TL;DR

• Dubai seems to be taking a government-led approach to the cryptocurrency market as it is structurally driven to focus on new growth drivers.

• While other countries' crypto business licenses are limited to performing the functions of a typical exchange, Dubai's license covers a broader range of business models, including margin trading.

• Many companies are aiming to use Dubai as an base entity for international expansion, and are unlikely to aim to actually do business within the city.

From Hong Kong to Singapore, and now, Dubai

As previously shown, Hong Kong's restrictions on the digital asset market under China's influence starkly contrasted with Singapore's stance. Singapore swiftly opened its doors and attracted numerous digital asset companies through rapid regulatory measures. However, a series of incidents that triggered the crypto winter in 2022 led Singapore's regulatory authorities to reassess the situation. From then, they have switched gears by implementing strong measures such as including digital asset companies on watchlists, and even prohibiting digital asset staking and lending services for retail investors. Consequently, many companies started seeking other hubs, leading them to a newly emergent, proactive player in the field of digital assets and blockchain: Dubai.

 

Government policy history: Government-led development of the virtual asset market

Dubai's focus on the digital asset market seems to be government-driven, primarily by its structural need to discover new growth engines. The United Arab Emirates, which Dubai is a part of, is composed of seven Emirates, or kingdoms ruled by monarchs. The role of the federal government is limited to certain areas, such as military and diplomatic affairs, with most powers being exercised autonomously by each Emirate. Hence, despite being part of the UAE, Dubai finds itself in a competitive relationship with other Emirates such as Abu Dhabi. Unlike other Emirates, Dubai has little oil left, necessitating the constant search for competitive growth engines. Thus, the Dubai government appears to have pinpointed blockchain technology and the digital asset market as its next growth engine.

In fact, in 2022, the Crown Prince of Dubai announced plans to make Dubai one of the top 10 'Metaverse Economies' in the world, which included attracting more than 1,000 blockchain and Metaverse companies. Hence, Dubai has been very friendly to the potentially burgeoning blockchain market. As a result, many companies seem to be shifting their bases from Singapore to Dubai. For instance, Binance practically has its headquarters in Dubai, and others like FTX and Crypto.com also consider Dubai their home base.

VASP license requirements: Easy, yet difficult

In Dubai, the Dubai Virtual Assets Law (DVAL) and the Dubai Virtual Assets Regulatory Authority (VARA), which is based on DVAL, are in place. VARA issues licenses to virtual asset service providers based on DVAL and carries out post-issuance supervision. The peculiar point about the virtual asset business licenses issued by VARA is that they require different application fees, license renewal fees, and annual supervision costs, depending on the business model. This ease of obtaining licenses, combined with proactive governmental support, is why many companies are moving their bases to Dubai.

There are four stages of approval in order to launch a business: 1) Temporary Approval, 2) Preliminary Approval, 3) Minimum Viable Product (MVP) Approval, and 4) Full Market Product (FMP) Approval. Currently, the criteria for FMP approval have been announced, and this article has been written focusing on the last stage.

Minimum capital requirements

The minimum paid-in capital requirement is determined based on the business model, but there should be a minimum amount of 100,000 dirhams. Depending on the business activity, whichever is higher between 500,000 dirhams or 15% of the annual fixed overheads also needs to be reserved as funds. There are additional requirements such as maintaining 1.2 times the monthly operating costs or securing necessary insurances.

Board of directors

There must be a board consisting of top executives equipped with the relevant technical knowledge and expertise. These board members must obtain VARA approval to ensure they meet qualifications as stipulated by law. The board is also obliged to disclose all necessary information to shareholders and stakeholders of the VASP (Virtual Asset Service Provider) to provide a comprehensive understanding of its overall performance and financial state.

Roles and responsibilities

In addition to the board, two adequately responsible personnel are to be assigned to ensure compliance with all legal and regulatory obligations. These individuals must meet specific criteria, including being full-time employees of the company, Emirati nationals, and have VARA approval.

Token listing standards

While there are no definitive criteria for reviewing all tokens, standards including liquidity and certification from recognized institutions must be established and disclosed. While VARA token approval is not mandatory, it is viewed as a vital step in business operations.

Evaulation of trading qualifications

Sufficient knowledge and experience in investing in virtual assets and sufficient awareness of risk is required, but not required.

Summary of main points

Unlike other countries where the qualifications of exchanges simply allow them to function, Dubai's regulations encompass a broad range of business models including margin trading. However, the approval process seems tricky as there have been no firms so far that have obtained final FMT approval, with significant platforms such as Binance, Bybit, and OKEX only receiving MVP approval. The main reason companies have not yet received approval is not due to failure in meeting license requirements, but the time-consuming approval process of the Dubai government. Although the license requirements are not difficult, VARA's approval process is complex, and there are a lot of extra requirements, making a close relationship with the Dubai government increasingly important.

Substantial tax benefits & exemptions

Key areas where innovative companies gather are the Dubai Multi Commodities Centre (DMCC) or Dubai International Financial Centre (DIFC), which offer benefits such as no income or corporate tax until 2054. Remarkable benefits also exist for foreign financial corporations, such as exemption from taxes on transfers and imports and exports for 50 years from the time of settlement. Still, the decision by the UAE Ministry of Finance to impose a federal corporate tax on companies located domestically from June 1, 2023, should be noted when deciding on future business directions.

 

So where are the businesses?

Despite these benefits, the question remains - are businesses actually operating in Dubai? Given the high proportion of foreign workers in Dubai, the labor population ratio leans heavily towards foreigners. It is a nation where simple virtual asset business models, such as "remittances", occur frequently. Government support and various business regulations create a conducive environment for running a business. Yet, no visible success of blockchain-related businesses in Dubai or the UAE is apparent. Most companies seem to be expanding abroad with a base in Dubai, rather than specifically targeting business within Dubai. Therefore, companies looking to set up an office there are more focused on tax benefits and corporate tax savings rather than doing business in Dubai itself.