The UAE is becoming one of the most attractive jurisdictions for launching a crypto project. In this article, we will discuss the key aspects of regulation, taxation, as well as the types of available licenses for virtual asset service providers (VASPs). We talked to Mark Gofaizen, Senior Partner at the consulting firm Gofaizen & Sherle, which specializes in crypto law and business development, about why Dubai is becoming a new point of attraction on the crypto market map.

A new center of attraction for the crypto business

Over the past two years, pressure from authorities on the crypto business in the US and EU has noticeably intensified. As a result, the number of companies operating in this industry has predictably decreased. This can be seen clearly on an example of Estonia, which once issued the first VASP license, but significantly tightened its regulations in 2020. If around 400 VASPs were operating in the country in 2020, by 2022 there were just about 100 left (and nowadays most of those licenses are still under the regulatory review awaiting an approval). 

As further evidence of this trend, in October 2022, the European Council approved the Markets in Crypto-Assets (MiCA) regulation project. MiCA is a single set of regulations for the crypto sphere throughout the EU. It will affect all companies in the European Union. Currently, its provisions are expected to come into effect in 2024. And its key requirements will be similar to current requirements in Estonia, namely:

• white paper
• local employees (AML Officer, Local Director, etc.)
• sufficient personal funds (separated from clients’ funds)
• share capital requirement (min 150 000 eur)
• reliable IT systems and supporting IT documents etc.

Jurisdiction of choice: why the UAE

The United Arab Emirates (UAE) has become an increasingly popular jurisdiction for crypto projects seeking to diversify their business operations. While European jurisdictions have long been attractive to crypto exchanges and companies, some are now exploring other options in light of new regulations like MiCA.

Since the beginning of 2023, there has been a significant increase in the number of inquiries for obtaining crypto licenses in the UAE, according to Gofaizen & Sherle. Clients are interested in the regulation, taxation, and types of licenses available in the country.

The UAE has taken steps to position itself as an international hub for virtual assets by establishing the Virtual Assets Regulatory Authority (VARA). In February 2023, VARA published its regulations on virtual assets and related rules, which provide a comprehensive framework for the regulation of virtual assets based on principles of economic sustainability and cross-border financial security.

VARA’s Regulatory Objectives:

1. To position Dubai as a regional and international hub for Virtual Assets and related services and to develop a digital economy in the city to boost its competitive edge locally and internationally.
2. To empower investors and increase awareness about Virtual Asset services and products and encourage innovation to promote real opportunity.
3. To promote the new world of Virtual Assets and attract investments and businesses to set up their base in the Emirate of Dubai.
4. To promote a shared responsibility in developing efficient and bespoke regulations for the protection of investors and to curb illegal practices in coordination with the concerned entities.
5. To develop the regulations, rules and standards required for regulating, supervising and overseeing Virtual Asset Platforms, Virtual Asset Service Providers and all other matters related to Virtual Assets.

 Key reasons to choose UAE

Some of the key advantages of choosing the UAE as a jurisdiction for a crypto project, include:

1.  Flexible capital requirements. The required share capital can range from 25,150 to 201,400 euros. The fees for obtaining a license can range from 10,100 to 25,150 euros. This allows for flexibility in choosing the type and scope of business operations in the country.
2.  Profitable tax regime. Corporate income tax, as well as tax on dividends, is 0%. All income of individuals from international activities is not taxed. At the same time, there are no currency restrictions and no tax rate on imports and exports. Moreover UAE has 123 double tax treaties. It means the absence of double taxation. 
3.  Stable currency exchange rate. The local currency, the dirham, is pegged to the US dollar, and English is the language of business communication in the country.
4.  No minimum investment requirements. This allows for starting a project with minimal investment.
5.  Support for the crypto and fintech community. The local regulator is supportive of the growth of the fintech and crypto industries, which provides networking opportunities. The fintech industry in the UAE is growing rapidly, creating significant opportunities for businesses.

What licenses are available in the UAE

In the UAE, companies can obtain two types of crypto licenses: Restricted Crypto Asset License and Financial Services License offered by VARA. You can learn more about it at our website.

Restricted Crypto Asset Licenses are for companies that deal with digital assets that do not meet the requirements for a Financial Services License. This license is for firms that do not offer custodial services or hold client assets. It is a straightforward process and is typically issued within a few weeks. 

There are five types of Restricted Crypto Asset Licenses:

• Proprietary Trading in Crypto-commodities
• Distributed Ledger Technology Services
• NFT’s E-Marketplace Provider
• Metaverse Service Provider
• Proprietary Crypto Mining

Each type of license has specific limitations on the activities that companies can engage in. For example, firms with Metaverse Service Provider licenses cannot issue tokens traded on exchanges or trade in crypto commodities. It’s important to consider the restrictions when choosing the appropriate license for your business.

Despite their limited functionality, these licenses are suitable for projects with a limited budget, and the process of obtaining them is very simple and fast. Currently, these licenses are available in the IFZA free zone and the DMCC free trade zone in Dubai. They differ in capital requirements, company structure, and the time required to obtain a license. The process of obtaining a license in the DMCC free zone is more complex and time-consuming, but the level of reputation for such a project will be significantly higher.

To obtain a license in DMCC, you need to pay a share capital of at least 50,000 Dirhams or 12,750 euros, confirm the director’s qualifications in crypto and fintech, meet KYC and AML policies, provide evidence of the origin of funds, present the company structure, and forecast its future profits. The entire process takes up to 12 weeks.

For IFZA, there are no specific requirements for minimum capital amount or previous crypto/financial experience of the director, but they still need to meet industry conditions such as KYC and AML policies, protecting customer data, complying with anti-money laundering requirements, and confirming the origin of funds. The period for obtaining a license in IFZA is up to nine weeks.

VARA’s Financial Services Licenses offer more opportunities for conducting business, but their cost is higher and the process of obtaining all necessary documents takes longer. There are seven types of Financial Services Licenses offered by VARA, including: Advisory Services, Broker-Dealer Services, Custody Services, Exchange Services, Lending and Borrowing Services, Payments and Remittances Services, and Virtual Asset Management and Investment services. Obtaining a Financial Services License empowers the business to furnish a complete suite of crypto services, presenting greater prospects for expansion.

The UAE is becoming a key player in the crypto market thanks to its economic policies and lenient regulation. We expect the fintech and crypto market in the UAE to grow several times in the coming years, particularly in light of the tightening of regulation in the EU and the need for many companies to find a friendly jurisdiction. At present, the UAE has an open-door policy towards crypto projects, offering a comfortable tax regime and access to key infrastructure.