UAE Encryption Regulatory Analysis: A Comparison of Abu Dhabi and Dubai

Thanks to its advantageous geographical location, government policy support, and friendly tax environment, the UAE has become one of the important centers for global encryption and blockchain innovation. It is worth noting that the UAE's virtual asset regulatory framework is primarily composed of two major jurisdictions: Abu Dhabi and Dubai. These two regions each have their own characteristics in terms of regulation, and this article will delve into the key contents and differences in their compliance regulation.

Regulatory Overview of Abu Dhabi and Dubai

Abu Dhabi

Abu Dhabi Global Market (ADGM), as an international financial center, was established to support the economic development strategy of the region. The independent regulatory authority of ADGM is the Financial Services Regulatory Authority (FSRA), which is responsible for formulating and enforcing specific regulations for encryption assets.

The FSRA regulates virtual assets as a specific asset class within the financial industry. Therefore, the scope of the encryption asset licenses issued is relatively limited and lacks a specialized regulatory framework. The application process typically takes six to seven months, and the compliance requirements for the applicant are quite strict, following the licensing standards of traditional financial institutions. This creates a high barrier to entry for exchanges with a technological background, while traditional financial institutions are more adaptable in transitioning to conduct encryption business.

Dubai

The virtual asset licensing system in Dubai is divided into two main categories:

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 of DIFC is the Dubai Financial Services Authority (DFSA). The DFSA regulates virtual assets by classifying them as tokenized assets within financial instruments, with an application cycle of about seven to eight months, primarily aimed at large institutions with financial qualifications. At the same time, the DFSA also offers a special channel for an "innovation license," which allows purely technical development companies (not involving client fund custody or financial transactions) to be approved in about three months.

2. Virtual Assets Regulatory Authority (VARA): This is a regulatory body established by the Dubai government that does not directly issue business licenses but overlays virtual asset operating licenses on existing company licenses. Its regulatory scope covers mainland businesses and free zone companies in Dubai (excluding DIFC), and it authorizes 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 ICOs in the UAE may need to obtain approval from the SCA.

Main Differences Between VARA and ADGM

Institutional Nature and Positioning

VARA is a 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, and more.

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

jurisdiction

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

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

Regulation scope of virtual asset activities

Virtual asset activities regulated by VARA include brokerage services, virtual asset consulting services, exchanges/multilateral trading, virtual asset custody, virtual asset management, investment trading as an agent, as well as NFT-related activities.

Virtual asset activities regulated by ADGM include brokerage services, virtual asset consulting services, exchanges/multilateral 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

1. Company Registration:

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

2. Office space: Both locations require a physical office and do not accept shared desks. Typically, VARA requires at least one desk for every two visas; ADGM typically requires at least one desk for every three visas.

3. Regulatory Capital:

   • The regulatory capital requirements of VARA 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 depending on the type of activity.

application process and time

The application process for VARA includes preparing a compliant business plan, conducting an initial meeting with VARA, submitting materials as required, reviewing materials, making operational adjustments based on conditions, undergoing a second review, and issuing the license. The time required to obtain a business license generally takes 4-8 months.

The application process for ADGM includes due diligence and discussions with the FSRA team, submitting a formal application, obtaining in-principle approval, receiving final approval, and conducting "operational launch" testing, with an application period generally around 6 months.

required fee

The application fee for VARA ranges from $11,000 to $27,000, while the ongoing supervision fees vary depending on the activity, ranging from $22,000 to $55,000.

The application fee for ADGM ranges from $20,000 to $125,000, and the ongoing supervision fee varies depending on the activity, ranging from $15,000 to $60,000.

By understanding the regulatory requirements and differences between Abu Dhabi and Dubai, encryption practitioners can better plan and conduct their business, ensuring legal and compliant operations, and promoting the healthy development of the entire encryption industry.