Oasis of encryption in the desert: Dubai VASP License Overview and Application Guide

The Dubai government has long been providing comprehensive support to the blockchain and Web3 industry, laying a solid foundation for digital opportunities through initiatives such as the Dubai Blockchain Strategy launched in 2016, the UAE Fourth Industrial Revolution Center established in 2019 by the Dubai Future Foundation in collaboration with the World Economic Forum, and the Dubai Metaverse Strategy in 2022.

The ambitious government strategy and world-class business-friendly environment support the attractiveness of Dubai as a hub for digital innovation, especially for entrepreneurs and investors in the blockchain and Web3 industries. Dubai’s Virtual Asset Service Providers (VASP) system has gained a renowned reputation due to its clear and precise regulatory framework, professional and high regulatory standards, approachable regulatory attitude, as well as a regulatory policy that encourages innovation and emphasizes risk prevention. This has not only continued to attract a continuous stream of blockchain and Web3 entrepreneurs and investors from around the world, but also industry giants who have set up camp here.

Dubai Virtual Assets Regulatory Authority and Its Regulatory Framework

According to Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai, the Dubai Virtual Assets Regulatory Authority (VARA), the regulatory authority responsible for overseeing virtual assets and virtual asset activities in all regions of Dubai (including special development zones and free zones, but excluding Dubai International Financial Centre), was established in March 2022. VARA plays a central role in creating an advanced legal framework in Dubai, protecting investors, establishing international standards for the virtual asset industry, and supporting the vision of a borderless economy.

The regulatory framework for virtual assets in Dubai consists of a complete system of laws and regulations from top to bottom. At the legal and regulatory level, Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai holds the highest position, while the Virtual Assets and Related Activities Regulations 2023 provide a comprehensive virtual asset regulatory framework covering specific aspects such as licensing, anti-Money Laundering, combating the financing of terrorism, and regulating marketing activities, aiming to provide regulatory certainty. This framework is based on the principles of economic sustainability and cross-border financial security. The UAE has always been committed to safely driving these factors, updating its supervisory and regulatory approaches, and addressing the global risks of Money Laundering (ML) and terrorist financing (TF) resulting from the misuse of new technologies.

The fifth part of the ‘Regulations’ is the ‘VA Activity Rules Manual’, which is a comprehensive Compliance guide for traps. It is divided into a mandatory rules manual and the VA activity and other rules manuals. The former applies to all VASPs, while the latter is a special code of conduct for the eight different types of VASP licenses mentioned above.

As a universal Compliance guide, the mandatory rule manual is self-evidently important. Among them, the Company Rule Manual stipulates the way VASP organizes and manages the company, board of directors, executives and employees, as well as maintains appropriate internal control and management systems. In addition, the Company Rule Manual covers corporate governance requirements and ESG responsibilities. The Compliance and Risk Management Rule Manual lists the general principles for implementing regulatory Compliance and Compliance management systems, including the appointment of Compliance officers and record keeping and auditing requirements. The Compliance and Risk Management Rule Manual also stipulates that VASP must always comply with all applicable laws, regulations, rules and guidance, and all tax reporting obligations under applicable US overseas account tax Compliance laws such as FATCA, as well as all tax reporting obligations under applicable national, international and industry best practices. The Technical and Information Rule Manual stipulates technology governance, control and security, including network security (and other legal and regulatory) obligations, as well as personal data protection Compliance requirements and Compliance plans. The Market Conduct Rule Manual provides guidance on marketing, advertising and promotional regulations and requirements.

VASP license and its classification

The Dubai Virtual Assets Regulatory Authority (VARA) has identified eight different regulated virtual asset (VA) activities and categorized them within the scope of regulation. Any Virtual Asset Service Provider (VASP) that intends to provide the following virtual asset activities, whether to customers residing in the Emirates or globally, must apply to VARA and obtain a license before commencing operations within the borders of the Emirate of Dubai.

Dubai Virtual Asset Service Provider (VASP) licenses include:

1.Virtual Asset Advisory Service

‘Consulting services’ refers to the provision of advice or advice upon the proactive request of an entity, based on the client’s request, on any one or long-term action or transaction related to any virtual asset, with the aim of helping clients understand and address the complexity of the virtual asset market, providing professional advice and strategies for them to make informed decisions. Consulting services may include market analysis, risk assessment, investment strategy advice, regulatory compliance guidance, etc., to ensure that clients operate safely and legally in the virtual asset field.

2. Virtual Asset Brokerage Services

“Brokerage services” refers to any of the following:

Arrange orders for buying and/or selling virtual assets between two entities;[a][b]Recruiting 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]As a distributor, the entity represents itself to conduct virtual asset transactions on its own account;[e]Trade in the virtual asset market using customer assets; or[f]Provide allocation, distribution, or other issuance-related services to customers issuing virtual assets. These services aim to provide customers with convenient channels for virtual asset trading and ensure smooth transactions and secure asset management through professional brokerage services.

3. Virtual Asset Custody Service

“Custody service” refers to the storage of virtual assets for another entity or on behalf of another entity, and only acts on verified instructions issued by that entity or on behalf of that entity. Note: Only VASPs that store the assets of each customer separately in individual VAWallets are eligible for custody service licenses. Custody service provides a secure way of asset storage, reducing the risk of asset theft or loss, and ensuring that customer assets are strictly managed and protected at all times.

4. Virtual Asset Trading Services

“Trading service” refers to any of the following:

Exchange, trade, or convert between virtual assets and currencies;[a][b]Exchange, trade, or convert between one or more virtual assets;[c]Match orders between buyers and sellers and proceed[i]Virtual assets and currency or[ii]Exchange, trade or conversion between one or more virtual assets; or[d]To further fulfill the above[a]、[b]Or[c]The order book is maintained by the project. The transaction service aims to provide a variety of virtual asset trading options to meet customers’ different trading needs and improve market liquidity and trading efficiency.

5. Virtual Asset Lending Service

“Lending service” refers to the performance of a contract, under which, according to the contract, a virtual asset should be transferred or lent from one party or longer (lender) to another party or longer (borrower). The borrower shall undertake to return the virtual asset to its own benefit or on behalf of others at the request of the lender at any time within the agreed period or at the end of the period. The lending service provides users with a flexible way of fund management to meet short-term or long-term fund requirements, while ensuring the interests and security of both parties involved in the lending.

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 responsible for the management, administration, or disposition of virtual assets of the entity, including but not limited to:

Investment management services or other ways to manage virtual assets; and[a][b]Responsible for ‘staking’ virtual assets to earn fees or other value paid by validators and/or node operators of the ‘proof of stake’ distributed ledger technology.

These services are designed to help customers effectively manage and increase the value of their virtual assets, and achieve maximum returns on assets through professional investment strategies and management methods.

7. Virtual Asset Transfer and Settlement Services

The ‘Transfer and Settlement services’ include companies engaged in transferring or moving virtual assets from one entity to another, or from one entity to another VA Wallet, Address, or location. Transfer and Settlement services ensure the safe and efficient transfer of virtual assets, reduce the risk of dropping assets during the transfer process, and enhance customer experience.

8. Virtual Asset issuance category 1

“Issuance Category 1” refers to the issuance of Fiat Currency linked to virtual assets (FRVA), commonly known as “Stable Coin”. These virtual assets claim to have a stable relationship with one or more fiat currencies, but they do not have legal tender status in any jurisdiction. The issuance of Stable Coin provides the market with a relatively stable medium of exchange, which helps reduce market fluctuations and improve the stability and predictability of transactions.

These VASP license types and corresponding service specifications provide detailed operational guidance for virtual asset service providers, ensuring compliance with relevant regulatory requirements and safeguarding the legitimate rights and asset security of clients during the provision of services.

The panorama of Dubai’s Virtual Asset Service Providers (VASP) licenses is as follows.

VASPs can apply for licenses for long activities and aggregate them under a single overall license, unless they involve virtual asset custody services. VASPs licensed to engage in long activities must fully meet the requirements of each activity and always maintain Compliance.

Virtual asset custody service is the only regulated activity that needs to be separated from other categories of virtual asset service licenses. In this case, a virtual asset custodian must be established as a separate legal entity, maintaining independence and non-affiliation in governance, and holding an independent license.

In addition, licensed VASPs are prohibited from conducting proprietary trading or trading their group’s asset portfolio under regulated activities licenses. In order to ensure fair and transparent market operations, a separate company must be established for proprietary trading. It is necessary to clearly separate proprietary trading from group asset management to prevent potential conflicts of interest and ensure that all clients can trade in a fair and protected environment.

Application Process

Any company wishing to engage in virtual asset activities in Dubai (excluding the Dubai International Finance Centre, DIFC) has a legal obligation to obtain VARA’s permission before commencing operations.

Mainland companies can submit applications through Dubai’s Department of Economy and Tourism (DET), or through any Dubai Free Zone (FZ) except the Dubai International Financial Centre (DIFC). Free zones are special economic zones that provide tariff benefits and tax exemptions to investors, and each free zone is governed by a special regulatory system. The benefits of establishing a company in a free zone include 100% foreign ownership, 100% capital and profit repatriation, and fast and easy business setup. Dubai has over 20 operational free zones, most of which are concentrated in one or several specific fields, providing business licenses for companies in these fields, typically covering trade, services, and industrial activities.

For newly established companies, the application process is as follows:

Stage One

1. Submit the Initial Disclosure Questionnaire (IDQ) to Dubai Economy&Tourism (DET) or the relevant Free Zone (FZ).
2. Provide other documents as needed, including but not limited to business plans and detailed information about the actual owners and senior executives of the company.
3. Pay the initial fee required for the application review to start (usually 50% of the license application fee).
4. Obtain preliminary approval to finally determine the legal establishment of the company and complete operational settings, including office space leasing and employee onboarding.

It should be noted that in the first phase, even companies that have obtained preliminary approval are not allowed to engage in virtual asset activities.

Phase Two

1. After receiving preliminary approval, prepare and submit documents according to the guidance provided by VARA.
2. Obtain feedback directly from VARA regarding the submitted content, which may include meetings, interviews, and further document submissions.
3. Pay the remaining application license fee and the first year’s regulatory fee.
4. Obtaining the VASP license, but may be subject to operational restrictions.

VARA reserves the right not to issue a VASP license if the company’s activities are beyond the scope of regulation or the company may not meet the appropriate regulatory standards.

The process diagram for VASP license application is as follows.

VARA has invited all companies (old VA operators) that conduct virtual asset business before February 2023 to apply for the Dubai Traditional Plan. This plan enables organizations to seamlessly transition to VARA’s regulatory framework. VARA has collaborated with the Ministry of Economy and Tourism and the Free Zone Committee to conduct various training courses and publicity programs.

As part of the regulatory process, VARA has required all existing VA operators in Dubai to register by filling out the Initial Disclosure Questionnaire (IDQ). VASPs that receive the Application Acknowledgement Notice (AAN) can proceed to obtain the existing Operating Permit (LOP) or No Objection Certification (NOC).

The existing Operation License (LOP) provides VASPs with the opportunity to transition to a comprehensive virtual asset regulatory system within a limited time, provided that they meet basic regulatory requirements. It also comes with other benefits, including a maximum 50% discount on the licensing fee and the drop of capital requirements. This license is valid for 12 months, giving VASPs enough time to formulate and comply with comprehensive licensing and regulatory requirements.

Summary and Outlook

The establishment of the VASP system is a deliberate layout of Dubai’s financial technology innovation. On the one hand, with strict Compliance requirements and advanced Risk Management framework, it provides investors with a safe, transparent, and efficient market environment. On the other hand, with more longCompliance VASP settling here, Dubai is expected to become a hub for digital assets connecting the East and the West, promoting the flow and integration of global financial resources.

The VASP system is expected to become a catalyst for financial technology innovation in Dubai, further promoting the development of Web3 technologies such as blockchain and virtual assets. The VASP system is also a beneficial attempt in Dubai to promote technological and business innovation within the framework of Compliance. Looking forward to Dubai opening a more open, inclusive, and win-win new era of digital economy.