UAE and EU Approaches
The digital asset market in the United Arab Emirates (UAE) stands out due to its regulatory framework, managed by the Virtual Assets Regulatory Authority (VARA) in Dubai and the Financial Services Regulatory Authority (FSRA) in Abu Dhabi. Both bodies prioritize retail investor protection, compelling Virtual Asset Service Providers (VASPs) to comply with stringent operational standards comparable to those in traditional finance.
Since 2018, the FSRA, and more recently VARA since early-2023, have enforced rigorous standards that require significant manpower and technical investments, posing compliance challenges for many entities.
European VASPs looking to operate in the UAE encounter a unique regulatory landscape. The current European regulatory regime is fragmented, focusing primarily on anti-money laundering (AML) requirements. This leaves out crucial elements such as board and senior management governance, market conduct, client asset segregation, risk management, outsourcing arrangements, operational financial requirements, and IT and cybersecurity standards.
MiCA: A Step Towards Harmonization in the EU
The European Union’s Markets in Crypto-Assets (MiCA) regulation aims to harmonize virtual asset regulations across its 27 member countries. Notably, MiCA’s requirements broadly align with those established by the UAE’s regulators.
| Criteria/Jurisdiction | MiCA | VARA | ADGM |
| Scope | EU-wide for issuers and service providers | Dubai-based virtual asset activities | ADGM jurisdiction for virtual asset activities |
| Application process | Apply to national competent authorities | Submit to VARA | Submit to FSRA of ADGM |
| Documentation | Business plan, governance, IT systems, AML/KYC | Business plan, governance, market conduct, risk management, IT, AML/KYC | Business plan, organizational structure, market conduct, risk management, IT, AML/KYC |
| Capital requirements | Varies by service type | Varies by nature and scale of operations | Varies by service type, including base and additional capital |
In practice, Crypto-Asset Service Providers (CASPs) operating within the EU will need to adhere to these stringent standards. This regulatory shift is expected to be disruptive, reshaping the digital asset market in the EU. While some CASPs may struggle to meet these new requirements and might exit the market, the sector is anticipated to become more robust. This will likely attract new players, including those from the banking sector or other regions who are better prepared to seize the opportunity and gain market share.
Preparing for the Future
Since the publication of VARA’s regulatory regime, Dubai has seen a surge of businesses seeking regulation. Over time, however, less prepared and less structured operators have been gradually exiting the UAE market. A similar trend is expected in the EU following the implementation of MiCA.
VASPs and CASPs should use this transition period to adopt the necessary operational frameworks as exemplified by the UAE’s regulations. By doing so, they can ensure they remain competitive and compliant in this evolving regulatory landscape.
Conclusion
The regulatory evolution in both the UAE and the EU represents a significant step towards a more secure and investor-friendly digital asset market. By aligning with stringent operational standards, VASPs and CASPs can build a resilient foundation that supports long-term growth and stability in the digital asset industry.
This proactive approach will not only help in maintaining compliance but also in attracting a broader investor base, thereby contributing to the overall maturity and robustness of the market.
