AI summaryAny company wishing to conduct virtual asset activities in Dubai (excluding the DIFC) or from Dubai must obtain a VASP license before commencing operations.
Any company wishing to conduct virtual asset activities in Dubai (excluding the DIFC) or from Dubai must obtain a VASP license before commencing operations.
The Dubai government has long provided comprehensive support to the blockchain and Web3 industries. Through initiatives such as the Dubai Blockchain Strategy launched in 2016, the UAE Centre for the Fourth Industrial Revolution established in 2019 by the Dubai Future Foundation in collaboration with the World Economic Forum, and the Dubai Metaverse Strategy in 2022, it has laid a solid foundation for digital opportunities.
Ambitious government strategies and a world-class, business-friendly environment underpin Dubai’s appeal as a hub for digital innovation, particularly for entrepreneurs and investors in the blockchain and Web3 sectors. Dubai’s Virtual Asset Service Provider (VASP) regime is renowned for its clear regulatory framework, sophisticated regulatory standards, accessible regulatory approach, and balanced policy that encourages innovation while mitigating risks. This has not only continuously attracted a steady stream of blockchain and Web3 entrepreneurs and investors from around the globe but also drawn industry giants to establish their presence here.
The Dubai Virtual Assets Regulatory Authority and Its Regulatory Framework
Pursuant to Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai, the Virtual Assets Regulatory Authority (hereinafter referred to as “VARA”) was established in March 2022 as the competent authority responsible for regulating virtual assets and virtual asset activities across all areas of the Emirate of Dubai, including special development zones and free zones, but excluding the Dubai International Financial Centre (DIFC). VARA plays a central role in creating an advanced legal framework in Dubai to protect investors and establish international standards for the governance of the virtual asset industry, while supporting the vision of a borderless economy.
Dubai’s regulatory framework for virtual assets consists of a complete top-down system of laws and rules. At the level of laws and regulations, Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai holds the highest hierarchy. The Virtual Assets and Related Activities Regulations 2023 provide a detailed and specific regulatory framework covering various aspects such as licensing, anti-money laundering and counter-terrorist financing, and the regulation of marketing activities, aiming to provide regulatory certainty. This framework is built on the principles of economic sustainability and cross-border financial security. The UAE has consistently committed to safely enabling these drivers by updating its supervisory and regulatory approaches to address global money laundering (ML) and terrorist financing (TF) risks arising from the misuse of new technologies.
Part Five of the Regulations, namely the Rulebook for VA Activities, is a comprehensive compliance guide. It is divided into two parts: the Mandatory Rulebook, which applies to all VASPs, and the Rulebook for VA Activities and Other Rules, which sets out specific codes of conduct for each of the eight different types of VASP licenses mentioned above.
As a universal compliance guide, the importance of the Mandatory Rulebook is self-evident. The Company Rulebook prescribes how VASPs should organize and manage their companies, boards of directors, senior executives, and employees, as well as maintain appropriate internal control and management systems on an ongoing basis. Furthermore, the Company Rulebook covers corporate governance requirements and ESG responsibilities. The Compliance and Risk Management Rulebook outlines general principles for regulatory compliance and the implementation of compliance management systems, including the appointment of compliance officers and requirements for record-keeping and audits. The Compliance and Risk Management Rulebook also stipulates that VASPs must at all times 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 U.S. Foreign Account Tax Compliance Act (FATCA). The Technology and Information Rulebook prescribes technology governance, controls, and security, including cybersecurity (and other legal and regulatory) obligations, as well as personal information protection compliance requirements and programs. The Market Conduct Rulebook provides guidance on regulations and requirements for marketing, advertising, and promotions.
VASP Licenses and Their Classification
The Dubai Virtual Assets Regulatory Authority (VARA) has identified eight distinct regulated virtual asset (VA) activities and classified the scope of regulation. Any Virtual Asset Service Provider (VASP) wishing to provide the following virtual asset activities (whether serving clients who are residents of the Emirate or, where permitted, serving global clients) must apply to VARA and obtain a license before commencing operations within the Emirate of Dubai.
Dubai Virtual Asset Service Provider (VASP) licenses include:
1. Virtual Asset Advisory Services
“Advisory Services” refer to providing advice to clients regarding one or more actions or transactions related to any virtual asset, either at the client’s request or at the initiative of the entity providing the advice. These services aim to help clients understand and navigate the complexities of the virtual asset market by offering professional advice and strategies to enable informed decision-making. Advisory services may include market analysis, risk assessment, investment strategy recommendations, and regulatory compliance guidance, ensuring that clients’ operations in the virtual asset sector are secure and lawful.
2. Virtual Asset Broker-Dealer Services
“Broker-Dealer 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 virtual asset transactions between buyers and sellers; [d] Acting as a dealer to conduct virtual asset transactions for its own account on behalf of the entity; [e] Utilizing client assets to conduct market transactions in virtual 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 transaction execution and secure asset management through professional brokerage services.
3. Virtual Asset Custody Services
“Custody Services” refer to safeguarding virtual assets for another entity or on behalf of another entity, and acting solely in accordance with verified instructions issued by or on behalf of that entity. Note: Only VASPs that store each client’s assets separately in individual VA wallets are eligible for a custody services license. Custody services provide a secure method of asset safekeeping, reducing the risk of theft or loss, and ensuring that clients’ assets are strictly managed and protected at all times.
4. Virtual Asset Exchange Services
“Exchange Services” refer to any of the following:
[a] Conducting exchanges, trades, or conversions between virtual assets and currency; [b] Conducting exchanges, trades, or conversions between one or more virtual assets; [c] Matching orders between buyers and sellers, and conducting exchanges, trades, or conversions of [i] virtual assets for currency or [ii] one or more virtual assets; or [d] Maintaining an order book for the further fulfillment of items [a], [b], or [c] above. Exchange services aim to provide diverse virtual asset trading options to meet customers’ varying trading needs, enhancing market liquidity and trading efficiency.
5. Virtual Asset Lending and Borrowing Services
“Lending and Borrowing Services” refer to fulfilling a contract under which a virtual asset is transferred or lent from one or more parties (lenders) to one or more parties (borrowers), and the borrower commits to returning the virtual asset for its own benefit or on behalf of others at any time within an agreed period or at the end of the period upon the lender’s request. Lending and borrowing services provide users with a flexible way to manage funds, meeting short-term or long-term funding needs while ensuring the interests and security of both lending and borrowing parties.
6. Virtual Asset Management and Investment Services
“Virtual Asset Management and Investment Services” refer to acting as an agent or trustee on behalf of an entity, or otherwise being responsible for managing, administering, or disposing of that 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 to validators and/or node operators of “proof-of-stake” distributed ledger technology.
These services aim to help clients effectively manage and enhance the value of their virtual assets, achieving maximized returns through professional investment strategies and management methods.
7. Virtual Asset Transfer and Settlement Services
“Transfer and Settlement Services” include engaging in the transmission or transfer of virtual assets from one entity to another entity, or from one entity to another VA wallet, address, or location. Transfer and settlement services ensure the secure and efficient transfer of virtual assets, reduce risks during the asset transfer process, and enhance customer experience.
8. Virtual Asset Issuance Category 1
“Issuance Category 1” refers to the issuance of Fiat-Referenced Virtual Assets (FRVAs), commonly known as “stablecoins.” These virtual assets claim to maintain a stable value relationship with one or more fiat currencies but do not have legal tender status in any jurisdiction. The issuance of stablecoins provides the market with a relatively stable medium of exchange, helping to reduce market volatility and improve the stability and predictability of transactions.
These VASP license types and corresponding service specifications provide detailed operational guidelines for Virtual Asset Service Providers, ensuring compliance with relevant regulatory requirements during service provision and safeguarding customers’ legitimate rights and interests and asset security.
The following is an overview of Dubai’s Virtual Asset Service Provider (VASP) licenses.
A VASP may apply for licenses for multiple activities and aggregate them under a single overarching license, unless virtual asset custody services are involved. A VASP licensed to engage in multiple activities must fully satisfy the requirements for each activity and maintain compliance at all times.
Virtual asset custody services are the only regulated activity that must be separated from other virtual asset service license categories. In this case, the virtual asset custodian must be established as a separate legal entity, maintaining independence and non-affiliation in its governance, and holding a separate license.
Furthermore, licensed VASPs are prohibited from conducting proprietary trading or trading their group’s asset portfolios under their regulated activity licenses. To ensure fair and transparent market operations, a separate company must be established for proprietary trading. Proprietary trading and group asset management require clear separation to prevent potential conflicts of interest and ensure that all clients can trade in a fair and protected environment.
Any company wishing to conduct virtual asset activities in Dubai (excluding the Dubai International Finance Centre, DIFC) or from Dubai has a legal obligation to obtain permission from VARA before commencing operations.
Mainland companies may submit applications through Dubai’s Department of Economy and Tourism (DET), or through any Dubai Free Zone (FZ) in the Emirate of Dubai (excluding the DIFC). Free zones are special economic zones that offer customs benefits and tax incentives to investors, with each free zone governed by a specific set of rules and regulations. Benefits of establishing a company in a free zone include 100% foreign ownership, 100% repatriation of capital and profits, and rapid and straightforward business setup. There are over 20 operating free zones in Dubai, most of which focus on one or more specific sectors, issuing business licenses for companies within these sectors, typically covering trade, services, and industrial activities.
For newly established companies, the application process is as follows:
Phase One
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Submit the Initial Disclosure Questionnaire (IDQ) to the Dubai Department of Economy and Tourism (DET) or the relevant Free Zone (FZ).
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Provide additional documents as required, including but not limited to the business plan and details of the company’s beneficial owners and senior management.
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Pay the initial fees required to commence the application review (typically 50% of the license application fee).
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Obtain preliminary approval to finalize the legal establishment of the company and complete operational setup, including office space leasing, employee onboarding, etc.
Note that during Phase One, even companies that have obtained preliminary approval are not permitted to conduct virtual asset activities.
Phase Two
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Upon receiving preliminary approval, prepare and submit documents in accordance with the guidance provided by VARA.
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Receive feedback directly from VARA regarding the submission, which may include meetings, interviews, and requests for further documentation.
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Pay the remaining license application fees and the first year’s regulatory fees.
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Obtain the VASP license, which may be subject to operational conditions.
VARA reserves the right not to issue a VASP license if the company’s activities fall outside the regulatory scope or if the company may not meet appropriate regulatory standards.
The following is a flowchart of the VASP license application process.
For companies that conducted virtual asset business prior to February 2023 (legacy VA operators), VARA has invited all such companies to apply for the Dubai Legacy Program. This program enables organizations to transition seamlessly into VARA’s regulatory framework. VARA has collaborated with the Department of Economy and Tourism and the Free Zones Council to conduct various training courses and awareness programs in this regard.
As part of the regulatory process, VARA has required all legacy VA operators in Dubai to register by completing the Initial Disclosure Questionnaire (IDQ). VASPs that receive an Application Acknowledgement Notice (AAN) may proceed to obtain a Legacy Operating Permit (LOP) or a No Objection Certificate (NOC).
The Legacy Operating Permit (LOP) provides VASPs with an opportunity to transition to the full virtual asset regulatory regime within a limited timeframe, provided they meet basic regulatory requirements. It also offers other benefits, including up to a 50% discount on licensing fees and reduced capital requirements. This permit is valid for 12 months, giving VASPs sufficient time to develop and comply with comprehensive licensing and regulatory requirements.
The establishment of the VASP regime represents Dubai’s thoughtful layout for fintech innovation. On 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, as more compliant VASPs settle in Dubai, the city is poised to become a digital asset hub connecting East and West, promoting the flow and integration of global financial resources.
The VASP regime is expected to serve as a catalyst for Dubai’s fintech innovation, further driving the development of Web3 technologies such as blockchain and virtual assets. The VASP regime is also a beneficial attempt by Dubai to promote technological and commercial innovation within a compliant framework. We look forward to Dubai ushering in a new era of the digital economy that is more open, inclusive, and mutually beneficial.
