How to Get a Crypto License in Dubai?
How much does it cost to get a crypto license to virtual assets providers? Which activities are regulated (token-sales, DAOs, investment funds)?
General Review
Dubai Emirate has recently enacted a new Virtual Assets Regulatory Framework (“VARA”) in accordance with Law No. (4) of 2022 Regulating Virtual Assets.
Virtual Assets Regulatory Framework (VARA) will support economic stability, investor protection, and jurisdictional resilience related to virtual assets as the authority mandated to conduct virtual assets oversight throughout the Emirate of Dubai (excluding DIFC).
Advising services, Broker-Dealer services, Custodial services, Exchange services, Lending-Borrowing services, Payments and Remittances services, and virtual assets management and investment services are only a few of the seven approved VA activities covered by the new legislation.
To help customers choose new tokens being launched in Dubai more wisely and to clarify the responsibilities of the issuer, issuance is also a regulated activity under the VARA regime.
What is a regulatory framework?
A) Place of business. If you are planning to operate your virtual business in Dubai, excluding Dubai International Finance Centre (DIFC), you should follow VARA Regulations.
B) Rulebooks. There are special issued thirteen rulebooks covered by the new VARA regulatory framework. The following are some important conclusions that every firm considering Dubai as a possible location for its virtual assets business should keep in mind:
· Virtual Assets and Related Activities Regulations 2023
· Company Rulebook
· Compliance & Risk Management Rulebook
· Technology & Information Rulebook
· Market Conduct Rulebook
C) Please keep in mind that any entity in the Dubai Emirate that issues a Virtual Asset in the course of a business, must comply with the VA Issuance Rulebook, as may be amended from time to time. The Rulebook list that the authority shall retain sole and absolute discretion, however will have regard to the following factors —
a. whether the Entity holds itself out as issuing the Virtual Asset in the course of a
business;
b. the regularity, scale and continuity with which the Entity issues Virtual Assets;
c. whether there is any direct or indirect commercial element to the Virtual Asset or how the Virtual Asset is issued, such as whether the Entity receives remuneration or other value in kind, commercial benefit or if it is related to any commercial or business activity in any way;
d. includes not-for-profit, non-profit and charitable organisations, foundations,
associations and activity; and
e. Virtual Assets that are issued for personal, non-commercial use only will not be deemed to be in the course of a business.
There are specific activities covered by the said rulebooks:
· Advisory services: proposing, delivering, or committing to deliver advisory services to individuals about acts or transactions involving virtual assets.
· Broker-dealer services: organizing orders, requesting or accepting orders, assisting in the matching of transactions, engaging in transactions as a dealer, market making, or offering placement, distribution, or other issuance-related services to customers issuing virtual assets.
· Custody services for or on behalf of another person while only acting in accordance with their verified instructions.
· Crypto-exchange: matching orders between buyers and sellers, maintaining an order book in regard to the aforementioned, and conducting exchanges, trades, or other services between virtual assets or between virtual assets and fiat money.
· Lending and borrowing services: Executing a contract whereby virtual assets are lent or transferred from the lender to the borrower, and the borrower agrees to return the same, at the lender’s request, at any point during the agreed-upon period.
· Payment and remittance services: Receiving virtual assets in order to transmit or transfer them from one person to another, from one virtual assets wallet, address, or location to another. Payment and remittance services.
· Management and investment services: if your entity is acting on someone else’s behalf as an agent or fiduciary, or otherwise taking responsibility for the management, administration or disposition of that person’s virtual asset.
D) Voluntary registration. Companies that offer technology services related to or utilizing digital ledger technology (DLT) to other businesses and companies that actively invest their own portfolio in virtual assets are two examples of the types of businesses that can voluntarily register with VARA, even if they do not fit into any of the aforementioned categories of virtual assets activity.
What types of Virtual Assets a Dubai company may issue?
Issuing Anonymity-Enhanced Cryptocurrencies and all VA Activity[ies] related to them are prohibited in Dubai.
Permitted Virtual Assets: The following Virtual Assets do not require approval from VARA prior to being issued by an Entity in the Emirate, however remain subject to the registration requirement —
· Free & Non-Transferable Virtual Assets: token offered for free that cannot be transferred between virtual assets wallets.
· Non-Redeemable & Non-Transferable Virtual Assets: token that may only be used within platforms operated by the issuer; is not redeemable or exchangeable for real-world goods, services, discounts or purchases and otherwise has no market, use or application outside of the platforms; cannot be converted into, or exchanged or redeemed for fiat currency, value in kind or other virtual assets; cannot be transferred between virtual assets wallets; and is not sold by the issuer for fiat currency, virtual assets or any value in kind.
· Redeemable Closed-Loop & Non-Transferable Virtual Assets: token that can be redeemed or exchanged for goods, services, discounts or purchases with the issuer and/or other merchants designated by the issuer, but cannot be converted into, or exchanged or redeemed for fiat currency; is not otherwise intended by the issuer to be used or accepted as a means of payment outside of the platforms operated by the issuer or designated merchants; cannot be transferred between virtual assets wallets other than for the purpose of redemption from the issuer or designated merchants; and is not sold by the issuer for fiat currency, virtual assets or any value in kind.
The issuer of the said virtual assets need:
(i) to be register the whitepaper of the virtual asset with VARA at least seven 7 days before its publication, accompanied by a declaration signed by the issuer which must be sent to VARA, and
(ii) comply with all requirements in of the VA Issuance Rulebook at all times.
Whitepaper is an educational and informational resource to highlight or promote qualities of issued virtual assets.
Company structure and corporate governance, DAO structures
The rules for business structure that apply to VASPs are laid out in the VARA Company Rulebook. Depending on a careful examination of its unique structure and business operations, a VASP’s corporate governance requirements may change, however there are following keystones you should follow to:
· Company structure should be clear and transparent, and should ensure a sound and effective operation of the business of the VASP, including its virtual assets activities, which is conducive to the fair and orderly functioning of any market involving virtual assets.
· Virtual assets service provider shall have and maintain a legal entity in Dubai in one of the legal forms approved by a company registrar or corporate licensing authority in Dubai or one of its free zones (except the DIFC). Since VARA is working and affiliating to the Dubai World Trade Centre (DWTC), we expect that VARA will encourage virtual assets service providers to set up their entities under the DWTC free zone laws. However, there is the Dubai Multi Commodities Centre (DMCC), which has been active in licensing virtual asset businesses.
· Virtual assets service providers need to maintain a company structure with a clear chain of ownership, delegated authority and all associated voting powers such that VARA can clearly identify any controlling entity (or entities) and the ultimate beneficial owners (UBOs).
· If virtual assets service provider adopts a complex company structure (e.g. trusts, nominees), including involvement of DAOs or other structures with decentralized governance, it should disclose such information to VARA: (i) the reasons for the adoption of such complex company structure and/or decentralized governance; (ii) the relationship between the virtual assets service provider and relevant DAOs and/or entities with decentralized governance; (iii) whether the inclusion of DAOs and/or entities with decentralized governance in the group or the virtual assets service provider’s affiliation with such entities may adversely impact the virtual assets service provider’s ability to ensure compliance with the VARA regulations; and (iv) whether the relevant DAOs and/or entities with decentralized governance are registered or otherwise legally recognized as, or have within their structure, an entity in any jurisdiction other than Dubai.
· If virtual assets service provider changes its corporate structure, it must obtain a written approval from VARA prior to any material change to its company structure including controlling entities and UBOs and/or adopting decentralized governance in respect of their operations relating to VA activities.
Environmental, social and governance compliance (ESG)
VARA will determine the ESG disclosure and compliance by virtual assets providers by following:
(i) The number of staff members or other personnel engaged by the VASP;
(ii) Turnover and/or other financial information; and
(iii) Business models and virtual asset activities.
VARA regulations established three levels of ESG disclosure: mandatory, voluntary and compliance.
· Voluntary. In the future, VARA may provide non-binding recommendations outlining “best practice standards” for how specific virtual assets service providers or classes of virtual assets service providers should conduct themselves with regard to ESG problems. Such best practice guidelines can contain sustainability criteria that are in line with the investment management plans and diversity and inclusion policies of such businesses.
· Compliance. In order to increase the openness of their ESG practices, virtual assets service providers that are required to comply with a compliance ESG disclosure level must describe their ESG strategies in the UAE, including but not limited to investment or operational plans relating to virtual assets mining or staking.
· Mandatory. The establishment of practices and procedures to increase public knowledge of ESG-related opportunities and actions, including the posting of pertinent material on websites and/or social media platforms, is required of virtual assets service providers subject to an obligatory ESG disclosure level.
· Mining and stake holding companies. Regardless of the ESG disclosure level, all virtual assets service providers with investments in virtual assets mining or staking operations, including through the sale of equipment, are required to publicly disclose current information about:
(i) the use of renewable and/or waste energy in the course of conducting the virtual assets mining or staking activities; and
(ii) initiatives relating to decarbonisation (e.g., purchase of carbon offsets) and emission reduction of the virtual assets mining or staking activities.
How much does it cost to obtain crypto license in Dubai?
License fees depends on the virtual assets activity and consist of (a) license application fee starting from $11'000 to $27'300, (b) annual supervision fee starting from $21'800 t0 $54'500, and © license extension fee which is 50% of lower license application fee (see the table below)
What if the virtual service provider will not follow VARA requirements ?
The VARA developed sanctions and liability table for violators of current laws and regulations. The liability table may be amended by regulations or special directives. Current fines consist of penalty from $5.5M to $13.7M.
Conslusion
The UAE has declared that it intends to become a major hub for cryptocurrencies, although it has done so in light of recent incidents that have damaged the industry’s credibility. VARA is paving the road for Dubai-based VASPs to stand out internationally as highly dependable businesses in the VA sector by allowing them to operate inside a framework that sets high regulatory standards.
Currently, there are several virtual assets service providers in a public registrar, such as Binance FZE, Komainu MEA, HEX Trust MENA, GC Exchange, CRO DAX Middle East (crypto.com).
If you are looking for advise on crypto regulation in Middle East, Dubai region, please write me.
DISCLAIMER: Due to the general nature of this update, not all scenarios may be applicable to the information presented here, thus you should not act upon it without seeking specialized legal advice based on your unique circumstances.
