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In the wake of the release of the Dubai Virtual Assets Regulatory Authority’s (VARA) regulations earlier this year, which strengthened the UAE’s drive towards creating a complex regulating ecosystem for virtual asset service providers (VASPs), the UAE government issued Cabinet Decision No. 111 of 2022 on the regulation of virtual assets and their service providers (Cabinet Decision), which established the UAE Securities and Commodities Authority (SCA) as the federal virtual assets regulator in the UAE.
The Cabinet Decision empowers the SCA to supervise, investigate and inspect virtual asset platforms and operators, and all ancillary or related activities, at federal level in the UAE. The SCA has now announced that it has begun to receive licensing applications from companies wishing to become licensed VASPs.
Subject to certain limited exceptions (including activities carried on in financial free zones (which have their own regulators), as well as digital securities and digital commodities contracts and payment related virtual assets), UAE companies must be appropriately licensed by the SCA in order to be able to do virtual assets business in the UAE.
In Dubai, such companies would also need to obtain a VARA licence in order to trade in or provide virtual asset related services. While initially there was a certain amount of confusion as to the interaction between the SCA’s and VARA’s roles in regulating VASPs, the SCA recently released a formal announcement clarifying its position vis-à-vis VARA. In its announcement, the SCA clarified that all VASPs in Dubai, which would fall under VARA’s jurisdiction, would also need to obtain the SCA’s approval prior to commencing full market operations.
In order to avoid creating onerous or unnecessary delays to operations, the SCA has clarified that once a VASP obtains VARA’s approval and a VARA licence, there will be a harmonisation of procedures such that the VASP would then be able to obtain the SCA’s approval (potentially using a fast track process). It is to be seen how the two processes are to work in practice.
This is welcome news, as dual licensing from two reputable regulators such as VARA and the SCA should go a long way towards strengthening the reputation of a VASP looking to be taken seriously in an increasingly scrutinised market.
The SCA has yet to release the implementing regulations which follow the Cabinet Decision; however, we anticipate that the release of these implementing regulations will likely lay out the procedure and anticipated timelines for obtaining SCA approval (either following a successful VASP application through VARA or, for non-Dubai companies, without VARA’s involvement), as well as further detail as to the rules governing the operations of SCA regulated VASPs.
Conclusion
As more companies look to be licensed by the SCA, the benefits of operating within the increasingly sophisticated regulatory landscape surrounding virtual assets in the UAE will become more and more apparent. It will be interesting to see how the SCA licensing procedure will operate in practice and the SCA’s hotly anticipated implementing regulations will likely be very revealing in this regard.
Client Alert 2023-101
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