Dubai's crypto industry is thrilled the jurisdiction has finally unveiled its crypto regulatory framework, giving locals a concrete licensing regime for digital asset issuers and service providers.
The framework comes after crypto markets went into a tailspin in 2022, prompting regulators everywhere to double down on setting up or enforcing safeguards, leaving companies and investors uncertain of crypto's future.
Under Dubai's new rules, all entities planning to offer one or more crypto-related services in the jurisdiction must seek the relevant authorization and licenses. The framework is accompanied by four compulsory rulebooks for service providers and seven activity-based rulebooks that set out requirements by the type of service offered – something Talal Tabbaa, founder of regional crypto exchange CoinMENA praised as being “elegantly designed.”
Dubai, one of seven emirates of the United Arab Emirates (UAE), is aiming to become a global hub for crypto and blockchain activity, and was courting companies to set up in the jurisdiction even before publishing its planned rules for the sector.
Since the new rules were published, institutional crypto custody provider Hex Trust became one of the first to get an operational go-ahead from the emirate’s watchdog, the Virtual Asset Regulatory Authority (VARA).
"We were waiting for a licensing framework. We were waiting for somebody with interest to take the responsibility," said Mohamed Reda El Shiekh, head of compliance at Hex Trust for Middle East and North Africa (MENA), referring to the time before VARA, which was set up in 2022.
But Dubai’s new rules are a work in progress, its comprehensive nature leaving room for further development over time. The aspiring hub’s new legal framework also sheds light on compliance costs in the region – something that could make it harder for smaller companies to set up in the area.
While Tabbaa called the licensing costs “peanuts” when compared to other operating costs like hiring workers or maintaining offices locally, and compliance fees are not something crypto companies focus on when looking to enter a market, even he admitted some of Dubai’s fees can be considered to be on the expensive side.
According to the document, a company looking to offer exchange services must pay an application fee of 100,000 UAE dirham (US$27,200) and an annual supervision fee of double that amount. The application fee doesn’t guarantee approval and if the company wants to offer additional services like custody, lending or payments, they have to apply for additional licenses (at a 50% discount on application fees) and cover additional supervision fees.
For comparison, Abu Dhabi, another UAE emirate, charges $20,000 application fee and a $15,000 annual supervision fee. But that goes up if companies want to offer other types of assets, the Abu Dhabi Global Market (ADGM) said in an email to CoinDesk.
“Apart from any tokenized securities, under ADGM’s regulations, any crypto exchange that operates a spot or derivative market in relation to virtual assets (which include cryptocurrencies such as bitcoin and ether) will have to apply for a Multilateral Trading Facility license,” the ADGM said. Regulations require a $125,000 application fee and a $60,000 annual supervision fee for companies seeking to open MTFs.
Over in Singapore, crypto exchanges that don’t engage with fiat currencies typically apply for a Major Payments Institution license (for digital payment token service), which comes with a 10,000 Singapore dollar ($7,500) annual fee. New York's BitLicense comes with a $5,000 application fee, but companies have reported bearing a cost of around $100,000 for time allocation, legal and compliance fees.
Dubai’s fees are reasonable for larger companies but may not be very sustainable for startups, Irina Heaver, a crypto lawyer based in the UAE, told CoinDesk.
“However, I fully agree that Dubai needed to step up and to regulate the space, with so many bottom feeding scammers trying to establish here, enough is enough. Hopefully, these regulations will be used to really target those bad players,” Heaver said.
In January, UAE Minister for Digital Economy Omar bin Sultan Al Olama faced tough questions about why Dubai comes up as a preferred destination for disgraced crypto founders like token issuer Terra’s Do Kwon. Al Olama said VARA’s regulations would be far from a “light touch.”
Not about the fees
The licensing fees may be on the high side in Dubai, but the grouping of Middle East and North Africa countries (known as MENA) is a lucrative market worth the price, Tabbaa said.
Mohammed AlKaff AlHashmi, co-founder of Dubai-based Islamic Coin, echoed Tabbaa, adding that “good projects” won’t have problems with high compliance costs, which could also help filter out “unwanted projects.”
“The fees are not the issue, one can raise money, earn or otherwise obtain the capital,” Heaver said, adding that, if not expensive, VARA’s regulations may be too prescriptive.
“Having read the regulations, although I understand the sentiment, and support it, I still believe that the regulations are overly prescriptive, to the point that it would make it hard for the supervisory personnel of VARA to supervise the compliance with their own regulations,” Heaver said.
Heaver said the requirement to obtain licenses by specific crypto activity might get in the way of enforcement. She, in turn, praised Switzerland’s principles-based regulations, which issues broad guidelines on how existing regulations apply to certain activities.
Although Dubai’s framework can be considered “slightly” rules-based, it isn’t prescriptive, according to Kristi Swartz, partner at law firm DLA Piper, which was VARA’s exclusive global legal advisor in setting up the regulatory package.
“It's not something that's prescriptive, because you do need, in this industry, to be slightly flexible, insofar as it’s a fast-paced, fast-moving industry. So if you're very prescriptive in nature, you could probably expect it to be something that was out of date as soon as you wrote it,” Swartz said, adding that DLA Piper worked on the package for nine months, and had been tracking Dubai’s regulation of the sector even before formally engaging with VARA.
“As we look at the current regulatory landscape, it’s important to note that different jurisdictions and regulatory bodies can take different paths when addressing digital assets,” Alex Chehade, general manager at Binance Dubai said. “The main key aspects that these regulations provide for the Emirate are clarity and increased security for industry players, users, and investors.”
Binance obtained a Minimal Viable Product (MVP) license from VARA in September 2022, but Chehade says the exchange is only partway through the four-stage approval process. Under the conditions of the MVP license, all products and services can be provided only to qualified and/or institutional investors. Retail consumers “are strictly prohibited” until VARA decides to eventually approve a full operation license for companies, he added. No entity currently has a full license from VARA.
Stablecoins and tokenized assets
Despite its comprehensive approach, Dubai’s rulebook has room for more specificity. Heaver pointed out that the framework doesn’t uniquely address payments-focused crypto like stablecoins, which are tethered to the value of other assets. Regulators around the world, including the U.K. and the European Union – with its cross-jurisdictional crypto regulation framework MiCA – have so far focused largely on stablecoin regulation.
VARA does address stablecoins to a certain extent, Swartz said, just not in its rulebook for token issuance, but in the one for companies. In VARA’s companies rulebook, it lays out liquid asset reserve requirements for firms – including for virtual assets that are linked to the value of sovereign currencies.
The rulebook stipulates that, in all events, fiat-referenced virtual assets must be “backed by cash or cash equivalent… reserves denominated in the fiat currency referenced of not less than the market value of the Fiat-Referenced Virtual Asset in public circulation, or not yet redeemed.”
The rulebook for issuance, instead, focused on tokenized assets including non-fungible tokens (NFT), Swartz said.
VARA received inquiries on token issuance on a daily basis, said Winson Lau, fintech and digital asset lawyer at DLA Piper, who worked on the regulatory regime with Swartz.
“And those issuances range from … maybe just plain-vanilla NFTs, which are just digital artworks to maybe more complex projects such as tokenization of real estate, or tokenization of financial instruments,” Lau said, adding the issuance rulebook is designed to provide guidance to industry participants on how they can actually register and get regulatory sign-off on their projects.
“A big part of the rulebook is focused on what should go into the white paper which has to be registered with VARA and also publicly disclosed,” Lau said.
No privacy coins?
Under a section titled “Prohibited Virtual Assets,” VARA says the issuing of and all activities related to anonymity-enhanced cryptocurrencies are prohibited in the Emirate.
But it’s not a hard “no,” Binance’s Chehade said.
The rulebook includes a caveat for service providers that have “mitigating technologies or mechanisms to allow traceability or identification of ownership,” in place. VARA did not clarify what these exemptions might look like in practice, and Swartz declined to comment on enforcement specifics.
“If we want to list these and offer these coins we have to demonstrate that you CAN have some level of traceability,” Chehade said.
It’s unclear if user-activated traceability options available with privacy-enhancing crypto like Zcash would qualify under the rules as “mitigating technologies.”
“Although I understand the sentiment, I completely do not agree,” Heaver said of the move to prohibit privacy coins. “I am a big advocate for privacy, I believe that privacy is a human right.”
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Correction (Mar. 3, 2023 13:12 UTC): corrects Winson Lau's name in the third section.
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