Virtual assets (commonly referred to as crypto assets), continue to draw the attention of both companies and private individuals. Engagement with virtual assets calls for an understanding of the regulatory landscape to allow investors and operators alike to properly assess opportunities.
Despite certain types of virtual asset presenting as volatile, cryptocurrency for example, such assets have continued to gain traction in global markets leading commentators to start to accept that perhaps they are here to stay.
Dubai (other than DIFC)
Adopting a proactive approach, the Government of Dubai has established the world's first independent regulator for virtual assets as part of a robust regulatory framework comprising laws, regulations, and supplemental rulebooks. The Virtual Assets Regulatory Authority ("VARA") was established in March 2022 with authority over the virtual asset market across the Emirate of Dubai, including Special Development Zones and Free Zones, but excluding Dubai International Financial Centre ("DIFC").
The VARA licensing framework, as set out in the Virtual Assets and Related Activities Regulations 2023 ("Regulations"), covers a wide range of virtual asset activities such as:
- Advisory services
- Broker-dealer services
- Custody services
- Exchange services
- Lending and borrowing services
- Managing and investment services
- Transfer and settlement services
Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai ("Virtual Assets Law") defines the terms used by the regulator, to describe virtual assets, quite broadly which allows for adaptability and flexibility as virtual assets and the underlying technologies continue to evolve. For example:
- "Virtual Asset" is defined as “a digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes. This includes Virtual Tokens, and any digital representation of any other value as determined by VARA”; and
- "Virtual Token" is defined as “a digital representation of a set of rights that can be digitally offered and traded through a Virtual Asset Platform”.
These definitions ensure that VARA’s jurisdiction goes beyond the common understanding of regulated crypto activities such as the trading of cryptocurrencies. Further, they allow VARA to create specific rules for the increasing range of virtual assets as they are created (such as NFTs and utility tokens).
Under the Regulations, any firm seeking to engage in virtual asset activities in Dubai must obtain a virtual asset service provider ("VASP") licence. The application process for obtaining such licence consists of two key stages, namely:
- obtaining an initial approval by submitting a preliminary disclosure questionnaire provided by VARA, supporting documentation such as a business plan, details of the beneficial owners/senior management and paying the application review fees.
- following receipt of the initial approval and after finalising the incorporation and operational setup of the relevant entity, firms obtain the final approval and VASP licence by submitting further relevant documents (as notified by VARA to the applicant during the initial approval stage) for approval by VARA.
When it comes to the licensing process, the second stage, which involves receiving feedback from VARA directly on submissions, is usually the longest. In practice, feedback may include meetings, follow-ups and additional requests. Therefore, it is essential that the documents submitted are of the highest quality as this is what the final decision will rely upon.
It is also suggested that firms remain proactive and live to any communication from their VARA Licencing point of contact. Demonstrating cooperation and willingness to meet deadlines will ensure a positive relationship with the regulator from the start.
Assuming that VARA's requirements are met, the firm will receive a VASP licence and may engage in virtual asset activities, in accordance with and subject to the terms of its licence and the regulations. A VASP license is valid for one year and must be renewed annually, which includes the payment of an annual supervision fee.
The VASP licensing process is separate from, and supplemental to, the incorporation of the entity before the Dubai Department of Economy and Tourism (for onshore entities) or the relevant free zone authority for entities incorporated in free zones in Dubai (other than the DIFC: see below).
It is important to note that once the licence is obtained, firms are required on an ongoing basis, to meet licensing conditions and comply with all relevant regulations, rules and directives established by VARA. As such, it is critical that firms remain aware of their responsibilities and in compliance.
DIFC
Independent of the Dubai-wide regulatory regime, described above, the DIFC recently enacted Digital Assets Law No 2 of 2024 ("Digital Assets Law") on 8 March 2024. The Digital Assets Law sets out the legal characteristics of digital assets and establishes how they may be controlled, transferred and dealt with by interested parties.
Section 8 of the Digital Assets Law clearly defines a "Digital Asset" as an asset that:
- exists as a virtual unit that is manifested by the operation of software and network-generated data;
- exists independently of any particular person and legal system;
- is not able to be copied; and
- once used or consumed by a person or specific group of persons, is not able to be used or consumed by another person.
Section 9 of the Digital Assets Law further provides that a Digital Asset is "intangible property". In addition to codifying the concepts captured by digital assets, the Digital Assets Law sets out the conditions required for a person to have control of a digital asset, and how title can pass. These changes are significant and provide clarity to the legal nature of digital assets in DIFC legislation.
Similar to the broad definitions provided in the Virtual Assets Law, sections 8 and 9 of the Digital Assets Law work to accommodate and properly regulate technological advances. However, unique to the Digital Assets Law, is that it includes specific mention of the fact that digital assets are created by software and the generation of data. This is useful as by breaking down what comprises digital assets, the law can act as an aid in understanding more advanced digital concepts such as distributed ledger technology and blockchain.
Within DIFC, firms who want to provide financial services in relation to digital assets will need to obtain the appropriate licence from the Dubai Financial Services Authority ("DFSA").
Like the onshore regime, there is a sequential process, as follows:
- the firm will submit a letter of intent and conduct an initial informal review with DFSA. A full application will then be submitted including a regulatory business plan; and
- if the firm receives an initial approval from DFSA, it will be required to incorporate or register with DIFC Registrar of Companies, open a local bank account, provide proof of remittance of capital and secure office space from where it will conduct its activities.
Similarly, to the rest of Dubai, the longest stage is the detailed review that the DFSA undertakes once the formal application has been submitted. This can last anywhere between 90 and 120 days. DFSA maintains communication with the applicant consistently during this stage, reverting with initial feedback after 2 weeks, and then follow-up reviews thereafter. As previously mentioned, firms should prioritise assisting the regulator as much as possible in order to avoid delays. The process is stringent and requires a high level of commitment to achieve success. Once the conditions are fulfilled, DFSA will grant a licence and the firm may start operations.
Dubai leading the way in virtual asset regulation
In keeping with Dubai's growing reputation as an international financial and business centre, the regulatory regime for virtual assets in Dubai was designed to promote the Emirate as a regional and international hub for virtual assets and related services, to boost the competitive edge of Dubai in this sector and to develop its digital economy.
Two years on from the establishment of VARA, the initiative appears to be gaining momentum, and there is increased awareness of opportunities to use Dubai as a base for which to provide virtual asset services, specifically those involving distributed ledger technology and blockchain. With a legal framework that is sector-friendly yet maintains stringent regulatory standards, Dubai offers a reputable, and commercially attractive jurisdiction for VASPs looking to establish. Further, the recent enactment by DIFC of the Digital Assets Law demonstrates Dubai's concerted effort to continuously develop a dynamic legal structure that can adapt and keep pace with rapidly evolving virtual assets.
