The evolution of virtual assets is rapidly reshaping the financial landscape. As innovative new products like fiat-referenced virtual assets (FRVAs) emerge, regulatory frameworks must adapt to promote innovation while protecting consumers. This evolving spectrum of virtual assets requires agile governance which is evidenced by the Virtual Asset Regulatory Authority's (VARA) recent update to its regulatory framework governing fiat-referenced virtual assets (FRVAs), commonly known as stablecoins.
The updated virtual asset issuance rulebook provides much-needed clarity on FRVAs /stablecoins. By categorizing virtual asset issuances and specifying regulatory obligations, VARA strikes a balance between enabling growth and ensuring accountability.
- At the outset, VARA rightly carves out an exclusion for assets pegged to the UAE Dirham, deferring to the Central Bank's authority over domestic currency. This clearly delineates regulatory jurisdiction and empowers VARA to regulate emerging assets, like stablecoins, that warrant oversight.
- Beyond this, the rulebook mandates all commercial virtual asset issuers obtain VARA's approval. This fundamental requirement establishes VARA's supervisory authority, upholding transparency and consumer safeguards.
VARA's risk-based approach requires issuers to obtain prior approval. This proportional oversight establishes VARA's supervision while avoiding undue barriers to responsible innovation. Critically, VARA introduces two categories of issuance with proportional regulatory burdens.
Category 1 covers FRVAs and requires licensing and compliance with mandatory rulebooks governing operations, risk, and conduct. This provides comprehensive oversight of systemically important assets.
Defining Fiat-Referenced Virtual Assets (FRVAs)
“Fiat-Referenced Virtual Assets FRVAs, defined as types of Virtual Assets that purport to maintain a stable value in relation to the value of one or more fiat currencies, but do not have legal tender status in any jurisdiction, as more fully defined in the FRVA Rules. The issuance of any FRVA that purports to maintain a stable value in relation to the value of AED shall not be approved under the VA Issuance Rulebook and the FRVA Rules and shall remain under the sole and exclusive regulatory purview of the CBUAE.”
The FRVA Rules stipulates that any FRVA purporting to maintain stability in relation to the value of the AED (United Arab Emirates Dirham) falls under the exclusive regulatory purview of the Central Bank of the UAE (CBUAE).
Exclusions from FRVAs
It's important to delineate that FRVAs do not encompass the following virtual assets:
- Equity Claim Representations: Virtual assets that represent equity claims in any form.
- Central Bank Digital Currencies (CBDCs): Virtual assets issued by central banks in their capacity as monetary authorities.
- Tokenized Bank Deposits: Virtual assets exclusively used for interbank settlement purposes.
General Requirements for VARA Approval
The comprehensive requirements for VARA (Virtual Asset Regulatory Authority) approval when dealing with FRVAs extend beyond the FRVA Rules and encompass the following rulebooks:
- Company Rulebook
- Compliance and Risk Management Rulebook
- Technology and Information Rulebook
- Market Conduct Rulebook
- VA Issuance Rulebook
VARA may exercise its discretion to impose additional conditions on approvals granted for FRVA issuance by VASPs (Virtual Asset Service Providers). Such conditions include:
- Segregation of business operations related to VA issuances.
- Provision of additional information demonstrating compliance capabilities.
- Modifications to existing regulatory requirements as deemed necessary.
Handling AED as a Reference Currency
In addition to the regulatory framework outlined in Regulation III.A.4, it's essential to emphasize that any virtual asset striving to maintain stability in relation to the AED remains under the sole regulatory jurisdiction of the CBUAE. Entities seeking to issue such virtual assets within the Emirate must adhere to applicable CBUAE regulations.
Prohibited Reference Currencies
VASPs are strictly prohibited from using currencies issued by countries or territories subject to sanctions under Federal AML-CFT Laws as reference currencies.
Designation of Significant FRVA Issuers
VARA holds the authority to designate VASPs licensed to issue FRVAs as Significant FRVA Issuers. This designation is subject to various considerations, including:
- The number of FRVA holders
- Circulating and outstanding supply value of FRVAs
- Value of Reserve Assets maintained by the VASP
- Transaction volume and value in FRVAs
- VASP's involvement in other VA Activities or financial services
- Connections with licensed financial institutions and VASPs
- Business complexity concerning the issued FRVA
VARA may also impose additional rules on Significant FRVA Issuers, covering aspects like corporate governance, capital requirements, audits, and regulatory reporting, as deemed necessary.
Additional Disclosures for FRVA Issuers
White Paper Disclosures
VASPs licensed to issue FRVAs must include comprehensive disclosures in their whitepapers. These disclosures should encompass:
- Types and composition of Reference Currencies
- Provisions for changes in Reference Currencies
- Policies on creation and redemption of FRVAs
- Details about Reserve Assets, including valuation methodology
- Criteria for identifying Reserve Assets
- Custody arrangements for Reserve Assets
- Maintenance of Reserve Assets and compliance with Rule III.B
- Handling of redemption requests and associated risks
- Procedures and timelines for FRVA redemption
- Redemption conditions in relation to Client Agreements
- Risk assessments related to Reserve Asset management
- Any other relevant information as specified by VARA
VASPs issuing FRVAs must regularly disclose specific information on their websites. This information should include:
- The number and value of FRVAs in circulation
- The value and composition of Reserve Assets
These disclosures should align with independent audits as outlined in Rule III.D.1 of the FRVA Rules. They must also confirm whether the FRVA remains fully backed by Reserve Assets.
Maintaining Stable Backing
The additional compliance obligations that FRVA issuers must adhere to, emphasizing the responsibility and diligence required in this evolving landscape are as:
Corresponding Increases and Decreases
VASPs (Virtual Asset Service Providers) licensed to issue FRVAs must ensure a crucial principle: any increase in the circulating supply of the FRVA must be backed by a corresponding increase in the Reserve Assets. Likewise, any decrease in the circulating supply must be matched by a decrease in the Reserve Assets. This principle ensures that the stability of the FRVA is maintained as intended.
Furthermore, VASPs must exercise responsible management when dealing with increases or decreases in Reserve Assets. The goal is to prevent any adverse impact on the market in relation to the Reserve Assets.
Regardless of whether third parties are involved in the creation or redemption of the FRVA, VASPs must consistently comply with these regulations, as outlined in Rulebook.
Reserve Assets Management
A fundamental requirement for FRVA issuers is to hold and maintain sufficient Reserve Assets to ensure that the FRVA is always at least one hundred percent (100%) backed by these assets. This robust backing is vital for maintaining the stability and trustworthiness of the virtual asset.
Reserve Assets must be exclusively denominated in the Reference Currency(ies). This includes cash or cash equivalents such as central bank reserve deposits, bank deposits, and Central Bank Digital Currencies (CBDCs). Additionally, highly liquid financial instruments with minimal market risk, credit risk, and concentration risk are acceptable, provided they can be rapidly liquidated with minimal market impact.
To ensure compliance, VASPs must effectively and prudently manage Reserve Assets at all times. This entails:
- Maintaining Reserve Assets only with financial services firms authorized to hold these specific types of assets.
- Ensuring the segregation of Reserve Assets from the VASP's own funds.
- Implementing policies and procedures for prompt access to and conversion of Reserve Assets into Reference Currency(ies) for redemption purposes.
- Conducting regular risk assessments to evaluate the appropriateness of the composition of Reserve Assets, including diversification.
VASPs must legally segregate Reserve Assets, ensuring they remain separate from their own assets and do not form part of their estate. This separation is crucial to prevent hindrances in processing redemption requests, especially in cases of insolvency.
VARA (Virtual Asset Regulatory Authority) should have the authority to control, liquidate, and distribute Reserve Assets to fulfill regulatory obligations. This ensures that VARA can take necessary actions to safeguard the stability of the FRVA ecosystem.
Priority Access Agreements
Agreements with financial services firms should be structured to provide VARA with priority access to Reserve Assets. This is essential for VARA to fulfill its regulatory obligations effectively.
Managing Conflicts of Interest
In addition to compliance with the Company Rulebook, VASPs issuing FRVAs must take proactive steps to identify, manage, and publicly disclose conflicts of interest arising from the constitution and management of Reserve Assets.
It's important to note that Reserve Assets held with financial services firms may be subject to additional reporting obligations beyond those outlined in this Rulebook. VASPs should be aware of and adhere to these incremental reporting requirements.
Any Entity seeking to carry out the issuance of an FRVA will, in addition to compliance with all other Regulations, Rules and Directives as communicated by VARA in its License or otherwise from time to time, be required to comply with the FRVA Rules mentioned in VA Issuance Rulebook at all times.
Category 2 covers assets not meeting Category 1 criteria. These issuers must still submit robust disclosures for VARA's case-by-case review. This tailored approach ensures appropriate supervision of diverse virtual assets.
Once authorized, issuers must comply with robust operating, risk, and conduct standards that promise to inspire public trust. Additionally, VARA requires independent audits of smart contracts, security controls, and reserves, underscoring its commitment to transparency and accountability.
As virtual assets continue maturing, VARA's collaborative rule making and supervision promises to deliver thoughtful, innovation-enabling oversight. Auditors and specialists alike should see VARA as an engaged partner in upholding ethical conduct and economic opportunity.
Overall, VARA's issuance framework demonstrates thoughtful adaptation to virtual assets' rapid evolution. By embracing disclosure, proportionality, and innovation, VARA fosters responsible crypto ecosystem growth. As virtual assets continue maturing, VARA's agile, collaborative governance promises to power sustainable growth while safeguarding the financial system.