In Brief:
- The Virtual Assets Regulatory Authority (VARA) has introduced the Full Market Product Regulations setting out the requirements for Virtual Asset Service Providers (VASPs) operating in Dubai (excluding the Dubai International Financial Centre (DIFC)).
- The introduction of the latest regulations further develops Dubai’s virtual economy and demonstrates recognition of the need for consumer protection and the creation of a transparent regulatory framework for virtual assets.
There appears to be no slowing down in the UAE Virtual Assets (VA) sphere in 2023. Indeed, recent bankruptcies in the crypto world have highlighted the pressing need to continually develop and update legislation regarding VA.
Cabinet Resolution No. 111 of 2022 regulating Virtual Assets and Related Service Providers came into effect at the beginning of 2023. This legislation specifies that all companies operating in, or seeking to operate in, the VA sector in Dubai must be licensed by VARA.
Subsequently, on 7 February 2023, pursuant to Dubai Law No. 4 on Regulating Virtual Assets (VA Law) in the Emirate of Dubai, VARA issued the long-awaited Full Market Product Regulations (the FMP Regulations). The FMP Regulations are in addition to the Marketing Regulations issued by VARA in August 2022. The FMP Regulations are the latest development for Dubai regulators in achieving their objective to become a leading global hub for VA.
The FMP Regulations aim to develop the digital economy of Dubai, increase awareness of the UAE’s crypto domain and to attract investment in VA. According to the VA Law, VARA’s objectives include protecting investors and dealers in VA by developing additional regulations, rules and standards to oversee and supervise VASPs in Dubai.
(1) The Regulatory Framework
The FMP Regulations set out a broad regulatory framework for governing VA and all related activities and apply with immediate effect to all VASPs operating in Dubai (excluding those in the DIFC).
The FMP Regulations are arranged into two categories, namely the Mandatory Rulebooks and the Activity-Specific Rulebooks:
1) The Mandatory Rulebooks in relation to which all VASPs with VARA licenses must adhere consist of:
- Virtual Assets and Related Activities Regulations 2023 (VARA Regulations);
- Company Rulebook;
- Compliance & Risk Management Rulebook;
- Technology & Information Rulebook; and
- Market Conduct Rulebook.
2) The Activity-Specific Rulebooks - which are applicable depending on the activity and license granted by VARA- consist of:
- Advisory Services Rulebook;
- Broker-Dealer Services Rulebook;
- Custody Services Rulebook;
- Exchange Services Rulebook;
- Lending & Borrowing Services Rulebook;
- Payments & Remittances Services Rulebook; and
- Management & Investment Services Rulebook.
All VASPs must adhere to the Mandatory Rulebooks as well as the relevant Activity-Specific Rulebooks applicable to their licensed activities. The FMP Regulations also require VASPs to comply with all federal AML / CFT laws. A brief overview of some of the Mandatory and Activity-Specific Rulebooks is set out below.
Mandatory Rulebooks
1) VARA Regulations
These Regulations set out the regulatory framework which governs VA and related activities in Dubai (excluding the DIFC). They also outline VARA’s enforcement and supervision powers. VARA has the power and discretion to make any changes to the Regulations in order to address continually evolving developments and emerging risks in the VA sector.
2) The Company Rulebook
This Rulebook governs the way in which VASPs may structure and manage their company, board and senior management (including their respective responsibilities) and sets outs the internal control and management systems for VASPs. It also states that the senior management of VASPs are ultimately responsible for the adequacy and efficacy of the internal systems and controls implemented by VASPs.
3) Market Conduct Rulebook
This Rulebook sets out the requirements for VAPSs conducting marketing, advertising and promotions. It also sets out the specific requirements in relation to the content of client agreements, the procedures for complaints handling, how VASPs should classify investors, the content of public disclosures and the prohibition on VASPs actively investing in their own VA and trading on their own account.
Activity Specific Rulebooks
1) The Advisory Services Rulebook
The Advisory Services Rulebook sets out the requirements for policies, procedures and public disclosures which VASPs must implement when offering advisory services. This Rulebook also sets out the procedures in respect of client suitability, staff competency requirements and verification of information provided by VASPs. It is a requirement that all VASPs must create a methodology which assesses the VA that it intends to offer to a client in order to ensure that the VA meets the investment objectives of the client.
2) The Broker-Dealer Services Rulebook
This Rulebook outlines the requirements for VASPs that carry out broker-dealer services and sets out the rules with which they must comply in relation to their policies, procedures & public disclosures, trading & execution and margin trading.
(2) The Licencing requirements
The FMP Regulations also set out the licencing requirements for VASPs and confirm that VASPs must in the first instance, apply to obtain a licence from VARA in order to carry out specific VA activities in Dubai (excluding the DIFC). These activities include: -
- Advisory Services;
- Broker-Dealer Services;
- Custody Services;
- Exchange Services;
- Lending and Borrowing Services;
- Payments and Remittances Services; and
- VA Management and Investment Services.
It is prohibited to conduct any of the above listed activities by way of business, without having an authorisation and a regulatory license or exempt status approval from VARA. The decision as to whether or not an activity is being conducted by way of business, will be solely determined by VARA.
VASPs must go through a four-stage process when applying for a licence. The process involves -
- obtaining a provisional permit;
- a preparatory licence;
- an operating licence; and
- a FMP licence.
On 14 April 2023, VARA set a deadline of 30 April 2023 for companies & VASPs to submit their initial disclosure questionnaires and confirm their intention to undertake regulated activities in the UAE. VARA also confirmed that VASPs currently operating in Dubai, who submit their applications by the deadline, will receive an acknowledgement notice and will have until 31 August 2023 to follow up on the appropriate course of action required by VARA.
The SCA formally announced on 17 April 2023 that all VASPs in Dubai, which fall under VARA’s jurisdiction, will also need to obtain SCA approval prior to commencing their full market operations. In addition to the recent introduction of VARA’s FMP Regulations, SCA also announced on 17 April 2023 that it will start accepting applications from companies seeking licenses to operate VA services in the UAE.
On 1 May 2023, VARA announced that it had granted the first MVP Operational License to BitOasis (a leading cryptocurrency trading platform) which will enable the company to offer VA broker-dealer services to qualified retail and institutional investors in Dubai. As of today, VARA has not granted a full licence (i.e. an operating licence or FMP licence) to any VASP. It remains to be seen how the latest regulations will impact VARA’s decision making in granting full licences to VASPs.
It should also be noted that VARA has discretion under the FMP Regulations to revoke the licence of VASPs for a number of reasons, including the material violation of any law, regulation, rule, directive, or insolvency of VASPs. Ultimately, the success of a VASP obtaining a full license from VARA will depend on the ability of the VASP to demonstrate its compliance with the FMP Regulations.
This latest raft of regulations from VARA demonstrates the recognition by the UAE Government of the need for consumer protection in relation to VA and the creation of a transparent regulatory framework for VA. We expect that the latest raft of regulations in connection with VA is just the beginning, with more to follow for both onshore Dubai and the other free zones in the UAE. We will follow this space closely as this area of the law develops.
Given the complexity of VA regulations, we recommend that VASPs seek legal advice before conducting VA related business in the UAE to ensure that they are in compliance with applicable regulations.
For specific advice and guidance in relation to VA or crypto related matters, please contact Catriona McDevitt, Head of Banking & Finance.