Following our recent post on Cabinet Resolution 111 of 2022, another milestone introduction by VARA is the Full Market Product Regulations ‘‘FMP Regulations’’ issued by VARA on February 7, 2023. FMP Regulations contain VARA’s VA licencing regulations and took immediate effect in the Emirate of Dubai (Dubai), including all of its free zones, with the exception of the Dubai International Financial Centre (DIFC).

VA regulation continues to receive high traction in balancing consumer protection and to foster a sense of innovation on regulatory authorities such as VARA. FMP Regulation constitutes the end result of VARA’s work with a unique touch to VA regulations.

What is the Structure of FMP Regulations?

FMP Regulations consist of the VAs and Related Activities Regulations 2023 (the VARA Regulation) and a number of separate rulebooks, the official rule books of an organization/entity. VARA Regulation is the foundation of the FMP Regulations and sets out VARA’s regulatory powers, its licencing and registration requirements, regulated VA activities (VA Activities) as well as anti-money laundering requirements and market offences, which includes insider trading and market manipulation.

Various rulebooks in the FMP Regulations have been issued pursuant to VARA Regulation, and each rulebook falls within one of three (3) distinct categories:

1. Compulsory Rulebooks

Compulsory Rulebooks consist of:
• Company Rulebook,
• Compliance & Risk Management Rulebook,
• Technology & Information Rulebook and
• Market Conduct Rulebook.

They apply to all entities licenced by VARA to carry out one or more VA Activities (VASPs) and contain detailed requirements pertaining to a range of issues, including corporate governance, regulatory capital, financial crime and technology security.

2. Activity-specific Rulebooks

Each VA Activity has a corresponding Activity-specific Rulebook, and VASPs are required to comply with every Activity-specific Rulebook that corresponds to a VA Activity that is licenced to carry out. These Rulebooks typically contain conduct of business requirements, though some also contain corporate governance requirements. Certain Activity-specific Rulebooks also contain margin trading restrictions. VARA has yet to publish its Activity-specific Rulebook for Payments and Remittances Services.

3. The VA Issuance Rulebook

The VA Issuance Rulebook applies to those who issue VAs (as defined below) in Dubai, and contains requirements covering, inter alia, notification/approval requirements and whitepaper content requirements.

VARA’s regulations with respect to the marketing of VAs and VA activities are set out in Administrative Order No. 01/2022 (the VARA Marketing Regulation), which has been in effect since last year and has not been amended by the FMP Regulations. Together, FMP Regulations and VARA Marketing Regulation constitute VARA’s current regulatory framework, and both are available on VARA’s website.

What is the Overview of FMP Regulations?

Jurisdiction

According to FMP Regulations, VARA’s jurisdiction extends throughout Dubai, including all of its free zones (such as the Dubai World Trade Centre (DWTC) and the Dubai Multi Commodities Centre, inclusive of the Crypto Hub (DMCC)), with the exception of DIFC.

DWTC and DMCC currently issue crypto-related commercial licences, and entities with such licences may subsequently require a VARA licence if they carry out VA Activities (as defined below).

Both the Securities & Commodities Authority (the SCA) and the UAE Central Bank (the UAE CB) as federal regulators have jurisdiction in Onshore UAE (that is, the UAE excluding the DIFC and the Abu Dhabi Global Market (the ADGM)) and both have their own VA-related regulatory regimes.

There has been some uncertainty surrounding the potential overlap among the jurisdictions of VARA, SCA and UAE CB. Following the publication of FMP Regulations and recent federal legislation, it appears that within Dubai:
a. a licence from VARA and not the SCA is generally required to carry out VA Activities;
b. central bank digital currencies are regulated by the UAE CB and not VARA; and
c. fiat-backed (money backed by the government instead of financial instrument) stablecoins (a type of cryptocurrency where value of digital asset is based on assumption/stereotype) maybe regulated by both VARA and the UAE CB.

Furthermore, it is important to note that under VARA Regulation, VASPs may be required to comply with VARA’s regulations as a minimum standard with respect to their activities outside Dubai. This requirement appears to apply even to VASPs based outside Dubai, which suggests that the FMP Regulations may have an extra-territorial scope.

VARA generally has jurisdiction over the use of VAs in Dubai, as discussed in our recent post which is broadly 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”.

What are the Licencing Requirements?

Under VARA Regulation, entities wishing to carry out one or more VA Activities in Dubai are generally required to obtain a licence from VARA (the General Prohibition). VA Activities are set out in Schedule 1 of the VARA Regulation and consist of:

1. Advisory Services;
2. Broker-Dealer Services;
3. Custody Services;
4. Exchange Services;
5. Lending and Borrowing Services;
6. Payments and Remittances Services; and
7. VA Management and Investment Services.

Broker-Dealer Services, for example, provide placement, distribution or other issuance related services to VA issuers. Furthermore, the inclusion of Lending and Borrowing Services and Payments and Remittances Services means this list of VA Activities is potentially broader and more comprehensive than those of other UAE VA regulators such as the SCA.

Additionally, VARA Regulation contains exemptions to the General Prohibition. These exemptions are generally limited to professionals (e.g., lawyers, accountants and business consultants) and Exempt Entities, which are effectively UAE-government linked entities.

VARA does not appear to have implemented a VA whitelist, meaning VAs do not need to be individually and separately approved by VARA for use in Dubai. VASPs are generally required to draft VA Standards and carry out VA Activities only in relation to those VA that meet such standards. VARA reserves the right to require the suspension of a VA Activity in respect of any VA upon reasonable grounds.

Neither the issuance of VAs nor the proprietary trading of VAs appears to constitute a VA Activity that triggers a VARA licencing requirement. However, the proprietary trading of VAs maybe subject to registration requirements and the issuance of VAs would require prior notification to or approval from VARA, as explained in further detail below.

What Are the Registration Requirements?

Certain other activities related to VAs that do not constitute VA Activities are subject to registration requirements rather than licencing requirements. In particular, proprietary traders of VAs are required to register with VARA if their portfolio of VAs reaches USD 250,000,000 in equivalent value during any rolling 30 day period.

Proprietary traders who fall below that threshold have the option to voluntarily register with VARA, as do entities that have a commercial or free zone licence in Dubai to provide technology services relating to or utilising distributed ledger technology to other businesses.

What are the Issuance Requirements?

In general, the issuance of a VA in Dubai requires prior approval from VARA. An exception is made for VAs that are non-transferable, which are known as Permitted VAs. Issuers of Permitted VAs are instead required to register the whitepaper of the Permitted VA prior to its publication.

Issuers of both Permitted VAs and non-Permitted VAs are required to comply with the various requirements set out in the VA Issuance Rulebook, which include detailed requirements on the contents of whitepapers, risk disclosures and technology and security requirements.

What are Other Requirements and Restrictions?

FMP Regulations contain various other notable requirements and restrictions with a special attention to the below from our practice perspective:

1. Privacy tokens are generally prohibited within Dubai.
2. Exempt Entities are required to notify VARA and obtain a no-objection confirmation from VARA, despite their exemption from the General Prohibition.
3. A VASP/Issuer will remain subject to VARA’s regulations for a period of ten (10) years following the date it is no longer regulated by VARA.
4. VASPs are generally required to publicly disclose details of any past prosecutions or convictions of any members of their senior management or board, regardless of whether such prosecutions/convictions occurred in the UAE or elsewhere.
5. VASPs are required to maintain reserve assets equivalent to 100% of the liabilities owed to clients with respect to all VA Activities. This is in addition to paid-up capital and liquidity requirements.
6. VASPs are required to submit accounting details such as balance sheets, income statements and statements of profit and loss on a monthly basis to VARA.
7. VASPs and their group members in Dubai are prohibited from trading on their own account (this includes trading in both VAs and other assets).

What are the Licencing, Registration and Approval Processes Requirements?

Entities intending to obtain a licence from VARA are currently required to undergo a four-stage process, including:

1. provisional permit;
2. preparatory Minimum Viable Product (MVP) licence;
3. operating MVP licence; and
4. Full Market Product (FMP) licence.

VARA has yet to publish detailed guidance on its four-stage licencing process (such as the application form(s) to be used, the content requirements of regulatory business plans and expected timeframes). However, it is clear that VA Activities cannot be carried out in Dubai until at least an Operating MVP licence has been obtained, and cannot be carried out in relation to retail investors until an FMP licence is obtained. VARA currently maintains that it has not yet granted any VASP an Operating MVP licence.

Furthermore, VARA has yet to set out its registration process for large proprietary traders or issuers of Permitted VAs, nor has it set out the approval process for issuers of non-Permitted VAs in detail.
We expect VARA to publish further information on these processes in the near future.

What Are The Takeaways?

This regulatory regime constitutes a unique approach to the regulation of VA Activities in Dubai. VARA has tailored a regime specifically for VA, with crypto-specific issues such as staking and blockchain-based payment systems clearly addressed. Many provisions within the FMP Regulations evidence a strong understanding by VARA of the operation of VAs and VASPs in general.

While VARA has not implemented a VA whitelist, the FMP Regulations are cautious in several respects, particularly in relation to corporate governance, regulatory reporting and public disclosure, reflecting VARA’s commitment to market integrity, consumer protection and regulatory resilience. FMP Regulations are also remarkably detailed, particularly with respect to the conduct of business rules that VASPs must comply with.

If you have any questions about the FMP Regulations or the regulation of VAs in the UAE, please contact our cryptoassets disputes Partner Yazeed Samain at ysamain@maslaw.com