A Comprehensive Explanation of Why Web3 Enterprises Need EU MiCA and Dubai VARA Licenses

Compliance Holds the Key to the Future

With Donald Trump’s election and Bitcoin reaching new highs, the crypto assets industry welcomed a fresh wave of positive signals at the end of 2024. As the industry continues to evolve, countries are continuously introducing corresponding regulatory measures. Among these measures, the most notable is the “license.”

What Is a License?In short, a “license” serves as the “passport” for Web3 enterprises to engage in crypto-related business.It enables Web3 enterprises to conduct crypto-related activities legally and securely, while building trust with investors and regulators.

This article delves into the compliance frameworks of MiCA and VARA, analyzing why holding a license is not merely an option but a necessity for Web3 companies seeking to thrive in regulated markets. Understanding this landscape is crucial for any company or investor aiming to succeed in the next chapter of the crypto industry.

MiCA and VARA Licenses: Compliance Tools for Web3 Enterprises to Access European and Middle Eastern Markets

The EU Markets in Crypto-Assets Regulation (MiCA) is “one of the most comprehensive digital asset regulatory frameworks to date.” It aims to provide a clear regulatory environment, reduce compliance costs, and encourage enterprises to enter the EU crypto market. The MiCA regulatory framework applies to all EU Member States. It also applies to the three European Free Trade Association (EFTA) countries that are part of the European Economic Area (EEA)—Iceland, Liechtenstein, and Norway—as they are part of the internal market and subject to many of the same EU regulations.

The Dubai Virtual Assets Regulatory Authority (VARA) is the world’s first independent virtual assets regulator, responsible for overseeing the issuance and trading of virtual assets within and beyond the Emirate of Dubai. Its policies set the tone for Web3 regulation in the Middle East. VARA’s jurisdiction is limited to the Emirate of Dubai; other regions of the United Arab Emirates and the Dubai International Financial Centre fall outside its scope.

Background and Global Impact of MiCA and VARA

Global Regulatory Trends: MiCA and VARA are landmark developments under the broader global trend toward regulation. They not only signify stricter oversight of the Web3 industry by various countries but may also serve as templates for regulatory frameworks in other jurisdictions.
Strategic Significance of the EU and the Middle East: The European and Middle Eastern markets are key markets for Web3 enterprises to expand, featuring a substantial investor base, an innovative ecosystem, and development potential. The guiding roles of MiCA and VARA in these two markets may serve as bellwethers for the global market.
From Regulation to Innovation: MiCA and VARA are not merely regulatory tools; they may bring more innovation opportunities. A regulated market is a double-edged sword for startups, imposing both constraints and incentives.

Commercial Value of Obtaining MiCA and VARA Licenses

Compliance and Market Access: Holding MiCA and VARA licenses can serve as a legal "passport" for entering the Middle Eastern and European markets, helping enterprises gain trust in local financial markets and reducing legal barriers to market access.
Enhancing Corporate Image and Market Reputation: In the crypto industry, a license is not only a mark of compliance but also a symbol of corporate strength. Web3 enterprises that obtain these licenses will receive greater recognition within the industry.
Increasing the Potential for Cross-Border Expansion: Obtaining MiCA and VARA licenses can help enterprises conduct business in different regions and reduce compliance risks associated with cross-border expansion. They provide enterprises with a "cross-border operational license" in the EU and Middle Eastern markets.

MiCA vs. VARA: A Comparison of the Styles of Two Regulatory Frameworks from the Perspective of License Application

Regulatory requirements and market demand for Web3 enterprises vary across jurisdictions, and the role and significance of MiCA and VARA licenses also differ accordingly. Europe may place greater emphasis on market transparency and risk prevention and control, whereas the Middle East may prioritize rapid innovation and capital mobility.

Overview of Licensed Business Activities under the MiCA Framework

MiCA sets out detailed compliance requirements for the issuance and trading of stablecoins, such as electronic money tokens (EMTs) and asset-referenced tokens (ARTs). However, due to space constraints, this article does not elaborate on those requirements in detail and instead provides a basic overview of “crypto-asset services” under the MiCA framework. “Crypto-asset services” refer to any of the following services and activities related to any crypto assets:

1. Providing custody and administration of crypto-assets on behalf of clients

2. Operation of a trading platform for crypto-assets

3. Exchange of crypto-assets for funds

4. Exchange of crypto-assets for other crypto-assets

5. Execution of orders for crypto-assets on behalf of clients

6. Placing of crypto-assets

7. Reception and transmission of orders for crypto-assets on behalf of clients

8. Providing advice on crypto-assets

9. Providing portfolio management on crypto-assets

10. Providing crypto asset transfer services on behalf of clients

Overview of Licensed Business Activities under the VARA Framework

Any entity, whether operating within or from the Emirate of Dubai, and whether serving UAE residents or global customers in jurisdictions where such activities are permitted, must apply to VARA for and obtain a license.

There are currently eight types of licensed business activities under the VARA framework, namely:

1. Advisory Services: Providing advice on matters relating to virtual assets

2. Broker-Dealer Services: Facilitating the buying and selling of virtual assets

3. Custody Services: Providing custody services for virtual assets to ensure their security (subject to additional VARA requirements)

4. Exchange Services: Operating virtual asset trading platforms

5. Lending and Borrowing Services: Facilitating the lending and borrowing of virtual assets (not yet covered by MiCA)

6. Management and Investment Services: Managing and investing in virtual assets on behalf of clients

7. Transfer and Settlement Services: Facilitating the transfer and settlement of virtual assets

8. Virtual Asset Issuance Category 1: Issuance of stablecoins, such as Fiat-Referenced Virtual Assets (FRVA)

A license applicant may apply for multiple licensed activities and consolidate them under a single umbrella license.

Comparison of the Scope of Licensed Activities under MiCA and VARA

As of the date hereof, the businesses covered by different licenses under the two regulatory frameworks are compared as follows:

As can be seen from the summary in the table above, MiCA and VARA have different regulatory scopes for licensed business activities.

With respect toLending and Borrowing Services, VARA provides a channel for applying for this licensed activity, whereas MiCA does not cover it. At least in 2024, MiCA will not offer licensing for lending and borrowing activities. Therefore, MiCA does not intend to regulate lending services related to crypto assets, including electronic money tokens, and thus expresses no prejudice regarding the application of national laws in this area.

With respect toCustody Services, VARA imposes additional regulatory requirements on Virtual Asset Service Providers (VASPs). Virtual asset custody services are the only business activity that must be handled separately from other licensed activities. In such cases, a virtual asset custodian must be established as an independent legal entity with a separate license, rather than being consolidated under an umbrella license like other businesses.

Furthermore, licensed institutions must ensure full compliance with the activity requirements of the license from the pre-application stage through the conduct of business activities.

Strategic Value of Licensing: Why Web3 Enterprises Must Plan Ahead

Why do Web3 enterprises need licenses? The most direct reason is that without a license, they will be blacklisted.In May 2024, the French financial regulator, the Autorité des Marchés Financiers (AMF), stated that, due to BYBIT providing virtual asset services in France without authorization, the AMF reserved the right to take legal measures to block the platform’s website.

Track industry trends and secure licenses in advance

With the rapid development of the Web3 industry, regulators around the world are gradually strengthening oversight of virtual assets and blockchain technology. Regulatory policies and legal frameworks in different jurisdictions are constantly evolving, creating significant compliance pressure for Web3 enterprises. If an enterprise fails to plan ahead for license applications, it may miss the optimal window for compliant development, thereby restricting its operations and expansion.

Rapid industry growth versus regulatory lag: Globally, the Web3 industry is developing rapidly, but regulatory frameworks in various countries often lag behind. This lag may cause some enterprises to fail to obtain necessary licenses in a timely manner, thereby missing market opportunities. Securing licenses in advance can help enterprises seize the initiative and gain market share.
The trend toward stricter regulation: Currently, whether it is VARA in the Middle East or MiCA in the European Union, regulators are accelerating the compliance of various virtual asset-related businesses. Understanding the requirements of these regulatory frameworks in advance and applying for relevant licenses in a timely manner will ensure that enterprises operate within the legal framework and avoid risks arising from future regulatory tightening.
Mitigate the risk of sudden policy changes: Governments around the world are increasingly adopting a strict regulatory stance toward the Web3 industry. If enterprises wait until policies are fully mature before beginning license applications, they will often face more cumbersome approval processes and may even risk rejection. Planning for licenses in advance enables enterprises to respond more calmly to potential future policy changes and regulatory requirements.

Manage compliance risks and reduce compliance costs

In the Web3 industry, compliance has always been a major challenge for enterprises. As the global regulatory environment continues to change, enterprises that fail to obtain compliant licenses in a timely manner will face a range of legal risks, including penalties, litigation, and even suspension of business. By applying for licenses in advance, enterprises can not only effectively manage compliance risks but also significantly reduce potential compliance costs.

Avoiding financial losses arising from compliance risks: If an enterprise fails to hold the requisite licenses and is penalized by regulatory authorities, it may face substantial fines, asset freezes, and even operational disruptions. Holding compliant licenses provides legal safeguards for the enterprise, reducing legal disputes and financial losses.
Complexity of the compliance review process: Regulatory frameworks vary across jurisdictions. Applying for licenses in advance and ensuring adherence to regulatory requirements can help enterprises avoid rejection or cumbersome review procedures due to non-compliance. In the long term, this reduces the costs and time expenditures associated with compliance failures.
Long-term advantages of compliant operations: Compliance is not a one-time task but an ongoing process. After obtaining a license, an enterprise is subject to periodic reviews by regulatory authorities. Securing a license in advance and successfully passing such reviews enables the enterprise to operate more steadily and competitively on the path of compliant operations.
Streamlining cross-border compliance issues: Web3 enterprises typically operate across borders, involving regulatory requirements in different countries and regions. Holding licenses in multiple jurisdictions can streamline cross-border compliance issues, ensuring smooth operations in different markets and avoiding legal obstacles arising from the lack of licenses.

Enhancing brand image and driving financing and partnerships

After the Securities and Futures Commission of Hong Kong issued virtual asset trading platform licenses this year, Xiaoweng Weng, CEO of HashKey Exchange, pointed out that driven by the new regulations effective June 1, the exit of unlicensed platforms would generate a user spillover effect for licensed institutions in the short term. HashKey has already observed significant changes on the business side, with the number of newly activated app users increasing by 267% week-over-week last week.

In the Web3 industry, trust is one of the key factors in attracting investors and users. A license is not only a symbol of compliance but also a mark of an enterprise’s reliability and professionalism. Obtaining a legitimate license can effectively enhance the enterprise’s brand image and bring more opportunities for financing and cooperation.

Enhancing user trust: Due to the nature of the industry, users and investors often have certain concerns regarding the compliance and security of Web3 enterprises. Holding a valid license can demonstrate an enterprise’s compliance to the market and establish a stronger foundation of trust. Such trust not only attracts more users but also increases institutional investors’ interest in investing in the enterprise.
Enhancing Brand Credibility: A compliance license represents an enterprise’s legitimacy and credibility in the global market. By obtaining regional or international licenses, Web3 enterprises can effectively build their brand image and demonstrate their professionalism within the industry. Especially in highly competitive markets, holding a license enables an enterprise to stand out.
Facilitating Fundraising and Partnerships: Licensed enterprises are generally more attractive for fundraising, particularly to institutional investors and venture capital firms. Investors prefer to invest in enterprises that operate in compliance, as this implies lower legal risks and greater market stability. Through licensing, Web3 enterprises can effectively secure more financial support.
Expanding Partnership Opportunities: Many business partners, such as financial institutions, technology providers, or multinational corporations, are more willing to collaborate with Web3 enterprises that hold compliance licenses. A license not only signifies an enterprise’s compliance but also conveys its maturity and sense of responsibility within the industry. Therefore, obtaining a valid license is an important condition for enterprises to expand partnership opportunities.

License Application Analysis: Case Study of Stablecoin Issuance under MiCA

New stringent regulations for stablecoin issuers under the MiCA framework take effect across the European UnionThis upcoming regulation represents a significant change in the regulatory framework for stablecoins in Europe. Under this new framework, any entity issuing stablecoins within the European region must comply with the provisions of the Markets in Crypto-Assets (MiCA) Regulation. Institutional responses to these changes have varied.

1. Responses from Licensed Institutions

Circle

In June 2024, Circle, a U.S.-based stablecoin issuer, announced that it had fully complied with MiCA requirements. As a result, the company became the first global stablecoin issuer to obtain an Electronic Money Institution (EMI) license under the EU’s MiCA regulatory framework, enabling it to utilize its license throughout the European Union. Circle announced that its two primary stablecoins, USDC and EURC, now meet the regulatory requirements of the new rules and can be used in accordance with the new European regulations. As an EMI registered in France, Circle Mint France will issue its euro-denominated EURC stablecoin “onshore” within the EU and issue USDC from the same entity, providing its services to customers across the entire European Union.

SG-Forge

Société Générale – Société Générale’s subsidiary, Forge (SG-Forge), has also announced that it has obtained an electronic money license, and its stablecoin EURCV is now classified as an electronic money token under the Markets in Crypto-Assets Regulation (MiCA). SG-Forge has removed whitelist restrictions by updating its smart contracts to achieve compliance with MiCA. This update is primarily intended to accelerate settlement speeds, enhance security, and expand its application scope on public blockchains. This enables EURCV to be used in a broader market while providing greater liquidity and use cases.

Now that these stablecoin issuers have taken this step and obtained electronic money licenses, we may see other stablecoin companies attempting to secure similar approvals in Europe. This could provide more options for those who wish to use stablecoins.

2. Responses from Unlicensed Entities

Due to the stringent requirements for USD-pegged stablecoins, MiCA faces the risk that many existing tokens will be deemed non-compliant, thereby forcing them to exit the European Union market. Under MiCA, companies issuing fiat-backed stablecoins must now obtain an electronic money license within the European Union. To offer stablecoins in the EU, issuers must register as electronic money institutions or credit institutions. There are several key obligations, such as publishing a white paper, holding liquid reserves with third-party custodians, and reporting the value and composition of reserves.

Many cryptocurrency exchanges operating within the European Union have taken action before the new rules came into effect. They have announced changes to their stablecoin policies and product offerings, while creating significant opportunities for licensed electronic money platforms. Major cryptocurrency exchanges, including Uphold, Binance, Bitstamp, Kraken, and OKX, have begun delisting non-compliant stablecoins, such as Tether and DAI, for their European customers, or have started implementing restrictions on services for users in the EU and the European Economic Area, while other exchanges have committed to doing so in the coming months.

Uphold

In June, Uphold, a New York-based cryptocurrency exchange and custody platform, announced its decision to cease support for multiple stablecoins in preparation for MiCA compliance. These stablecoins include Tether, FRAX, GUSD, USD, and TUSD. Effective July 1, 2024, these digital assets will no longer be available on the Uphold platform. We encourage users holding these stablecoins to convert them into other cryptocurrencies by June 28, after which the cryptocurrency exchange will automatically convert them into USD Coin. Failure to convert by this deadline will result in the automatic conversion of these stablecoins into Circle’s USDC.

3. HashKey’s Stance: “License First”

Livio Weng, Chief Operating Officer of HashKey Group and CEO of HashKey Exchange, stated in a recent interview: “We firmly believe that unregulated financial activities should not be undertaken lightly, which is closely aligned with our principle of ‘long-termism.’ All of HashKey’s businesses adhere to the principle of ‘obtaining licenses before operations.’ We have already secured licenses in Japan, Singapore, Hong Kong, and other jurisdictions, with additional licenses currently under application. We consistently insist on obtaining regulatory licenses before commencing business operations, upholdingthe philosophy of ‘no finance without regulation’philosophy.”

It is foreseeable that in the future, the “license first” philosophy will permeate the industry and become an essential component for Web3 enterprises when expanding their business.

Conclusion

This article uses the MiCA and VARA licensing regimes as a point of departure to compare the differences in their licensed activities. By incorporating practical cases, it emphasizes the necessity for Web3 enterprises to apply for licenses. Regulatory frameworks are not static; as pioneers, VARA and MiCA provide an excellent model for licensing regulations worldwide and will have a profound impact on the future Web3 industry. For Web3 enterprises, whether they already hold licenses or have not yet applied, it is essential to reassess the risks and costs associated with licensing in light of its strategic value, thereby supporting the long-term development of the enterprise.

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A Comprehensive Explanation of Why Web3 Enterprises Need EU MiCA and Dubai VARA Licenses

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