At a time when crypto is going through a bit of a reckoning and reassessment, Dubai’s crypto business world has never been more buoyant. This is not coincidental.
The issue of Dubai’s new virtual assets framework law and the creation of the Virtual Asset Regulatory Authority (VARA) as a Dubai mainland dedicated virtual assets regulator around the same time as the DIFC started shaping its own investment and crypto token regulations sent a clear message as to Dubai’s ambitions to distinguish itself as a reputable, safe environment for virtual asset related business.
VARA followed through in its mission by publishing, on February 7, 2023, its much anticipated regulations applicable to virtual assets business conducted in Dubai (excluding the DIFC).
These regulations have been hotly anticipated in the growing and booming virtual asset ecosystem building in Dubai. VARA’s regulations signal the seriousness with which the emirate takes the world of Web3 and create a clear regulatory environment for virtual asset service providers (VASPs) and any traditional companies looking to add blockchain or virtual assets to their existing functions.
What businesses does VARA supervise?
The VARA regulations apply to all VASPs operating in Dubai (excluding the DIFC) and aim to provide specific rules for the growing range of digital assets available, including NFTs and utility tokens. All financial services activities conducted through the issuance and exchange or control of a token in Dubai (except DIFC) now fall under VARA’s supervision.
The VARA regulations comprise of 13 separate rulebooks. Five apply to all VARA regulated businesses and cover fundamental matters such as virtual assets and related activities, company formation and structure, compliance and risk management, technology and information management, and market conduct.
The remaining eight are activity-specific and cover advisory services, broker-dealer services, custody services, exchange services, lending and borrowing services, payment and remittance services, and management and investment services. All entities providing such services will need to register with VARA.
Interestingly, VARA has also created an avenue for voluntary registration for entities which, while not falling in one of the categories of regulated services mentioned above, could benefit from supervision by a reputable regulator. These may be providers of technology services relating to or utilising distributed ledger technology or for other businesses and companies that actively invest their own portfolio in virtual assets.
Voluntary registration is likely to prove popular. A growing number of crypto businesses, especially those with pioneering business models that may not fall within the traditional categories of financial services recognised by regulators, are showing interest in submitting themselves voluntarily to regulation, and thus providing comfort to investors and counterparties that the business they are dealing with is subject to regulation and supervision of a reputable, specialised virtual assets regulator.
VARA built in its regulations certain innovative solutions and requirements that we have not seen in other jurisdictions. One such innovation is the applicability of ESG requirements to VASPs. This is in line with the UAE’s campaigns supporting a green tomorrow.
It is worth noting that VARA is one of the first regulators to acknowledge that decentralised autonomous organisations (DAOs) are a key fixture of corporate structures used by Web3 companies and therefore they must be recognised.
Lastly, VARA has created a specialised set of rules for any company, whether offering financial services or not, that issues tokens. These specialised regulations aim to instil confidence in such, most likely private, unregulated, issuers.
What does the future hold?
At a time when Terra Luna collapsed, FTX unravelled and several prominent VASPs are being investigated by the SEC in the US, Dubai has chosen to plant a flag in the world of blockchain to signal to all operators in this space that it is open for responsible crypto business.
It is a pragmatic view, but the world of Web3 has its fair share of unsavoury opportunists. VARA’s regulations are a sieve that aims to separate the wheat from the chaff. Dubai appears to be poised to solidify its reputation as the home of choice for reliable, robust and reputed companies of the future.
It is time for evolution and adoption, a mixing of central acceptance of decentralised systems. Only time will tell how successful this gambit will be, but for now, Dubai is, undeniably, a growing crypto capital of the world.