VARA: Dubai Deep Dive – Regulation, Oversight, and Open For Business

[00:00] Introduction

[0:13] Paul Hearns: Hello and welcome to the latest edition of the Blockchain Leaders Insights podcast series from Blockchain Ireland. My name is Paul Hearns, I’m co-lead of the Events and Comms Working Group and I’m joined this morning by Paul Boots, Senior Director, Head of Sector Development at VARA, the Virtual Asset Regulatory Authority in the United Arab Emirates. Welcome Paul.

[0:35] Paul Boots: Thank you, it’s great to be here.

[0:36] Paul Hearns: And here with me also is my colleague from Blockchain Ireland, Pearse Ryan, Head of the Legal and Regulatory Working Group. Paul, we’re here to talk about the regulatory environment in UAE and the Middle East more broadly, to do a little bit of compare and contrast with the European experience and here in Ireland generally. But just to start with, tell us a little bit about your background, how you came to your current role.

[1:04] Paul Boots: Sure. So I’ve been in Dubai now for 17 years, and I’ve been very privileged to be able to work on several projects within different industries. On putting Dubai on the map that started off way back in the day with the diamond industry that evolved to kind of gold and other commodities. We did some trade finance initiatives on behalf of one of the free zones there. I did some consulting. I was part of a one of the first fintech startups in Dubai, a company that was focused on peer-to-peer lending, and over the years I’ve done kind of some consulting work for some of the large UAE entities and helping them kind of with strategy and the last five years I’ve been working with the investment corporation of Dubai which is the sovereign wealth fund there again working on a very large initiative to bring certain industries to Dubai and it’s been a really amazing journey, up until also very recently when I when I received a phone call from the team at Vara and they were telling me about the exciting projects that they have going and they’ve asked me to you know help with developing the sector. So on the on the regulatory side you know VARA was set up as a as a regulator but also was set up to help drive the industry from Dubai and regulation is a very important part of that but it’s also around kind of developing the wider ecosystem.

[2:24] Paul Hearns: Very good. So that’s the next question then tell us a little bit about VARA specifically and it’s its mandate but also maybe it’s sort of approach you know, how they like to do things.

[2:35] Paul Boots: VARA was, set up specifically to regulate the virtual asset industry and that’s quite unique in the world because in other jurisdictions it’s traditional regulators of traditional finance who are looking after virtual assets as well. So they’ve had to adapt their own regulation to fit this new innovative industry and that comes sometimes with difficulties not to say that we don’t have difficulties in in regulating and coming up and being continuing to be innovative but we’ve been able to start this regulatory framework from scratch and really build it in a way that’s robust yet flexible and open to innovation for the industry, while still maintaining protection of investors and all the other important areas that a regulator of course needs to look at.

[3:23] Paul Hearns: And that is that critical balance really, isn’t it? It’s having the assurance of regulation but not getting in the way of innovation. And UAE’s position geographically means it’s something of a middle ground anyway between sort of east and west and things. So how has that sort of played out in terms of the virtual asset space specifically?

[3:46] Paul Boots: Well that comes down to you know the other part of your question around our approach right. Dubai throughout its history has been able to adapt to upcoming trends, has been able to build an infrastructure with government support that helps companies thrive. You know it started as a trade hub and trade continues and trade is international and this is where Dubai thrives. The infrastructure that we have with you know Emirates airlines with the airport that connects to you know the entire world mostly in direct flights. You know it’s also the road infrastructure, the tax infrastructure so Dubai in itself has a very business friendly mindset. That business-friendly mindset has also translated into VARA. That doesn’t mean that we don’t take our role as a regulator extremely serious. But the way that we do that is with a very business-friendly mindset of, for instance, as an example, having face-to-face meetings with companies that are starting the process of licensing. We are very open to speaking with companies and answering their questions around the process and supporting them where they need. We have a lot of companies, of course, that are coming to Dubai for the first time. They need sometimes a little bit of guidance as well on where to go and where to set up their company, how to get banking facilities, how to get insurance. And VARA is very much focused on also supporting the entities in those areas. So we work very closely with the different free zones that are in Dubai. We work very closely with the wider ecosystem of service providers. And we feel that is also part of our mandate to make sure that the ecosystem and the infrastructure that’s in Dubai is fit for purpose for the virtual asset industry.

[5:30] Paul Hearns: Very good. Well, that kind of leads on to the next question. This industry, even more than other areas of technology, is moving at a hugely accelerated pace. So how has VARA evolved from its beginnings and particularly in that environment that is business friendly but has so many influences internationally?

[5:52] Paul Boots: Yeah. So we initially, of course, had to deal with a market that already had companies operating. So when VARA was set up, you know, and this is now three years ago and we’re still, you know, quite young as an entity. But at the time we were set up, there were about a thousand entities operating in the UAE or in Dubai that were doing something with virtual assets. Some of it was needed to be regulated. Some of it, you know, did not need regulation, but still needed to maybe register or needed other support. So the initial focus was, of course, for VARA to create a regulatory framework. To implement that regulatory framework and to start licensing entities and to make sure that any entities that are in the market understand the requirements that we have as a regulator the obligations that they have as companies operating in this industry. So that was the initial focus. Now we’re at a stage where we’ve started to license a number of VASP’s already. You know we are now more also in a supervision phase where our teams are monitoring what the license VASP’s are doing. We are continuing still with a lot of applications that are coming in, but we’re also focusing more and more outward. So part of the reason why I’m here today as well is to understand what the Irish market is doing and how we can support Irish businesses from Dubai as well.

[7:14] Paul Hearns: Very good. Well, Piers, you’re here this morning in a couple of guises, I suppose, as a startup founder in the space with other insights, so.

[7:24] Pearse Ryan: Yes, indeed. Thank you very much, Paul. Yeah, I have a couple of hats that I wear, one of which is as a lawyer, the other is a co-founder, a would-be entrepreneur, and the other is that I chair the Legal and Regulatory Working Group of Blockchain Ireland. So I’m very interested to hear what Paul has to say and has said, because we were at some meetings with him yesterday, and they were very enlightening in relation to what VARA is about and looking to be about and how it will grow and fulfil its mandate. And that was very interesting. Thank you, Paul. Let’s go on and talk a little bit about virtual assets in particular and Dubai and the broader UEA. Paul, talk to us a little bit about the current state of the virtual or crypto asset, it doesn’t matter how we describe it, market sector in Dubai and the broader UAE.

[8:08] Paul Boots: Yeah, so it’s a very fast growing ecosystem. We have a lot of entities that are coming to Dubai to serve the market there. And also just to clarify, so VARA is the regulatory authority for Dubai, excluding the financial free zone in Dubai, DIFC. So, in the wider UAE, there are other regulators, including the Securities and Commodities Authority, ESCA. But also, for instance, Central Bank may get involved in some elements of the industry. But for Dubai, it’s VARA who looks after the industry from a regulatory point of view. Now, the Dubai market itself is growing very fast. And we are attracting very large international firms, exchanges, broker-dealers, and so on. And why that has been, we feel, is that our regulatory framework is focused on activity rather than product or technology. So what does that mean? Well, for exchanges, that means that, for instance, we don’t maintain a white or black list of certain coins that can or cannot be traded. We, from a regulatory point of view, look after the exchange as an activity and we license the exchange and their processes, including, of course, the processes that they use in order to approve listings and so on. So our adaptable framework, in a way, from that point of view, has allowed these entities to thrive and to service the investor base in Dubai without stifling their business.

[9:43] Pearse Ryan: Yeah. I think we can observe that in fairness to the EU Commission and the relevant national competent authorities, it has tried. They are trying to be flexible in this area, but they are rather hamstrung by, decades of policies and procedures and rules and regulations. To be able to start from scratch in a new area is hugely enabling. And I think anyone in Europe would recognize that and be a little bit envious, perhaps.

[10:10] Paul Hearns: But it must be quite a dynamic environment then as well, because as a regulator for Dubai specifically, in the environment of a central bank and other authorities that may have overlap, It must be quite a juggle as well.

[10:27] Paul Boots: Yeah, but we work very closely with them, right? So in the end, it is still a comprehensive approach from the entire UAE and all of its regulators to make sure that we become a great destination for the industry. And I always look at it in a way of providing choice to companies. Whatever is best for your entity, wherever you want to get set up in the UAE, that will be a good home for you. And different free zones, different areas, different cities even within the UAE or Emirates have different value propositions. And that goes all the way from entities who are looking for a very high-end office space that really kind of wows their customers to entities that actually are more cost-conscious and are looking at a much more cost-effective value proposition. For anyone, there is a place.

[11:21] Pearse Ryan: Maybe delve into that a little bit. Just talk to us for a few moments on what makes UAE generally, and Dubai in particular, an attractive establishment destination for a crypto virtual asset business. I mean, it’s not the population numbers. It must be something else. You know.

[11:38] Paul Boots: Well, so we talked about business-friendly environment. Now, that means also, for instance, there’s a lot of government support. There is great infrastructure, right? Offices, road infrastructure, housing, all the way down to a great tax infrastructure, right? There is very low corporate taxes. There is no personal income tax. So that also helps to attract great talent. That combined with some of the other elements of our connectivity and our location, it makes it a great place to be for large global entities, indeed, not only to serve the local market, but also to use it as a hub to serve that side of the world. And that’s always been a very important part for us, is to say, yes, we are looking after Dubai, but also we’re looking after entities that have a global mandate, and we want to make sure that we give them the best possible environment to do that. And that includes, you know, all of the other infrastructure that’s in Dubai, including banking, but also schools for children. You know, a lot of CEOs and founders move their families to Dubai. So the infrastructure that’s there also needs to be catered to that.

[12:45] Pearse Ryan: Those intangibles are vital, absolutely vital in terms of attracting investment.

[12:51] Paul Boots: And talent, right? The other thing is, you know, it’s okay to attract companies, but if you then cannot attract the right kind of talent for your business, you’re still not going to thrive. So, you know, we have a lot of initiatives where we look to, you know, attract talent, to educate more talent. And these are initiatives that are kind of around the entire emirate. And that’s multiple entities that are working together to do this.

[13:14] Pearse Ryan: So we’ve spoken really about Dubai in particular, their attractiveness as a global hub for business and attractiveness as somewhere to establish in general, and then in particular in relation to virtual assets. So maybe just take a slight detour and just ask the question, how, generally speaking, does the Dubai regulatory framework differ from the European MECAR? Not to get into too much detail, but just at a reasonably high level.

[13:42] Paul Boots: Yeah, look, you’ll see a lot of similarities as well, right? When we were developing the regulatory framework, obviously, we also looked around the world what was already in progress, what was already established, and what we could learn from that. One of the biggest differentiators I mentioned earlier as well is really our focus around licensing the activity rather than the technology and that’s created really an environment that attracts companies who want to also look more at innovation, who want to be able to work in a regulatory environment that gives protection to investors that gives comfort you know to the market while at the same time being adaptable enough for their business principles that are constantly changing. We live in a very innovative world at the moment and we as VARA are able to adapt to that quicker. You know a regulator is never going to be on the cutting edge even though the industry is. But as a regulator what we try to do is we try to be as close to the cutting edge as possible and you know I can go into it a little bit the way that we do that is by using regulatory pilots. And regulatory pilots are open to licensed VASPs, who, you know, are already doing activities in Dubai, but who are looking to expand their product offering. And we work very closely with them to put certain guardrails in place for a period of time where they can test the market properly with these products. And we can also understand and make sure that we can adapt our regulatory framework to these innovations that are coming.

[15:17] Pearse Ryan: So that’s part of the question, the broader question being in order to assist and promote, I suppose, and to enable, facilitate innovation. What’s the best model? Is it tech sprints? Is it pilot regimes? Or is it a sandbox? Question. You know, to which there is no single answer. And personally, my company has been in a tech sprint with GFIN, the Global Financial Innovation Network. We’re currently in the European blockchain regulatory sandbox. We’ve not been in a pilot. So perhaps that would be our next step to go to Dubai and do a pilot.

[15:49] Paul Boots: You’re welcome to Dubai.

[15:50] Pearse Ryan: But talk to us. Thank you. Talk to us a little bit about pilots because I think the audience would be very interested in that. They’ll have some familiarity with sandboxes, but pilots, I know there is the EU Commission pilot regime, but it’s not perhaps been quite as successful as it would have been hoped. It’s not terribly flexible. So talk to us a little bit about the pilot regime.

[16:10] Paul Boots: So the pilot regime is really around kind of specific topics, right? So we have a number of pilots running at any time, and we have multiple licensed VASP’s that then participate in those pilots. And these could be on any kind of topics that are happening in the industry. A big discussion at the moment is around real-world asset tokenization. So one could imagine that we would be looking at pilots for specific topics within that. It allows us to work with existing entities and in a real-life environment, rather than in a sandbox which is quite controlled, You know, sandboxes will give you lots of information as well, but we feel by using the pilots, we can get more real-world experience.

[16:55] Pearse Ryan: So the pilot allows, Paul Limited, in conjunction with a local VASP to trade in a controlled environment.

[17:02] Paul Boots: So it allows licensed VASPs to offer or, you know, yeah, to create or offer products in a real-world environment, but with very kind of clearly defined guardrails around.

[17:15] Pearse Ryan: Guardrails. For how long, typically?

[17:18] Paul Boots: It depends. So it depends, and the easier answer is there for as long as it takes for us to get comfortable.

[17:25] Pearse Ryan: So in that case, we’re probably talking six months plus?

[17:29] Paul Boots: Oh no, it can be shorter as well.

[17:30] Pearse Ryan: It can be shorter.

[17:31] Paul Boots: It really depends on the kind of pilot that we’re running, on the products that are there, and the participants in that.

[17:39] Pearse Ryan: Okay, we go back to the broad level. How do you see UAE’s and in particular Dubai’s regulatory approach evolving in the next few years in the area of virtual crypto assets? Is there a clear trajectory or is it more adaptation?

[17:54] Paul Boots: The trajectory is always to kind of continue to fine tune the regulatory framework to make sure that it’s fit for purpose. It’s also to, you know, continuously enhance investor protection measures and education of investors and so on. And a lot of the other elements are going to, be determined by the market. You know, we will continuously work to strengthen the regulatory framework and through the use of pilots, make sure that it’s also up to date. You know, there is always going to be a focus around, you know, anti-money laundering, you know, terrorist financing, like all these kind of elements, the basics, but also to get, you know, deeper and deeper into those and to ensure, you know, global compliance to all the different standards that are there to make sure that Dubai remains its reputation, you know, as a safe market for the industry.

[18:50] Pearse Ryan: So on that point of Dubai reaching out, talk to us a little bit about Dubai’s VARA collaboration with other regulators in the regulator domain and in the policy setting and so on domain. How do you reach out to other regulators?

[19:06] Paul Boots: So while we are in regular contact with regulators on trips like what I’m doing now, right? So I’m here, I’m meeting with the regulators, I’m meeting with the industry here to understand what’s happening. We also attend quite a few conferences and our team speaks at these conferences to meet with the industry. And we encourage and are very open to the dialogue and information sharing, knowledge sharing with the different regulators, both locally, let’s say, within the UAE, where, of course, we have very strong relationships with the regulators, and outside of that, particularly in the growing markets.

[19:44] Pearse Ryan: Yeah. So assume the audience knows, as it were, nothing about the UAE and or its regulatory regime. So if I was to desire to trade in the UAE and I desired to do that out of Dubai and I become regulated, can I trade entirely within the UAE or is it more of a passport regime?

[20:04] Paul Boots: The licensing with VARA is a licensing for Dubai. But VARA has MOUs in place with the other regulators in the UAE to ensure that companies have a wide kind of scope of operations to make sure that when companies come to Dubai as their home base, they can still work within the UAE.

[20:30] Paul Hearns: And just broadly then, talking about organisations such as Blockchain Ireland, the industry does seem to be well supported in terms of advocacy groups and things like that. So how does VARA work with the likes of Blockchain Ireland in your own environment?

[20:48] Paul Boots: Well, we work with entities like Blockchain Ireland and others on information sharing, on getting our ear to the ground within the industry, but also joint initiatives, joint events. We are very keen to meet the local industry, the players that are here, and entities like yourselves are the conduit to that. It’s economies of scale for an entity like ours. We are trying to identify entities that are looking to expand into Dubai. And the easiest way to do that is by going through industry groups, working with them, having joint events, doing these kind of discussions and information sharing, training, trainings potentially that we can do together. There’s lots of ideas and we are open to discussing all of them.

[21:34] Pearse Ryan: I think the audience will take a couple of things from this talk, if you like, this interview. And I think one of the major things they’ll take is that Dubai is open for business and willing to talk, which is, you know, fairly unusual to come from a regulator.

[21:48] Paul Hearns: Indeed. But I think the other thing to highlight is that the audience, The close working with other regulators in other jurisdictions, familiarity with the European regime and the fact that there are open dialogues that organizations who may have gone through a licensing process here will have some familiarity essentially with going to a jurisdiction like Dubai and working there. So that is very reassuring.

[22:24] Pearse Ryan: Because on that point, if I understand correctly, at the moment, you’ve got 25, 26 VASPs?

[22:29] Paul Boots: Correct. That are fully licensed.

[22:31] Pearse Ryan: That are fully licensed.

[22:32] Paul Boots: And many in the pipeline.

[22:34] Pearse Ryan: Yeah. And what’s your feeling? I mean, it’s a dovetail with a question from some minutes ago. A year from now, do you think you’ll be up around the 30 and that kind of incremental growth? Is that what we’re looking at? As opposed to a thousand.

[22:45] Paul Boots: That’s difficult to say. Yeah, yeah, yeah. Because a lot of it actually depends on the submissions that we receive and how quickly kind of gaps are closed by the VASPs and so on. What I can say is that we are growing our team quite quickly because of the demand that we’re seeing. And we are making sure that we have the right people in place to support the VASPs, you know, because you’re not just going through a licensing process. Every entity that’s licensed then, you know, becomes an entity in a supervision process. And we need more and more people to do that as well. So the only way I can explain that part is really by saying our team is growing fast because we have so much demand.

[23:22] Paul Hearns: Obviously, the message that Dubai is open for business and that there is a welcoming regime there is good to hear. So if people here, people in our audience wanted to know more about VARA, how is the best way to engage? How do they follow you? How do they get in contact?

[23:42] Paul Boots: They can find us on our website, which is vara.ae. But also we’re on LinkedIn. We are on Twitter or X. And you can also find, you know, our individual profiles on LinkedIn and please feel free to reach out.

[23:57] Paul Hearns: Very good.

[23:58] Paul Boots: You know, we are always happy to have a discussion. We are always happy to guide people in their decision making around kind of coming to the region or not. And yeah, indeed, as you said, we’re open for business. That doesn’t mean that, you know, our regulatory framework is not set in stone in a way and, you know, and it’s not robust. But it does mean that we have a business friendly approach. We work with the industry to make sure that the regulations are fit for purpose and to make sure that the environment that companies come into when they come to Dubai is ready for them to grow.

[24:34] Pearse Ryan: And that is a feature, I think, what you’re talking about there is a feature in fairness of the virtual crypto asset space. Regulators are willing to… Generally speaking to talk to potential applicants in a somewhat looser way than is traditionally the case. And that’s, I think, a feature of this sector. But it’s a particular feature in relation to this talk of VARA. And it’s very welcome, I think. I think it will be very welcome by viewers and listeners. That willingness to talk is very important.

[25:05] Paul Hearns: Indeed. And as this year for the Blockchain Ireland summit, which is taking place in May, and you can get details on blockchainireland.ie. We’ll hopefully have a representative from VARA there to speak. But as our broad theme for the event is that increasing regulatory frameworks are providing a stability and a base there to hopefully allow the industry to flourish. So it’s good to hear that particular balance that you as a regulator is trying to achieve in facilitating innovation while providing protection. So it’s certainly a good story to hear. Okay, so that sounds like a good place to wrap it up. Paul Booth from VARA, thank you very much.

[25:55] Pearse Ryan: Thank you, sir.

[25:56] Paul Hearns: And Pierce Ryan from Blockchain Ireland.

[25:57] Pearse Ryan: Thanks for that, Paul.

[25:58] Paul Hearns: Thank you as well. So thank you very much, ladies and gentlemen, for joining us. And we’ll hopefully see you for another episode of the Blockchain Leaders Insights from Blockchain Ireland.