As crypto banking gains momentum, prospective entrants must prepare for the realization that licensing in this sector is not as straightforward as in traditional banking. How can one navigate these pitfalls in crypto licensing?
Since even traditional banking institutions like Deutsche Bank and Bank of America’s Merrill are stepping up their efforts to offer crypto services, the question of how to obtain a crypto license becomes more important. This is especially true in the UAE, where crypto adoption outpaces regional trends, with 72% of local investors flocking to Bitcoin.
In the traditional banking realm, an IT firm seeking to offer customer banking services can forge a white-label agreement with an existing bank, operating under the bank’s license, albeit with some limitations. However, for banks intent on providing crypto services, such intermediary arrangements are non-starters.
First MVP, Then License, or Vice Versa?
Some enterprises prefer to launch minimum viable products (MVPs) to test their crypto service capabilities before rolling out the final product in an effort to mitigate risks. However, is this approach viable within the UAE context?
We’re proud to announce our latest milestone in global regulatory compliance and licensure.https://t.co/vCNztATSCO has secured its MVP Preparatory License from the Virtual Asset Regulatory Authority in Dubai. 🇦🇪
Learn more:https://t.co/ApmdXpUBI3 pic.twitter.com/iwYCznyYXQ
— Crypto.com (@cryptocom) March 20, 2023
Regrettably, no. Essentially, any institution engaging with crypto assets must obtain a crypto license. Regardless of the regulatory framework or jurisdiction, be it within a free zone or elsewhere, a crypto license is imperative.
Even if a company delegates certain functions to subcontractors, such as custody or exchange services, it remains engaged in crypto operations, mandating compliance with licensing requirements. Otherwise, it may face severe consequences, including hefty fines and even potential imprisonment.
Thus, the sequence dictates: first, secure the crypto license, then proceed with establishing the bank.
Timing and Budget
The licensing process can usually take 4 to 12 months and can be costly. For example, on the UAE mainland, the registration fee for crypto custody or exchange activities is around $30,000, with an annual fee of around $60,000. If the bank is willing to process money transfers, then the registration fee stands at around $10,000, with an annual fee of roughly $25,000.
#Binance is proud to have received a Virtual Asset Service Provider (VASP) licence from Dubai’s Virtual Assets Regulatory Authority (VARA).
This milestone allows us to extend our services to the retail market alongside qualified and institutional investors.
Read more ⤵️
— Binance (@binance) April 18, 2024
The licensing process is segmented into three levels: initial permission for crypto activities, operational licensing, and obtaining a full-market product license. Only the latest one allows companies to work with individuals. Given that newly established banks often target individual clients, securing all three milestones is typically imperative.
Therefore, the full-market product license remains the sole authorization enabling banks to service individual clients.
However, fledgling firms have an alternative option. They can apply for the license directly via the Department of Economy and Tourism (for mainland entities), the relevant Free Zone Authority (for free zone enterprises), or directly to the Virtual Assets Regulatory Authority (VARA) for unregistered entities.
Requirements for Securing a Crypto License
What criteria must companies fulfill to obtain a crypto license in the UAE? Enterprises seeking licensure must satisfy several requirements. The minimum share capital requirement varies from AED 500,000 for payment and transfer services to AED 1,500,000 for exchange services using a custodian.
Dubai’s Virtual Asset Regulatory Authority (VARA) is exploring ways to ease the regulatory cost burden for smaller crypto firms.
During Paris Blockchain Week, VARA CEO Matthew White discussed potential solutions, including a model where larger entities support smaller ones.
— Satoshi Club (@esatoshiclub) April 11, 2024
This capital must be held in a trust account with VARA serving as beneficiary and as a surety bond provided by a guarantee company or in another manner. Companies must also maintain liquid net assets of at least 1.2 times their monthly operating expenses and reserve assets equal to 100% of client obligations.
Obtaining professional insurance, directors & officers, commercial crime/hot wallet insurance, and any other insurance required by VARA is mandatory.
Additionally, companies must implement robust policies and procedures, including KYC (know your customer), appointing key officers, compliance systems, disclosures, AML/CFT (anti-money laundering and combating the financing of terrorism), risk management, asset/cash handling, data protection, complaint handling, business continuity, and cybersecurity measures.
Difficulties and Challenges
However, companies may face some difficulties while applying for a license. One of the primary challenges is a lack of relevant expertise in crypto services. Regulators are more inclined to grant licenses to companies with prior experience in this field and a strong legal and compliance team.
Overall, obtaining a crypto license in the UAE is time-consuming and not straightforward, reflecting the authorities’ commitment to safeguarding the financial system and protecting citizens.
We’re delighted to have secured in-principle approval of a financial services license from Dubai Financial Services Authority, unlocking our end-to-end managed payments services in the UAE. 🌍🇦🇪https://t.co/4zq8YPlgaG
— Ripple (@Ripple) October 1, 2024
Companies seeking to enter the crypto market must be prepared to navigate a rigorous licensing process and ensure compliance with stringent regulatory requirements. While challenging, adhering to these standards not only ensures legal operation but also fosters a secure and trustworthy crypto ecosystem within the UAE.
