Dubai’s crypto industry welcomes new licensing regime amid global regulatory uncertainty

Dubai’s crypto industry is excited that the jurisdiction has finally unveiled its crypto-regulatory framework, providing locals with a concrete licensing regime for digital asset issuers and service providers.

The framework comes after crypto markets crashed in 2022, prompting regulators everywhere to double down on setting up or enforcing safeguards, leaving companies and investors uncertain about crypto’s future.

Under Dubai’s new rules, all entities planning to offer one or more crypto-related services in the jurisdiction must apply for the relevant authorization and licenses. The framework is accompanied by four mandatory rulebooks for service providers and seven activity-based rulebooks that set requirements according to the type of service offered – something Talal Tabbaa, founder of regional crypto exchange CoinMENA praised as “elegantly designed”.

Dubai, one of seven emirates in the United Arab Emirates (UAE), aims to become a global hub for crypto and blockchain activity, and encouraged companies to set up in the jurisdiction even before it published its planned regulations for the sector.

Since the new rules were published, institutional crypto custody provider Hex Trust became one of the first to receive 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 someone with an interest to take charge,” said Mohamed Reda El Shiekh, head of compliance at Hex Trust for the 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, and their comprehensive nature leaves room for further development over time. The aspiring hub’s new legal framework also highlights the costs of compliance in the region – which could make it more difficult for smaller businesses to establish themselves in the area.

While Tabbaa called the license costs “peanuts” compared to other operating costs such as 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 that some of Dubai’s fees could be considered on the expensive side.

According to the document, a company wishing to offer exchange services must pay an application fee of 100,000 UAE dirhams ($27,200) and an annual supervisory fee of double that. The application fee does not guarantee approval and if the company wishes to offer additional services such as custody, lending or payments, they must apply for additional licenses (with a 50% discount on application fees) and cover additional regulatory fees.

By comparison, Abu Dhabi, another emirate in the United Arab Emirates, requires a $20,000 application fee and a $15,000 annual supervisory fee. But it does go up if companies want to offer other types of assets, Abu Dhabi Global Market (ADGM) said in an email to CoinDesk.

“Apart from any tokenized securities, under the ADGM’s regulations, any crypto exchange that operates a spot or derivative market in relation to virtual assets (which includes cryptocurrencies such as bitcoin and ether) will need to apply for a multilateral trading facility license,” the ADGM said. Regulations require an application fee of $125,000 and an annual supervisory fee of $60,000 for companies wishing to open MTFs.

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.

“But I absolutely agree that Dubai needed to step up and regulate the space, with so many bottom-feeding scammers trying to set up here, enough is enough. Hopefully these rules will be used to really target the bad players,” Heaver said.

In January, UAE Minister of Digital Economy Omar bin Sultan Al Olama faced tough questions about why Dubai is emerging as a preferred destination for disgraced crypto entrepreneurs such as token issuer Terra’s Do Kwon. Al Olama said VARA’s regulations would be far from a “light touch”.

License fees may be on the high side in Dubai, but the grouping of countries in the Middle East and North Africa (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” will not have problems with high compliance costs, which could also help filter out “undesirable projects.”

“The fees are not the problem, you can raise money, earn or otherwise raise the capital,” Heaver said, adding that, if not expensive, VARA’s regulations may be too prescriptive.

“After reading the regulations, while I understand the sentiment and support it, I still believe the regulations are overly prescriptive, to the point that it would make it difficult for the supervisory staff of VARA to monitor compliance with their own regulations,” Heaver said.

Heaver said the requirement to obtain licenses for specific crypto activity could get in the way of enforcement. For her part, she praised Switzerland’s principles-based regulations, which provide broad guidelines for how existing regulations apply to certain activities.

Switzerland does not have specific or separate rulebooks for crypto. In 2017 and 2018, the country’s financial regulator issued guidelines on how banking, securities and anti-money laundering rules apply to the popular crypto fundraising method known as initial coin offerings (ICO).

While Dubai’s framework can be considered “somewhat” rules-based, it is not prescriptive, according to Kristi Swartz, partner at law firm DLA Piper, who was VARA’s exclusive global legal advisor in setting up the regulatory package.

“It’s not something that’s prescriptive, because you need, in this business, to be a little bit flexible, to the extent that it’s a fast-paced, fast-moving industry. So if you’re very prescriptive, you probably expect that there was 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 formal engagement with VARA.

“Looking at the current regulatory landscape, it is important to note that different jurisdictions and regulatory bodies may take different paths when addressing digital assets,” said Alex Chehade, Managing Director of Binance Dubai. “The most important key aspects that these regulations provide for the Emirate are clarity and increased security for industry players, users and investors.”

Binance received a Minimal Viable Product (MVP) license from VARA in September 2022, but Chehade says the exchange is only halfway through the four-step approval process. Under the terms of the MVP license, all products and services may only be offered to qualified and/or institutional investors. Retail users “are strictly prohibited” until VARA decides to finally approve a full operating license for companies, he added. No devices are currently fully licensed by VARA.

Despite its comprehensive approach, Dubai’s rulebook has room for more specificity. Heaver pointed out that the framework does not uniquely address payment-focused cryptos like stablecoins, which are tied to the value of other assets. Regulators around the world, including the UK and the EU – with its cross-jurisdictional crypto regulatory framework MiCA – have so far largely focused on stablecoin regulation.

VARA addresses stablecoins to some extent, Swartz said, just not in the token issuance rulebook, but in the corporate one. In VARA’s regulations for companies, it sets reserve requirements for liquid assets for firms – including for virtual assets linked to the value of sovereign currencies.

The rulebook stipulates that in all cases, fiat-referenced virtual assets must be “backed by cash or cash equivalents … reserves denominated in the fiat currency referenced to no less than the market value of the fiat-referenced virtual asset in public circulation, or not yet redeemed.” “

This reserve requirement is consistent with the requirement of other jurisdictions planning stable coin regulations such as Hong Kong and Israel.

The issuance rulebook instead focused on tokenized assets including non-fungible tokens (NFTs), Swartz said.

VARA received requests for token issuance on a daily basis, said Winston Lau, fintech and digital asset lawyer at DLA Piper, who worked on the regulatory regime with Swartz.

“And these issuances range from … maybe just plain vanilla NFTs, which are just digital artworks to maybe more complex projects like tokenization of real estate or tokenization of financial instruments,” Lau said, adding that the issuance rulebook is designed to provide guidance to industry participants about how they can actually register and get regulatory sign-off on their projects.

“A large part of the rulebook is focused on what should go into the white paper that needs to be registered with VARA and also made public,” Lau said.

Under a section titled “Prohibited Virtual Assets”, VARA states that the issuance 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 those exemptions might look like in practice, and Swartz declined to comment on the enforcement specifics.

“If we want to list these and offer these coins, we need to demonstrate that you CAN have some level of traceability,” Chehade said.

It is unclear whether user-enabled traceability options available with privacy-enhancing cryptos like Zcash would qualify under the rules as “mitigating technologies.”

“While I understand the sentiment, I don’t fully agree,” Heaver said of the movement to ban privacy coins. “I’m a big advocate of privacy, I believe that privacy is a human right.”