UAE: SCA and VARA Cooperation Agreement

On September 5, 2024, the Securities and Commodities Authority (SCA) and Dubai's Virtual Assets Regulatory Authority (VARA) signed a cooperation agreement that modifies the licensing and supervision processes for virtual asset service providers (VASPs) in the UAE. VASPS operating in Dubai can now serve the entire UAE by acquiring a license from VARA and automatically being registered with the SCA.

Key Provisions of the Agreement:

Licensing Structure

Under the new agreement, Virtual Asset Service Providers (VASPs) operating in or from the Emirate of Dubai, or those intending to service Dubai, are required to obtain a license from VARA. Once licensed by VARA, these entities can be registered by default with the SCA, allowing them to operate in the wider UAE. However, VASPs wishing to operate in Emirates other than Dubai must obtain their license directly from the SCA. This structure creates a streamlined process for Dubai-based operations while maintaining the SCA's oversight across the rest of the UAE.

Collaborative Supervision

The agreement establishes mechanisms for mutual supervision of VASPs by both SCA and VARA. It outlines procedures for coordinated imposition of penalties and fines. Provisions are made for the exchange of information and statistics between the authorities. The agreement includes plans for cooperation in employee training and qualification.

Previous Regulatory Landscape

Prior to this agreement, the UAE's virtual asset regulation was more fragmented and the boundaries of regulatory authority were less clear. Initially, there was significant overlap between the jurisdictions of the Securities and Commodities Authority (SCA) and VARA, with both appearing to have authority over virtual assets in Dubai.

The SCA had passed Decision No. 23 of 2020 Concerning Crypto Assets Activities Regulation, which regulated the offering, issuing, listing, and trading of crypto assets. In Dubai, VARA was established by Law No. 4 of 2022, and subsequently published its Virtual Assets and Related Activities Regulations in February 2023, along with associated rulebooks forming the Virtual Asset Framework. This framework provided detailed regulations for various virtual asset activities, including advisory services, broker-dealer services, custody services, and exchange services.

The regulatory overlap was partially addressed by Cabinet Decision No. 111 of 2022, which confirmed that overall federal authority rests with the SCA, with the power to delegate this authority. This decision helped to clarify the roles of the SCA and VARA, paving the way for the current cooperation agreement.

This new agreement between the SCA and VARA further clarifies and formalizes the division of responsibilities, creating a more coherent and navigable regulatory environment for VASPs and investors. It establishes clear boundaries of authority, with VARA taking the lead in Dubai and the SCA overseeing operations in other Emirates, while also providing a mechanism for collaboration between the two regulators.

‍

Roles of Regulatory Bodies

Securities and Commodities Authority (SCA):

Maintains its role as the overarching federal regulator for virtual assets in the UAE.

Responsible for licensing VASPs operating outside of Dubai.

Collaborates with VARA on supervision and regulatory matters.

Continues to issue directives and facilitate inquiries relating to the licensing regime.

Virtual Assets Regulatory Authority (VARA):

Continues as the specialized regulator for virtual assets in Dubai.

Issues licenses for VASPs operating in or from Dubai.

Works in conjunction with the SCA to ensure comprehensive regulatory coverage.

Maintains its role in developing policies and strategic plans for virtual asset services in Dubai.

‍

Financial Free Zones (DIFC and ADGM)

The Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) remain unaffected by the new cooperation agreement between the SCA and VARA. As stipulated in Article 3 of UAE Cabinet Decision No. 111/2022 and Article 3 of Dubai Law. No. 4 of 2022, these financial free zones are exempt from the regulatory oversight of both the SCA and VARA in matters relating to virtual assets. The DIFC and ADGM continue to operate under their own independent regulatory frameworks for virtual asset activities, maintaining their existing licensing and supervision rules separate from this new collaborative arrangement between the SCA and VARA. Therefore, if virtual asset service providers want to operate in such internationally esteemed financial freezones, they have to comply with laws and license requirements of DIFC and ADGM respectively.

‍

Conclusion

This cooperation agreement between the SCA and VARA represents a significant development in the UAE's virtual asset regulatory landscape. By harmonizing licensing processes and enhancing collaborative supervision, it aims to create a more cohesive and efficient regulatory environment. This development aligns with the UAE's broader economic objectives and its ambition to establish and maintain itself as a leading jurisdiction for virtual asset activities, while maintaining robust investor protections and market integrity.

As the UAE's virtual asset regulatory landscape evolves, Pontinova Law, a boutique law firm specialized in fintech with offices in UAE and Switzerland is well-positioned to assist clients in navigating these changes.