Dubai has always been ahead in responding to the evolving demands of the digital or virtual assets industry. The city-state released its blockchain strategy back in 2016 and the metaverse strategy in 2022. And in February 2023, Dubai’s crypto regulator VARA issued its “Virtual Assets and Related Activities Regulations” - a framework taking into consideration economic sustainability and cross-border financial security.
A report published on February 2nd, 2023, showed Dubai ranking second globally as a cryptocurrency hub and was followed by New York, Singapore, and Los Angeles.
The Study, evaluated Dubai, along with other cities worldwide, on the parameters of the quality-of-life score, crypto-specific events, people working in crypto-related jobs, crypto companies, R&D spending as a percentage of GDP, number of crypto ATMs, capital gains tax rate, and ownership of crypto in each country. The ultimate aim of the report, done by Recap, a well-known private crypto tax software and portfolio tracker, was to test the crypto-readiness of the city.
Dubai has more than 750 crypto-based companies. It also offers a zero percent tax regime, making it lucrative for investors to invest money in building their crypto firms. Many major crypto firms, including crypto.com, Bybit, Binance, Deribit, and others, are planning to make Dubai their home.
With all these initiatives already setting a crypto-friendly context for Dubai, it has now set up the Virtual Assets Regulatory Authority, tasked primarily with licensing and regulating the crypto space across Dubai, the mainland, and free zone territories, including Dubai International Financial Centre (DIFC ) that serves as a financial hub for the Middle East, Africa, and South Asia (MEASA) markets.
The implementation of VARA is expected to introduce a competitive edge for the Emirates, along with augmenting its position as a hub globally, in the virtual assets and related services space. The authorities expect this to translate into a more developed regional digital economy. It will spread awareness, encourage innovation, and attract investment in the Virtual Assets, services, and products world.
From the consumers’ point of view, regulations, rules, and standards are expected to bring efficiency to the system while protecting investors and dealers and putting a check on fraudulent and illegal practices.
DWTCA, which stands for the Dubai World Trade Centre Authority, will be the competent authority overseeing the efficient implementation of the regulations.
The Vision Driving VARA
VARA aims at a fair, transparent, and resilient market to prevent fraud and criminal activities. Credit risk, market risk, liquid risk, operational risk - VARA wants to make the market safe from such risks that can take a toll on businesses’ financial resources and affect the entire financial ecosystem and its consumers. Though fairness, transparency, and orderliness do not necessarily mean a lack of volatility.
VARA takes a practical and balanced approach toward risk - viewing it as “a necessary evil” if the returns are to be high. VARA mandates service providers in the market to inform their consumers beforehand so that they are aware of the risks and make informed choices.
VARA seeks to move beyond the practice of banning. Unless an activity is illicit or illegal, VARA gives a preference to regulation, rather than banning. The aim is also to become a regulatory paradigm that does not become outdated quickly, a significant possibility for an evolving, tech-dependent industry space. Its mission is to put in motion a regime with a balanced view.
Fulfilling VARA’s licensing requirements requires compliance with four compulsory rulebooks: Company, Compliance and Risk Management, Technology and Information, and Market Conduct.
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There are an additional seven activity-specific rulebooks that Virtual Asset Service Providers (VASPs) must comply with when they obtain the VARA license.. These activities include offering advisory services, broker-dealer services, custody services, exchange services, lending and borrowing services, payments and remittance services, and management & investment services.
Besides bringing the system within a regularized functional framework, VARA will act as an Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)
the supervisory authority in the Emirates as well.
VARA has also outlined a defined list of market offenses that include insider dealing, unlawful disclosure, and market manipulations. Additionally, VARA holds the right to classify any other behavior as a market offense apart from what has already been mentioned in the list.
Insider dealing refers to a situation where an entity that possesses inside information uses it by carrying out a transaction for its account or the account of a third party. And when an entity in possession of inside information discloses it to an entity unrelated to the normal exercise of an employment, profession, or duty, it becomes an offense of unlawful disclosure.
Market manipulation, the third category of offense VARA is responsible for overseeing, is when a virtual asset's supply and demand dynamics are affected artificially.
There are different ways of manipulating a market, including disseminating false or misleading information about a company, conducting a series of transactions with the ulterior motive of making a virtual asset appear more actively traded, rigging quotes, prices, or trades of an asset, and more. VARA will ensure that such offenses do not happen in the market.
To ensure that the regulatory authority of VARA is properly executed, it can enforce fines, penalties, etc, and can issue written reprimands and enforcement notices. VARA can ask service providers to rectify the issues of non-compliance within a specific time and can ask a VASP to cease any specific VA activity for a specified or indefinite period. It can impose fines or other civil penalties and even suspend or revoke a license.
Overall, the purpose of VARA is to create a crypto regulatory framework that would help healthy and sustainable industry growth while safeguarding consumer, investor, and provider interests.
The VARA licensing process is multi-staged, starting with a provisional permit. Next is a two-step licensing, including a preparatory MVP license in the first step and an operating MVP license in the second. The final result is a Full Market Product (FMP) license. A provider will obtain an FMP license only after the regulations have been tested with the VARA regime.
The provisional and preparatory MVP licenses, the only two categories of licenses issued so far, offer an opportunity for providers to enter the VARA regime and work on the rest of the requirements necessary for an FMP license. These requirements include setting up offices, onboarding employees with work visas, securing domestic bank accounts, etc.
MVP licenses have been issued to several players across a range of industry segments, including broker-dealer services, custody services, exchange services, payments and remittances services, management and investment services, and virtual assets issuance. Providers of advisory services and lending and borrowing services, among others, have not been licensed yet.
The driving philosophy of VARA seeks to enforce socio-economic stability, robust consumer protection, and jurisdictional resilience in the virtual assets space. Although no company has yet obtained the third stage MVP operational license so far, some VASPs have already reached stage 2 of the activity-specific licensing procedure. This includes providers like BitOasis, GCEX, Binance, Bybit, Crypto.com, Huobi, and OKx, among others.
These providers are allowed to offer Virtual Assets (VA) services to qualified and/or institutional investors. The participation of mass retail customers will only be a reality when providers obtain Full Market Product (FMP) licenses.
The FMP licenses will have provisions for securing borderless economic opportunities across the global VA industry. It will also be VARA’s concern to protect investors and market participants, which will require security, cross-border compliance mechanisms, and more.
VARA will have to deal, in detail, in the areas of custody and segregation of client money, prudential requirements - such as insurance and liquidity cover, FATF compliance, market manipulation, and more.
The successful implementation of the checks and balances in these areas will enable VARA to help Dubai become the leading VA hub globally. While it will bring investment and promote awareness about VA services, it will protect all concerned entities from the risk of illegal activities, frauds, breaches, and market manipulations. That said, observers would have to wait until the FMP licenses come into play and mass retail consumers start getting involved. Only then would it be an opportune time to assess the capabilities of VARA in its entirety and its role in prospering Dubai’s Crypto Hub.
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