Dubai’s Virtual Assets Regulatory Authority (“VARA”) has recently introduced two significant updates to its virtual assets regulatory framework, which is relevant for all entities providing services to or from Dubai, other than entities conducting business in the Dubai International Financial Centre ( “DIFC”). For an overview of VARA’s virtual assets framework, please refer to our previous articles here and here.
These two updates involve changes to VARA’s Custody Services Rulebook and Virtual Asset Issuance Rulebook respectively, and represent key developments for entities carrying out virtual asset activities under VARA’s evolving regulatory regime. We set out a summary of these developments below, along with further considerations that firms should consider when operating in the virtual assets space in Dubai.
Key changes to the Custody Services Rulebook
Custody services involve safekeeping virtual assets for or on behalf of another person. Staking services involve ‘staking’ or otherwise using, committing, pledging or locking up virtual assets, for the purposes of participating in the consensus mechanisms or other maintenance, operation or functioning of a Distributed Ledger Technology to which those virtual assets relate, and may include receiving rewards generated and distributed for that participation.
On 24 August 2023, VARA published a revised Custody Services Rulebook, which enables Virtual Asset Service Providers (“VASPs”) licensed to provide custody services also to provide staking services to their customers from the same legal entity without the need for a separate licence for virtual asset management and investment, subject to specific additional approval from VARA.
In practice, this update will represent a considerable financial and administrative benefit to VASPs in avoiding the need for multiple licences, and represents an innovative move in the international virtual assets regulatory space as other jurisdictions continue to grapple with how staking services should be classified and regulated.
Key changes to the Virtual Asset Issuance Rulebook
On 18 September 2023, VARA published a revised Virtual Asset Issuance Rulebook, which introduced new rules for Fiat-Referenced Virtual Assets (“FRVAs”), commonly referred to as ‘stablecoins’. These rules apply to all FVRAs (as defined below) except those which reference the United Arab Emirates Dirham (“AED”), which remain under the sole and exclusive regulation of the Central Bank of the United Arab Emirates (“CBUAE”).
The new rules are set out in Annex 1 of the Virtual Asset Issuance Rulebook. This defines a FRVA as a type of virtual asset that purports to maintain a stable value in relation to the value of one or more fiat currencies (other than AED) but does not have legal tender status in any jurisdiction. The definition clarifies that a FRVA is neither issued nor guaranteed by any jurisdiction and fulfils its functions only by use and acceptance within the community of users of the FRVA.
The definition does not include virtual assets which are a representation of any equity claim, which are issued by central banks acting in their monetary authority capacity (e.g. Central Bank Digital Currencies), or which are tokenised bank deposits used only for interbank settlement purposes.
Under the new rules, the issuance of a FRVA requires a category 1 licence. In addition to the licensing requirement, FRVA issuers are required to include additional disclosures in the whitepaper which is required to be published prior to the offering of a virtual asset. These include, amongst other things, clear and detailed policies on the creation and redemption of any FRVAs in circulation, information of the types and composition of the reserve assets, and detailed assessments of risks relevant to the management, custody, investment and/or liquidation of the reserve assets. VASPs licensed to issue FRVAs are also subject to additional ongoing disclosure requirements, including monthly independent audits of the number and value of FRVAs in circulation and the number and value of FRVAs in circulation.
Other additional compliance obligations on FRVA issuers include those relating to the maintenance of stable backing, reserve assets, redemptions, marketing and capital requirements. as well as compliance with auditing, reporting, marketing, and capital requirement standards.
Also important to note is the prohibition on incentive benefits, which prohibits VASPs licensed to issue FRVAs from granting any interest or otherwise making any payments or benefits for the purpose of incentivising persons to acquire, hold, or otherwise use a FRVA.
Practical concerns and consequences for non-compliance
While these two updates represent important developments for Dubai’s regulatory framework for virtual assets and provide welcome clarity to market participants (and, in the case of custody and staking, a more streamlined regulatory approach), any entities seeking to provide the services to which they relate – i.e. staking and custody services or FRVA issuance services – should be diligent in ensuring compliance with the new rules.
For general compliance requirements under the virtual assets regulatory framework in Dubai, please refer to our previous article here, as well as our summary of the specific virtual asset marketing and promotion standards available here. VARA also expects entities to comply with its stringent Anti-Money Laundering and Combatting the Financing of Terrorism (“AML & CTF”) requirements, which include implementing AML & CTF controls and conducting any appropriate risk assessments.
VARA has already demonstrated its willingness to enforce these rules, for example by publishing in April 2023 details of an administrative fine of AED 10 million against exchange operator OPNX and additional personal fines of AED 200,000 against its four co-founders.
Further developments in the Virtual Assets space
Over the last six months VARA has continually demonstrated its commitment to maintaining a fluid and developmental regulatory regime for virtual assets in Dubai, aptly reflecting the ever-developing industry and technological landscape and the evolving regulatory landscapes globally and in the Middle East region in particular. VARA has shown itself to be a modern and future-facing regulator, ideally suited to facilitating Dubai’s ambition of becoming a global virtual assets hub.
As such, we can expect to see a continuation of regulatory developments in Dubai’s virtual assets space. One such possible development, for example, with FRVAs having now been defined and their issuance brought specifically within the purview of VARA (removing previous ambiguity as to responsibility between VARA and the CBUAE), is further clarity on asset classification, which will help virtual asset issuers and intermediaries understand their applicable regulatory obligations to a clearer degree and continue to foster the development of Dubai’s burgeoning ecosystem.
Co-authored by Rupert Nodder