Establishment of a New Law and Regulatory Authority

The Government of Dubai recently enacted Law No. 4 of 2022 on the Regulation of Virtual Assets (VAL) and established the Dubai Virtual Assets Regulatory Authority (VARA). By establishing a legal framework for businesses related to virtual assets, including (without limitation) crypto assets and non-fungible tokens (NFTs), this landmark law reflects Dubai’s vision to become one of the leading jurisdictions for entrepreneurs and investors of blockchain technology. Under VAL, VARA aims to promote Dubai’s position as a regional and international destination in the virtual assets sphere and to develop Dubai’s digital economy. VARA further seeks to enhance investment awareness of the virtual assets sector, attract investment and companies operating in the field of virtual assets to establish themselves in Dubai and provide the regulations, rules and standards necessary to regulate, supervise and control all matters related to virtual assets.

VAL excludes activities related to virtual assets in the Dubai International Finance Centre (DIFC) from its scope of application. The DIFC, a prominent free zone within the UAE, has its own regulatory framework for virtual assets under the jurisdiction of the Dubai Financial Services Authority (DFSA). The DFSA has stated that it will be adopting its own rules for the regulation of cryptocurrencies in the near future for the DIFC. Similarly, the Securities and Commodities Authority (SCA), the securities regulator in the UAE, has also stated that it is working on its own regulatory framework for cryptocurrencies that it is getting close to launching.

Scope of the New Law

VAL defines virtual assets as “digital representation of value which can be digitally traded or transferred or used as an exchange or payment tool or for investment purposes” (this broad definition would include cryptocurrencies, tokens, non-fungible tokens and any other virtual asset determined by VARA) and defines virtual tokens as “digital representation of a group of rights which can be issued and traded digitally through a virtual asset platform (a platform operated by a virtual asset provider licensed by VARA)”.

VAL defines the business activities available, subject to VARA authorisation, as follows:

  • Operating and managing virtual assets platforms services
  • Exchange services between virtual assets and currencies, whether national or foreign
  • Exchange services between one or more forms of virtual assets
  • Virtual asset transfer services
  • Virtual asset custody and management services
  • Services related to the virtual asset portfolio
  • Services related to the offering and trading of virtual tokens

Key features of VARA

Key features of VARA include (without limitation):

  • VARA will have a legal personality and financial and administrative autonomy, with an independent and juridical capacity to protect and regulate the stakeholders in virtual asset services. VARA will be affiliated with the Dubai World Trade Centre Authority (DWTC).
  • VARA is responsible for regulating, supervising and overseeing the issuance, offering and relevant disclosure processes of virtual assets and NFTs.
  • VARA will also cooperate with other federal agencies, including the UAE Central Bank, to provide a code of ethics, general policy, and strategic plans, and be in charge of the enforcement of the VAL, but does not regulate services related to virtual assets on a federal level.
  • Any natural person or legal entity offering virtual asset services can only do so if granted a license from VARA, and must be operating in the Emirate of Dubai and have a trade license from the relevant commercial authority in Emirate of Dubai. VARA’s mandate includes (without limitation) monitoring trading activities in virtual asset services to prevent price manipulation and establish high standards of protection for beneficiaries’ personal data.

Licensing and Other Requirements

VAL requires that applicants are established in the Emirate of Dubai, as well as the headquarters of their business, and must obtain a commercial license first from the relevant licensing authority in Dubai. Specific licensing processes and additional ongoing requirements are expected to be set out in the separate implementing decisions to be issued by VARA, upon the implementation of the VAL, which would also include a description of the activities, exempted virtual assets, procedures for licensing and associated fees and charges virtual asset custodians, digital wallets, and tokenization and trading.

 Fines, Breaches, Penalties and Sanctions

The acts that constitute a breach of the provisions of VAL and the fines imposed on a violator will be determined by the board of directors of the DWTC on a case-by-case basis. In addition to any penalty imposed, VARA will also have the authority to either suspend licences for a period of up to six months, revoke the authorisation, or coordinate with the competent commercial licensing authority in Dubai to cancel the commercial license of violators. The potential sanctions for violation of VAL may, therefore, be significant and have wide-ranging repercussions.

Hunton Andrews Kurth LLP will continue to monitor further developments in this area and share our insights and experience as our clients navigate through the same. Please feel free to contact the authors, or your usual Hunton Andrews Kurth contact, for further information and assistance.