UAE encryption Compliance Regulation: VARA and ADGM Interpretation

This article will explore the key contents and differences in compliance regulation between Abu Dhabi and Dubai. By understanding the regulatory requirements and differences in both regions, encryption practitioners can better conduct their business, ensure their legal and compliant operations, and promote the healthy development of the entire encryption industry.

Author: Beosin

With its advantageous geographical location, clear government support for encryption policies, and tax-friendly environment (0% personal income tax, 9% corporate tax, and signing 146 agreements to avoid double taxation), the UAE has become one of the global centers for cryptocurrency and blockchain innovation. It is noteworthy that in the regulatory field of virtual assets in the UAE, ADGM (Abu Dhabi Global Market) and VARA (Dubai Virtual Assets Regulatory Authority) have different characteristics and positioning. When analyzing the regulated virtual asset licensing system in the UAE, it is essential to distinguish between the two major jurisdictions of Abu Dhabi and Dubai.

This article will explore the key aspects and differences in compliance regulation between Abu Dhabi and Dubai. By understanding the regulatory requirements and differences in these two locations, encryption practitioners can better conduct their business, ensure their legal compliance, and promote the healthy development of the entire encryption industry.

Abu Dhabi VS Dubai

In Abu Dhabi, ADGM (Abu Dhabi Global Market) serves as an international financial center, established to support the economic strategy of the region and play a role as a global financial and business hub. Its independent regulatory authority is the FSRA (Financial Services Regulatory Authority), responsible for overseeing and enforcing the specific encryption asset regulatory provisions of ADGM.

The FSRA regulates virtual assets as a specific asset class within the financial industry. Therefore, the scope of the issued encryption asset licenses is relatively limited and does not possess the specialized customized regulatory framework similar to Dubai VARA. The application process typically takes six to seven months, and the compliance requirements for applicants are quite strict—adopting the licensing standards of traditional financial institutions. This creates a higher entry barrier for exchanges with a technological background, while traditional financial institutions are more adaptable to transforming and conducting encryption business.

In Dubai, the virtual asset licensing is divided into two major systems:

1 DIFC (Dubai International Financial Centre): As a financial free trade zone, its regulatory model is similar to that of ADGM, with its independent regulatory authority being DFSA (Dubai Financial Services Authority). DFSA classifies virtual assets as tokenized assets within financial instruments for regulation, with an application cycle of about seven to eight months, primarily aimed at large institutions with financial qualifications. However, it offers a special channel for "innovation licenses": purely technical development enterprises (not involving customer fund custody or financial transactions) can be approved in about three months.

2 VARA (Virtual Assets Regulatory Authority): A regulatory body specifically established by the Dubai government, which does not directly issue business licenses but rather overlays virtual asset operation licenses on existing company licenses. Its regulatory scope covers mainland Dubai enterprises and free zone companies (excluding DIFC), authorizing specific virtual asset businesses through a licensing mechanism.

3 SCA (Securities and Commodities Authority) is responsible for regulating ICO and token issuance activities. Companies planning to conduct ICOs in the UAE may need to obtain approval from the SCA.

Main Differences Between VARA and ADGM

Institutional Nature and Positioning

VARA: It is a government function department established by the Dubai government to specifically regulate the virtual assets sector, responsible for overseeing the virtual asset industry in Dubai (excluding DIFC), including virtual currency exchanges, virtual asset venture capital funds, NFT platforms, etc.

ADGM: It is a financial free trade zone with an independent regulatory system, and its Financial Services Regulatory Authority (FSRA) is responsible for regulating businesses that provide virtual asset-related services within ADGM.

Jurisdiction

VARA: The jurisdiction is the Emirate of Dubai (excluding DIFC).

ADGM: The jurisdiction covers the Abu Dhabi Global Market and Al Maryah Island.

Regulation Scope of Virtual Asset Activities

VARA: Regulated virtual asset activities include brokerage services, virtual asset consulting services, exchanges/multilateral trading, virtual asset custody, virtual asset management, investment trading as a principal, and also include NFT-related activities.

ADGM: Regulated virtual asset activities include brokerage services, virtual asset consulting services, exchanges/multi-lateral trading, virtual asset custody, virtual asset management, and investment trading as an agent, but NFT-related activities are not within the regulatory scope.

Application Conditions and Requirements

Company Registration: VARA requires the applicant company to be registered in the mainland area of Dubai or any free trade zone in Dubai (except DIFC); ADGM requires the applicant company to be registered in the Abu Dhabi Global Market.

Office Space: A physical office is required, and shared desks are not accepted. Generally, VARA requires at least one desk for every two visas; ADGM generally requires at least one desk for every three visas.

Regulatory Capital: VARA's regulatory capital requirements range from $11,000 to $27,000, with a maximum of $408,000, or 15%/25% of fixed annual expenses, depending on the type of virtual asset activity; ADGM has an operating expense (opex) cycle of 6 to 12 months based on the type of activity.

Application Process and Time

VARA: The application process includes preparing a compliance business plan, having an initial meeting with VARA, submitting materials as required, reviewing materials, making operational adjustments based on conditions, conducting a second review, and issuing a license. The time required to obtain a business license generally takes 4-8 months. Document list: Overview of virtual asset services, KYC documents for company directors and shareholders, financial forecasts, and other regulatory documents required by VARA.

ADGM: The application process includes conducting due diligence and discussions with the FSRA team, submitting a formal application, obtaining in-principle approval, obtaining final approval, and conducting "operational launch" testing, etc. The application time is generally around 6 months. Document list: Virtual asset service business plan, KYC documents for company directors, shareholders, and other key personnel, financial forecasts, and other regulatory documents required by ADGM.

Required Fees

VARA: Application fees range from $11,000 to $27,000, and ongoing supervision fees vary by activity, ranging from $22,000 to $55,000.

ADGM: The application fee ranges from $20,000 to $125,000, and the ongoing supervision fee varies between $15,000 and $60,000 depending on the activities.