Reed Smith In-depth

On 7 February 2023, the Virtual Asset Regulatory Authority (VARA) released its much anticipated rulebooks for the regulation of virtual assets in Dubai (excluding its financial free zone, the Dubai International Financial Centre (DIFC)). These regulations were issued pursuant to Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai (the Dubai VA Law).

Under the Dubai VA Law, a ‘Virtual Asset’ (VA) has been defined as a “digital representation of value that may be digitally traded, transferred, or used as an exchange or payment tool, or for investment purposes. This includes Virtual Tokens, and any digital representation of any other value as determined by VARA.” A ‘Virtual Token’ covers “a digital representation of a set of rights that can be digitally offered and traded through a Virtual Asset Platform”.

This expansive definition has been purposely chosen to ensure that VARA’s jurisdiction does not just cover the traditional understanding of regulated crypto activities, such as trading of cryptocurrencies on centralised exchanges, but also allows VARA to create specific rules for the growing range of digital assets available, including NFTs and utility tokens.

What is VARA?

VARA is one of five financial services regulators in the UAE, but its sole purpose is the regulation of VAs.

In the UAE (which is a federal state made up of seven emirates), at a federal level, financial services are regulated by the Security and Commodities Authority (SCA) and the UAE Central Bank. Within the two emirates of Dubai and Abu Dhabi, there are independent financial free zones known as the DIFC and the Abu Dhabi Global Market (ADGM). The DIFC and ADGM have their own common law systems of legislation (mostly corporate, commercial and financial services related) and their own common law court systems. Crucially, each of the DIFC and ADGM has their own financial services regulator: the Dubai Financial Services Authority (DFSA) and the Financial Services Regulatory Authority (FSRA) respectively. Each of the DFSA and the FSRA has issued its own virtual asset-related system of regulations. VARA is a Dubai financial services regulator established in 2022, responsible for regulating virtual asset-related financial services activities at the emirate level (excluding the DIFC). Virtual asset-related activities conducted in or from the UAE (excluding the emirate of Dubai, DIFC and ADGM) are expected to fall under the jurisdiction of the SCA. The SCA has not issued its own virtual assets regulations as yet, and it is not clear whether it intends to do so. Therefore, there is, to date, no clear framework for setting up a UAE-based virtual asset business outside of Dubai, DIFC and ADGM.