Correction: This article was corrected on Dec. 21 to include Transfer and Settlement services instead of Payment and Remittance services in the license list mentioned in the sixth paragraph.
The Virtual Asset Regulatory Authority (VARA), the regulator overseeing cryptocurrency laws within Dubai, has moved steadily toward its goal of establishing comprehensive rules for the crypto service providers in the region.
Formed in March 2022 to oversee and develop the Web3 ecosystem in Dubai, VARA released comprehensive crypto regulatory guidelines less than a year later, in February 2023, for virtual asset service providers (VASPs).
The virtual asset guidelines include four compulsory rulebooks, seven activity-specific rulebooks that lay down the rules for operating VASPs, and one virtual asset issuance rulebook.
These regulations only govern market participants within Dubai, excluding those operating under the Dubai International Financial Centre, a designated free zone for trade. VASPs must obtain a license from VARA before offering their services and fulfill all criteria of the aforementioned rule books.
The regulations require new and existing entities to obtain approval and a license from VARA before carrying out any of the activities related to virtual assets. Some of the services that would require a license include:
Advisory servicesBroker-dealer servicesCustody servicesExchange servicesLending and borrowing servicesTransfer and settlement servicesVirtual asset management and investment servicesIf a firm does not fall into any of the above mentioned categories, it can directly register with VARA. Firms that actively invest their own portfolios in virtual assets and traders with trading capital above $250 million must register with VARA as well.
All licensed and non-licensed service providers must adhere to the rulebook, and violators will be fined between 20,000 dirhams ($5,500) and 200,000 dirhams ($55,000). The regulations also prohibit the issuance of privacy coins.
Cointelegraph spoke with some key executives at VARA to gain insight into the regulatory body’s approach toward crypto. Deepa Raja Carbon, managing director and vice chair at VARA, told Cointelegraph that the regulator’s focus is never to differentiate for the “sake of distinction but by a steadfast commitment to harmonization and interoperability within the international regulatory landscape.”
Today, Dubai’s Virtual Assets Regulatory Authority (VARA) made its debut in the Metaverse with the establishment of its Metaverse headquarters in the dynamic virtual world of ‘The Sandbox’. The initiative creates a new model to manage and expand Dubai’s government operations
— Hamdan bin Mohammed (@HamdanMohammed) May 3, 2022
Regarding the role of stakeholders and the importance of collaboration with existing market players, Vanessa Zuabi, associate director of ecosystem development at VARA, told Cointelegraph that it regularly engages with virtual asset firms through roundtable discussions, feedback sessions and collaborative workshops, adding:
“This hands-on approach ensures that we get first-hand insights into the decentralized ecosystem’s intricacies, allowing us to craft regulations that are both robust and conducive to growth. It’s a symbiotic relationship where we learn from them, and they benefit from a supportive regulatory landscape,” Raja explained.
VARA is setting a precedent
Raja Carbon discussed the key challenges regulators face while formulating laws around a nascent industry like crypto. She noted that the focus was to work on delineating a regulatory framework and rulebook that are comprehensive and aligned with global best practices.
The vice chair said crafting guidelines for a nascent industry like virtual assets is undeniably challenging. VARA thoroughly analyzed existing frameworks and assimilated global best practices wherever feasible.
She added that VARA has set a precedent for the world on how regulators and stakeholders of the ecosystem can work in cohorts, explaining:
“Our approach has been inherently consultative and collaborative. We engaged with a diverse array of stakeholders — from industry leaders to innovators, peer regulators to legislators, investors to the public.”
She added that by working in concert with Dubai’s established entities such as “DET [Department of Economy and Tourism] and the DFZC [Dubai Free Zone Council for Mainland and the various free zones, we’ve crafted a unified and fungible framework.”
The vice chair also shed light on the role of special development zones and their importance in propagating and inviting more businesses to the region. She noted that establishing Special Development Zones (SDZs) has played a crucial role in developing VARA’s regulatory acumen.
Recent: Dubai's regulator VARA shows how authorities, market can work in tandem — vice chair
The SDZs serve as incubators for innovation, providing a ground for converging virtual assets and traditional financial systems in a single place.
Raja Carbon explained that the camaraderie within these zones is vital, as it ensures that newcomers are not isolated but become part of a vibrant community, which collectively elevates their potential. She claimed that this model has enhanced regulators’ understanding of the crypto market’s intricacies and influenced the pragmatic and inclusive approach to building a regulatory framework.
The vice chair said that SDZs act as microecosystems that reflect the larger market, providing VARA with invaluable empirical data and experiences. She added that these zones allow regulators to refine their strategies and tailor the regulations to support innovation while “maintaining robust oversight, ultimately fostering a regulatory environment where virtual assets can flourish responsibly and sustainably.”
VARA set to expand focus on crypto niche ecosystems such as DeFi and the metaverse
The virtual asset ecosystem has grown beyond tokens and crypto assets, and niche ecosystems within the sector have flourished to erect multibillion-dollar industries within the virtual asset ecosystem collectively called Web3. Decentralized finance (DeFi), the metaverse and nonfungible tokens (NFTs) are some of the niche sectors that have grown to garner mainstream attention over the past few years.
NFTs and the metaverse became popular during the last bull run of 2020–2021, with the likes of Meta and Apple having shown interest in incorporating and building for these communities. The DeFi ecosystem, on the other hand, has drawn attention from the likes of JPMorgan Chase and many other institutional giants over the years.
Raja Carbon told Cointelegraph that the VARA’s regulatory philosophy is to bridge the dynamism of niche Web3 sectors like DeFi with the resilience of the blockchain and metaverse verticals. She noted that VARA is fully aligned with the ambitious goals of the Dubai Metaverse Strategy, which emphasizes the development of Web3 and metaverse ecosystems as key drivers for innovation and economic expansion.
“In line with the initiative to attract over a thousand companies in the field and support the creation of more than 40,000 virtual jobs by 2030, VARA is shaping a regulatory framework that underpins this growth and innovation.”
VARA’s new regulatory regime has postitioned Dubai and the United Arab Emirates to become a global crypto hub with favorable working conditions. Several crypto firms — including Hex Trust MENA FZE, Trek Labs Ltd TOKO FZE and Komainu MEA FZE — have managed to obtain operational licenses from VARA, while many others are in the process of getting one. Apart from VARA, Hong Kong and the European Union are the only countries with comprehensive regulatory frameworks currently in place.
Dubai’s crypto regulatory framework, which was introduced in February 2023, mandated all crypto exchanges and service providers to apply for an operational license by Nov. 17, 2023. As a result, VARA received over 1,000 applications for registration.
All crypto exchanges and service providers to license applicants in Dubai were asked to lodge their applications by Nov.17 for crypto exchanges to apply for operational licenses, and over 1,000 crypto platforms that have applied for registration.
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