UAE Encryption Regulation: An Analysis of the Differences Between Abu Dhabi and Dubai

The UAE has become one of the important centers for global cryptocurrency and blockchain innovation, thanks to its advantageous geographical location, clear support for encryption policies, and favorable tax policies. It is noteworthy that there are regional differences in the regulation of virtual assets in the UAE, primarily reflected in the different characteristics and positioning of the Abu Dhabi Global Market (ADGM) and the Dubai Virtual Assets Regulatory Authority (VARA). Therefore, when analyzing the virtual asset licensing system in the UAE, it is essential to distinguish between the two main jurisdictions of Abu Dhabi and Dubai.

This article will delve into the key contents and differences in compliance regulation between Abu Dhabi and Dubai. By understanding the regulatory requirements and differences in both places, practitioners in the encryption industry can conduct their business more effectively, ensure legal compliance, and thereby promote the healthy development of the entire encryption industry.

Regulatory Overview of Abu Dhabi and Dubai

Abu Dhabi

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

The FSRA regulates virtual assets as a specific asset class within the financial industry. Therefore, the scope of the encryption asset licenses it issues is relatively limited, lacking the specialized customized regulatory framework seen in Dubai's VARA. The application process typically takes six to seven months, with strict compliance requirements for the applicants, adhering to the licensing standards of traditional financial institutions. This creates a higher barrier to entry for exchanges with a technical background, while traditional financial institutions have more advantages in transitioning to conduct encryption business.

Dubai

The virtual asset licensing in Dubai is divided into two major systems:

1. Dubai International Financial Centre (DIFC): As a financial free trade zone, its regulatory model is similar to that of ADGM. The independent regulatory authority, Dubai Financial Services Authority (DFSA), classifies virtual assets as tokenized assets regulated under financial instruments. The application period is approximately seven to eight months, primarily targeting large institutions with financial qualifications. At the same time, DIFC offers a special channel for "innovation licenses," allowing pure technology development companies (not involving customer fund custody or financial transactions) to be approved in about three months.

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

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

Main Differences between VARA and ADGM

Institutional Nature and Positioning

• VARA: The government authority established by the Dubai government to specifically regulate virtual assets, responsible for overseeing the virtual asset industry in Dubai (excluding DIFC), including virtual currency exchanges, virtual asset venture capital funds, NFT platforms, etc.

• ADGM: Abu Dhabi Global Market, a financial free trade zone with an independent regulatory system, where the Financial Services Regulatory Authority (FSRA) is responsible for regulating companies providing virtual asset-related services within ADGM.

jurisdiction

• VARA: Jurisdiction over the Emirate of Dubai (excluding DIFC).
• ADGM: Jurisdiction over Abu Dhabi Global Market and Al Maryah Island.

Scope of regulation for virtual asset activities

• VARA: The regulatory scope includes brokerage services, virtual asset consulting services, exchanges/multilateral trading, virtual asset custody, virtual asset management, investment trading as an agent, and NFT-related activities.

• ADGM: The regulatory scope includes brokerage services, virtual asset consulting services, exchanges/multilateral trading, virtual asset custody, virtual asset management, investment trading as an agent, etc., but excludes NFT-related activities.

application conditions and requirements

1. Company Registration:

   • VARA requires the applying company to register in mainland Dubai or any free trade zone in Dubai (excluding DIFC).
   • ADGM requires the applicant company to be registered in the Abu Dhabi Global Market.

2. Office Space: Both require a physical office and do not accept shared desks.

   • VARA generally requires at least one desk for every two visas.
   • ADGM generally requires at least one desk for every three visas.

3. 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 activities.
   • ADGM requires the operational expense (OPEX) cycle to be between 6 to 12 months, depending on the type of activity.

application process and time

1. VARA:

   • The application process includes preparing a compliant business plan, having an initial meeting with VARA, submitting materials, reviewing materials, making operational adjustments, undergoing a second review, and issuing the license.
   • The time required to obtain a business license is generally 4-8 months.
   • Required documents include an overview of virtual asset services, KYC documents for company directors and shareholders, financial forecasts, etc.

2. ADGM:

   • The application process includes due diligence and discussions with the FSRA team, submitting a formal application, obtaining in-principle approval, obtaining final approval, conducting "operational launch" testing, etc.
   • The application period is generally around 6 months.
   • The required documents include a business plan for virtual asset services, KYC documents for company directors, shareholders, and other key personnel, financial projections, etc.

required fee

1. VARA:

   • The application fee ranges from $11,000 to $27,000.
   • The ongoing supervision fees vary between $22,000 and $55,000 depending on the activity.

2. ADGM:

   • The application fee ranges from $20,000 to $125,000.
   • Ongoing supervision fees vary by activity, ranging from $15,000 to $60,000.

By understanding the differences in virtual asset regulation between Abu Dhabi and Dubai, professionals in the encryption industry can choose the most suitable regulatory environment based on their business needs and characteristics, better conduct compliant operations, and promote the healthy development of the industry.