With VARA, Dubai Claims Emerging Crypto Capital Status

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At a time when crypto is going through a bit of reckoning and reassessment, the Dubai crypto business world has never been more vibrant. It is not a coincidence.

The issue of Dubai’s new Virtual Assets Framework Law and the establishment of the Virtual Asset Regulatory Authority (VARA) as a dedicated virtual asset regulator for the Dubai mainland around the same time the DIFC has began to shape its own investment regulations and crypto tokens have sent a clear message as to Dubai’s ambitions to distinguish itself as a reliable and safe environment for virtual asset-related activities.

VARA continued its mission by publishing, on February 7, 2023, its long-awaited regulations applicable to virtual asset activities carried out in Dubai (excluding DIFC).

These regulations have been highly anticipated in the growing and burgeoning construction of the virtual asset ecosystem in Dubai. The VARA regulations signal how seriously the emirate is taking the world of Web3 and create a clear regulatory environment for Virtual Asset Service Providers (VASPs) and all traditional businesses looking to add blockchain or virtual assets to their existing functions.

Which companies does VARA supervise?

The VARA regulations apply to all VASPs operating in Dubai (except DIFC) and aim to provide specific rules for the growing range of digital assets available, including NFTs and utility tokens. All financial services activities conducted through the issuance and exchange or control of a token in Dubai (except DIFC) now fall under the supervision of VARA.

The VARA regulations consist of 13 separate regulations. Five apply to all companies regulated by VARA and cover fundamental issues such as virtual assets and related activities, formation and company structure, compliance and risk management, technology and management of information and market conduct.

The other eight are activity-specific and cover advisory services, brokerage services, custodial services, foreign exchange services, lending and borrowing services, payment and remittance services, and management and investment. All entities providing such services will be required to register with VARA.

Interestingly, VARA has also created a voluntary registration opportunity for entities that, although they do not fall under one of the regulated service categories mentioned above, could benefit from supervision by a reputable regulator. These may be technology service providers related to or using distributed ledger technology or for other businesses and corporations that actively invest their own portfolio in virtual assets.

Voluntary registration is likely to prove popular. A growing number of crypto firms, especially those whose pioneering business models may not fall into the traditional categories of financial services recognized by regulators, are showing interest in voluntarily complying with regulation, and thus reassuring investors and counterparties on the fact that the company they are subject to the regulation and supervision of a specialized and reputable virtual asset regulator.

VARA-Innovation

VARA has incorporated some innovative solutions and requirements into its regulations that we have not seen in other jurisdictions. One of these innovations is the applicability of ESG requirements to VASPs. This is in line with UAE campaigns supporting a green future.

It should be noted that VARA is one of the first regulators to recognize that Decentralized Autonomous Organizations (DAOs) are a key part of the corporate structures used by Web3 companies and therefore should be recognized.

Finally, VARA has created a specialized set of rules for any business, financial services or not, that issues tokens. These specialized regulations aim to inspire confidence in these issuers, most likely private and unregulated.

What does the future hold?

As Terra Luna collapsed, FTX collapsed and several top VASPs are being investigated by the SEC in the United States, Dubai chose to plant a flag in the blockchain world to signal to all operators of this space that it is open to responsible crypto company.

It’s a pragmatic view, but the Web3 world has its fair share of unsavory opportunists. The VARA regulations are a sieve that aims to separate the wheat from the chaff. Dubai appears to be on the verge of cementing its reputation as a hotspot for reliable, robust and reputable up-and-coming companies.

It’s time to evolve and adopt, a blend of central acceptance of decentralized systems. Only time will tell how successful this bet will be, but for now, Dubai is undeniably a growing crypto capital of the world.

Adela Mues

Adela Mues is a partner at Reed Smith

Soham Panchamiya

Soham Panchamiya is a partner at Reed Smith

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