless economy.

Dubai's regulatory framework for virtual assets consists of a complete set of top-down laws and rules. At the legal and regulatory level, the "Virtual Assets and Related Activities Regulations 2023" provides a detailed virtual asset regulatory framework involving licensing, anti-money laundering and counter-terrorism financing, and market conduct regulations, aiming to provide regulatory certainty. This framework is built on the principles of economic sustainability and cross-border financial security. The UAE has committed to safely driving these driving factors, updating its supervisory and regulatory approaches to address the global money laundering (ML) and terrorist financing (TF) risks arising from the misuse of new technologies.

The fifth part of the "Regulations," the "VA Activity Rules Manual," is a comprehensive compliance guide. It is divided into a mandatory rules manual and VA activity and other rules manual, with the former applying to all VASPs and the latter providing specific behavioral guidelines for the eight different types of VASP licenses mentioned above.

The mandatory rules manual, as a universal compliance guide, is of paramount importance. The "Company Rules Manual" specifies the way VASP organizes and manages companies, boards of directors, executives, and employees, as well as maintaining appropriate internal controls and management systems. In addition, the company rules manual also covers corporate governance requirements and ESG responsibilities. The "Compliance and Risk Management Rules Manual" lists general principles for regulatory compliance and compliance management system implementation, including the appointment of compliance officers and record-keeping and audit requirements. The "Compliance and Risk Management Rules Manual" also stipulates that VASPs must always comply with all applicable laws, regulations, rules, and guidance, as well as all tax reporting obligations under national, international, and industry best practices, including the applicable Foreign Account Tax Compliance Act (FATCA). The "Technology and Information Rules Manual" specifies technology governance, controls, and security, including network security (and other legal and regulatory) obligations, as well as personal data protection compliance requirements and compliance plans. The "Market Conduct Rules Manual" provides guidance on marketing, advertising, and promotional regulations and requirements.

VASP Licenses and Their Classifications

The Dubai Virtual Assets Regulatory Authority (VARA) has identified eight different regulated virtual asset (VA) activities and classified the regulatory scope. Any Virtual Asset Service Provider (VASP) wishing to provide the following virtual asset activities (whether to residents of the Emirate or globally, where permitted) must apply to and obtain a license from VARA before commencing operations within the Emirate of Dubai.

The Dubai Virtual Asset Service Provider (VASP) licenses include:

1. Virtual Asset Advisory Services

"Advisory services" refer to entities that, at the proactive request of clients or upon request, provide advice on one or more actions or transactions related to any virtual asset, aiming to help clients understand and address the complexity of the virtual asset market, provide professional advice and strategies, and ensure that clients operate safely and legally in the virtual asset field.

2. Virtual Asset Brokerage Services

"Brokerage services" refer to any of the following:

[a] Arranging orders for the purchase and/or sale of virtual assets between two entities; [b] Soliciting or accepting orders for virtual assets and accepting currency or other virtual assets for such orders; [c] Facilitating the matching of buyers and sellers of virtual assets; [d] Trading virtual assets on behalf of the entity for its own account; [e] Trading in virtual assets using client assets; or [f] Providing placement, distribution, or other issuance-related services to clients issuing virtual assets. These services aim to provide clients with convenient channels for virtual asset transactions, ensuring smooth transactions and secure asset management through professional brokerage services.

3. Virtual Asset Custody Services

"Custody services" refer to the safekeeping of virtual assets for another entity or on behalf of another entity, and acting only on verified instructions issued by or on behalf of that entity. It is important to note that only VASPs that store each client's assets separately in individual VA wallets are eligible for custody services licenses. Custody services provide a secure way to store assets, reducing the risk of theft or loss, and ensuring that clients' assets are strictly managed and protected at all times.

4. Virtual Asset Trading Services

"Trading services" refer to any of the following:

[a] Exchanging, trading, or converting virtual assets and currencies; [b] Exchanging, trading, or converting one or more virtual assets; [c] Matching orders between buyers and sellers and conducting [i] exchanges, trades, or conversions between virtual assets and currencies or [ii] exchanges, trades, or conversions between one or more virtual assets; or [d] Maintaining order books to further fulfill the above [a], [b], or [c] items. Trading services aim to provide diverse options for virtual asset transactions, meeting clients' different trading needs, and enhancing market liquidity and trading efficiency.

5. Virtual Asset Lending Services

"Loan services" refers to the performance of a contract under which a virtual asset is transferred or lent from one or more parties (lenders) to one or more parties (borrowers), with the borrower committing to return the virtual asset to the lender for its own benefit or on behalf of others at the lender's request, within the agreed period or at any time upon the end of the period. Loan services provide users with a flexible way of managing funds to meet short-term or long-term financial needs while ensuring the interests and safety of both lenders and borrowers.

6. Virtual Asset Management and Investment Services

"Virtual asset management and investment services" refer to acting as an agent or trustee for an entity, or otherwise being responsible for managing, administering, or disposing of the entity's virtual assets. This includes but is not limited to:

[a] Investment management services or otherwise managing virtual assets; and [b] Being responsible for "staking" virtual assets to earn fees or other value paid by validators and/or node operators of the "proof of stake" distributed ledger technology.

These services aim to help clients effectively manage and enhance the value of their virtual assets, achieving maximum returns on assets through professional investment strategies and management means.

7. Virtual Asset Transfer and Settlement Services

"Transfer and settlement services" include companies engaged in transferring or moving virtual assets from one entity to another or from one entity to another VA wallet, address, or location. Transfer and settlement services ensure the safe and efficient transfer of virtual assets, reducing the risks during the asset transfer process and enhancing the customer experience.

8. Virtual Asset Issuance Category 1

"Category 1 issuance" refers to the issuance of fiat-pegged virtual assets (FRVA), commonly known as "stablecoins." These virtual assets claim to have a stable relationship with one or more fiat currencies but do not have legal tender status in any jurisdiction. The issuance of stablecoins provides a relatively stable trading medium in the market, helping to reduce market volatility and improve trading stability and predictability.

These VASP license types and corresponding service specifications provide detailed operational guidelines for virtual asset service providers, ensuring compliance with relevant regulatory requirements and safeguarding the legal rights and asset security of clients.

The panorama of Dubai Virtual Asset Service Provider (VASP) licenses is as follows.

VASPs can apply for licenses for multiple activities and aggregate them under a single overall license, except for virtual asset custody services. VASPs that are licensed for multiple activities must fully meet the requirements of each activity and maintain compliance at all times.

Virtual asset custody services are the only regulated activity that needs to be separated from other virtual asset service license categories. In this case, a virtual asset custodian must be established as a separate legal entity, maintaining independence and non-affiliation in governance, and holding an independent license.

In addition, licensed VASPs are prohibited from engaging in proprietary trading or trading their group's asset portfolios under the regulated activity license. To ensure fair and transparent market operations, a separate company must be established for proprietary trading. The separation of proprietary trading and group asset management is necessary to prevent potential conflicts of interest and ensure that all clients can trade in a fair and protected environment.

Application Process

Any company wishing to conduct virtual asset activities in Dubai (excluding the Dubai International Financial Centre, DIFC) or from Dubai has a legal obligation to obtain a license from VARA before commencing operations.

Mainland companies can submit applications through Dubai's Department of Economy and Tourism (DET) or any Dubai Free Zone (FZ) excluding the DIFC. Free zones are special economic zones that provide tariff benefits and tax exemptions to investors, each managed by a set of special regulations. The benefits of setting up a company in a free zone include 100% foreign ownership, 100% capital and profit repatriation, and a quick and easy company setup. Dubai has over 20 operational free zones, most of which are focused on one or more specific sectors, providing business licenses for activities such as trade, services, and industrial operations within those sectors.

For newly established companies, the application process is as follows:

Phase One

1. Submit an Initial Disclosure Questionnaire (IDQ) to Dubai's Department of Economy and Tourism (DET) or the relevant Free Zone (FZ).
2. Provide additional documents as required, including but not limited to a business plan and detailed information about the actual owners and senior management of the company.
3. Pay the initial fee required to start the application review (usually 50% of the license application fee).
4. Obtain preliminary approval to finalize the legal establishment of the company and complete operational setup, including office space leasing and employee onboarding.

It is important to note that even with preliminary approval, companies are not allowed to conduct virtual asset activities in the first phase.

Phase Two

1. Prepare and submit documents according to the guidance provided by VARA upon receiving preliminary approval.
2. Receive feedback directly from VARA regarding the submission, which may include meetings, interviews, and further document submissions.
3. Pay the remaining license application fee and the first year's regulatory fee.
4. Obtain the VASP license, but may be subject to operational conditions.

If a company's activities fall outside the regulatory scope or the company may not meet appropriate regulatory standards, VARA reserves the right not to issue a VASP license.

The VASP license application process flowchart is as follows.

For companies conducting virtual asset business before February 2023 (existing VA operators), VARA has invited all such companies to apply for the Dubai Legacy Plan. This plan allows organizations to seamlessly transition to VARA's regulatory framework. VARA has conducted various training courses and promotional campaigns in collaboration with the Department of Economy and Tourism and the Free Zone Committee.

As part of the regulatory process, VARA has required all existing VA operators in Dubai to register by completing the Initial Disclosure Questionnaire (IDQ). VASPs that receive the Application Acknowledgment Notice (AAN) can proceed to obtain the Legacy Operating Permit (LOP) or No Objection Certificate (NOC).

The Legacy Operating Permit (LOP) provides VASPs with an opportunity to transition to the comprehensive virtual asset regulatory system within a limited time, provided they meet basic regulatory requirements. It also offers other benefits, including a maximum 50% discount on license fees and reduced capital requirements. This permit is valid for 12 months, allowing VASPs sufficient time to formulate and comply with comprehensive licensing and regulatory requirements.

Conclusion and Outlook

The establishment of the VASP system is a well-thought-out layout by Dubai for financial technology innovation. On the one hand, it provides investors with a safe, transparent, and efficient market environment through strict compliance requirements and an advanced risk management framework. On the other hand, with more compliant VASPs settling here, Dubai is expected to become a hub for digital assets connecting the East and the West, promoting the flow and integration of global financial resources.

The VASP system is expected to be a catalyst for financial technology innovation in Dubai, further driving the development of Web3 technologies such as blockchain and virtual assets. The VASP system is also a beneficial attempt by Dubai to promote technological and business innovation within a compliant framework. It is hoped that Dubai will usher in a more open, inclusive, and mutually beneficial new era of the digital economy.

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