Why Web3 companies need EU MiCA and Dubai VARA licenses

The EU's Crypto Asset Markets Regulation (MiCA) is "one of the most comprehensive digital asset regulatory frameworks to date". The aim of this legislation is to provide a clear regulatory environment, reduce compliance costs, and encourage businesses to enter the EU crypto market. The MiCA regulatory framework applies to all EU member states. It also applies to the three European Free Trade Association (EFTA) member states (Iceland, Liechtenstein, and Norway) that are part of the European Economic Area (EEA), as they are part of the internal market and subject to many of the same EU regulations. The Dubai Virtual Assets Regulatory Authority (VARA) is the world's first independent virtual asset regulator, responsible for regulating the issuance and trading of virtual assets within and from the Emirate of Dubai. Its policies are shaping the Web3 regulatory landscape in the Middle East region. VARA's influence is limited to the Emirate of Dubai; other areas of the United Arab Emirates and the Dubai International Financial Centre are not under its jurisdiction.

• Global Regulatory Trends: MiCA and VARA are landmark events in the global regulatory trend. They not only mark the strict regulation of the Web3 industry by various countries, but may also become templates for regulatory frameworks in other countries.
• Strategic Significance of the EU and the Middle East: The European and Middle Eastern markets are key markets for the expansion of Web3 companies, with a large investor base, innovative ecosystem, and development potential. The guiding role of MiCA and VARA in these two markets may become a global market indicator.
• From Regulation to Innovation: MiCA and VARA are not just regulatory tools, but may also bring more opportunities for innovation. A standardized market is a double-edged sword for startups, with both constraints and incentives.

The Business Value of Obtaining MiCA and VARA Licenses

• Compliance and Market Access: Holding MiCA and VARA licenses can serve as a legitimate "passport" for entering the Middle Eastern and European markets, helping companies gain the trust of local financial markets and reduce legal barriers to market access.
• Enhancing Corporate Image and Market Reputation: In the crypto industry, licenses are not only a sign of compliance, but also a symbol of a company's strength. Web3 companies that obtain these licenses will gain higher recognition in the industry.
• Increasing the Possibility of Cross-border Expansion: Obtaining MiCA and VARA licenses can help companies conduct business in different regions, reducing the compliance risks of cross-border expansion. They provide companies with a "cross-border operating license" in the EU and Middle East markets.

MiCA vs VARA: A Comparison of Two Regulatory Frameworks from the Perspective of License Application

Different regions have different regulatory requirements and market demands for Web3 companies, and the roles and importance of MiCA and VARA licenses also vary in these regions. Europe may be more focused on market transparency and risk control, while the Middle East may be more focused on rapid innovation and capital flow.

Overview of Licensed Business Activities under the MiCA Framework

MiCA sets out detailed compliance requirements for the issuance and trading of stablecoins, such as EMTs and ARTs, but due to the limited scope of this article, the author will only focus on "crypto-asset services" under the MiCA framework. "Crypto-asset services" refer to any of the following services and activities related to any crypto-asset:

1. Providing custody and administration of crypto-assets on behalf of clients

2. Operation of a trading platform for crypto-assets

3. Exchange of crypto-assets for funds

4. Exchange of crypto-assets for other crypto-assets

5. Execution of orders for crypto-assets on behalf of clients

6. Placing of crypto-assets

7. Reception and transmission of orders for crypto-assets on behalf of clients

8. Providing advice on crypto-assets

9. Providing portfolio management on crypto-assets

10. Providing transfer services for crypto-assets on behalf of clients

Overview of Licensed Business Activities under the VARA Framework

Any entity, whether operating within the UAE or starting operations from there, whether targeting UAE residents or providing services to global clients permitted to engage in the relevant activities, must apply for and obtain a license from VARA.

Currently, there are 8 licensed business activities under the VARA framework:

1. Advisory Services: Providing advice on matters related to virtual assets

2. Broker-Dealer Services: Facilitating the buying and selling of virtual assets

3. Custody Services: Providing custody services for virtual assets to ensure their security. (VARA has additional requirements)

4. Exchange Services: Operating a virtual asset trading platform

5. Lending And Borrowing Services: Facilitating the lending and borrowing of virtual assets. (MiCA has not yet covered this)

6. Management and Investment Services: Managing and investing virtual assets on behalf of clients

7. Transfer and Settlement Services: Facilitating the transfer and settlement of virtual assets

8. VA Issuance Category 1: Issuance of stablecoins such as FRVA (Fiat-Referenced Virtual Asset)

Applicants can apply for multiple licensed business activities and consolidate them under a single, overarching license.

Comparison of Licensed Business Scope between MiCA and VARA

As of now, the comparison of the licensed business activities under the two regulatory frameworks is as follows:

From the summary in the table, it can be seen that MiCA and VARA have different regulatory scopes for licensed business activities.

In terms of lending business (Lending And Borrowing Services), VARA provides a channel for applying for this licensed business, but MiCA has not covered it, at least in 2024, MiCA will not provide a licensed business activity for lending services. Therefore, MiCA has no intention to regulate lending services related to crypto-assets, including electronic money tokens, and thus does not prejudice the applicable national laws in this field.

In terms of custody services (Custody Services), VARA imposes additional regulatory requirements on VASPs, and virtual asset custody services are the only business activities that need to be handled separately from other licensed businesses. In this case, a VA custodian must be established as a separate legal entity with a separate license, rather than being consolidated into a single, overarching license like other businesses.

Furthermore, licensed institutions must ensure that they fully comply with the activity requirements of the license from the application stage to the conduct of business activities.

The Strategic Value of Licenses: Why Web3 Companies Must Prepare in Advance

Why do Web3 companies need licenses? The most direct reason is - without a license, they will be blacklisted. In May 2024, the French financial regulator Autorité des Marchés Financiers (AMF) stated that it reserves the right to take legal action to block the website of BYBIT, as the platform was providing virtual asset services in France without authorization.

Track Industry Trends and Prepare Licenses in Advance

As the Web3 industry is developing rapidly, regulatory authorities around the world are gradually strengthening their regulation of virtual assets and blockchain technology. The regulatory policies and legal frameworks in different regions are constantly changing, which poses a huge compliance challenge for Web3 companies. If companies do not prepare the license application in advance, they may miss the best window of opportunity for compliant development, which could restrict their operations and expansion.

• Rapid Industry Development and Lagging Regulation: Globally, the Web3 industry is developing rapidly, but the regulatory frameworks in various countries often lag behind. This lag may cause some companies to fail to obtain the necessary licenses in a timely manner, thereby missing market opportunities. Preparing licenses in advance can help companies seize the initiative and gain market share.
• Trend of Stricter Regulation: Currently, whether it is the VARA in the Middle East region or the MiCA in the EU, they are all pushing for the compliance of various virtual asset-related businesses. Understanding the requirements of these regulatory frameworks in advance and applying for the relevant licenses in a timely manner will ensure that companies operate within the legal framework and avoid the risks brought by future regulatory tightening.
• Avoid the Risk of Sudden Policy Changes: Governments' attitudes towards the Web3 industry are gradually shifting towards strict regulation. If companies wait until the policies are fully mature before applying for licenses, they often face more cumbersome approval processes, and may even risk being rejected. Preparing licenses in advance means that companies can more calmly cope with possible future policy changes and regulatory requirements.

Manage Compliance Risks and Reduce Compliance Costs

Compliance has always been a major challenge for enterprises in the Web3 industry. As the global regulatory environment continues to evolve, if enterprises fail to obtain compliance licenses in a timely manner, they will face a series of legal risks, including penalties, lawsuits, and even business interruptions. By applying for licenses in advance, enterprises can not only effectively control compliance risks, but also significantly reduce potential compliance costs.

• Avoid financial losses caused by compliance risks: If an enterprise does not hold a legal license and is penalized by the regulatory authorities, it may face huge fines, asset freezes, and even operational interruptions. Holding a compliance license can provide legal protection for enterprises and reduce legal disputes and financial losses.
• Complexity of the compliance review process: The regulatory frameworks of different countries and regions may vary. Applying for licenses in advance and ensuring compliance with regulatory requirements can help enterprises avoid being rejected or encountering complex review procedures due to non-compliance. In the long run, this will reduce the costs and time spent on compliance failures.
• Long-term advantages of compliant operations: Compliance is not a one-time task, but an ongoing process. After obtaining a license, regulatory authorities will conduct regular reviews of the enterprise. Obtaining a license in advance and successfully passing the review can help the enterprise move more steadily on the path of compliant operations and become more competitive.
• Simplify cross-border compliance issues: Web3 enterprises are often multinational, involving regulatory requirements in different countries and regions. Holding licenses in multiple regions can simplify cross-border compliance issues, ensure the smooth operation of the enterprise in different markets, and avoid legal obstacles due to the lack of licenses.

Enhance brand image and drive financing and cooperation

After the Hong Kong Securities and Futures Commission issued virtual asset trading platform licenses this year, HashKey Exchange CEO Weng Xiaoqi pointed out that under the drive of the new regulations on June 1, the withdrawal of unlicensed platforms will bring a user spillover effect to licensed institutions in the short term. HashKey's business has already perceived obvious changes, with a 267% week-on-week increase in new app activations last week.

In the Web3 industry, trust is one of the key factors in attracting investors and users. Licenses are not only a symbol of compliance, but also a sign of the reliability and professionalism of the enterprise. Obtaining a legal license can effectively enhance the brand image of the enterprise and bring more financing and cooperation opportunities.

• Enhance user trust: Due to the characteristics of the Web3 industry, users and investors often have certain doubts about the compliance and security of Web3 enterprises. Holding a legal license can demonstrate the compliance of the enterprise to the market and establish a stronger foundation of trust. This trust can not only attract more users, but also increase the investment interest of institutional investors in the enterprise.
• Enhance the credibility of the brand: Compliance licenses represent the legitimacy and credibility of the enterprise in the global market. Web3 enterprises can effectively establish their brand image and demonstrate their professionalism in the industry by obtaining regional or international licenses. Especially in highly competitive markets, licenses can help enterprises stand out.
• Promote financing and cooperation: Licensed enterprises are usually more attractive in terms of financing, especially for institutional investors and venture capitalists. Investors are more inclined to invest in enterprises with compliant operations, as this means lower legal risks and higher market stability. Through licenses, Web3 enterprises can effectively obtain more financial support.
• Expand cooperation opportunities: Many business partners, such as financial institutions, technology suppliers, or multinational companies, are more willing to cooperate with Web3 enterprises that hold compliance licenses. Licenses not only represent the compliance of the enterprise, but also convey the maturity and sense of responsibility of the enterprise in the industry. Therefore, obtaining a legal license is an important condition for enterprises to expand cooperation opportunities.

License application analysis: Taking the issuance of MiCA stablecoins as an example

Under the MiCA regulation, the new strict requirements for stablecoin issuers are effective across the entire European Union. This upcoming regulation represents a major change in the European stablecoin regulatory framework, and under this new framework, any entity issuing stablecoins in the European region must comply with the provisions of the MiCA framework, to which institutions have different reactions.

1. Reaction of licensed institutions

Circle

In June 2024, Circle, a stablecoin issuer headquartered in the United States, announced that it has fully complied with the MiCA regulations. The company has thus become the first global stablecoin issuer to obtain an Electronic Money Institution (EMI) license under the EU MiCA regulatory framework, allowing it to use its license within the EU. Circle announced that its two main stablecoins, USDC and EURC, now meet the regulatory requirements of the new rules and can be used under the new European regulations. As an EMI registered in France, Circle Mint France will issue its euro-denominated EURC stablecoin "domestically" within the EU, and issue USDC from the same entity to serve customers across the entire EU.

SG-Forge

SG-Forge, a subsidiary of Société Générale, has also announced that it has obtained an electronic money license, and its stablecoin EURCV has now been classified as an electronic money token under MiCA. SG-Forge has updated its smart contract to remove the whitelist restriction, making it compliant with the MiCA regulations. This update is mainly to accelerate settlement speed, enhance security, and expand its application on public chains. This allows EURCV to be used in a wider market, providing more liquidity and use cases.

Now that these stablecoin issuers have taken this step and obtained electronic money licenses, we may see other stablecoin companies try to obtain similar approvals in Europe. This can provide more choices for those who want to use stablecoins.

2. Reaction of unlicensed institutions

Due to the strict requirements for stablecoins pegged to the US dollar, MiCA faces the risk of many existing currencies being considered non-compliant and being forced to withdraw from the EU market. According to the MiCA regulations, companies issuing fiat-backed stablecoins must now obtain an electronic money license within the EU. To provide stablecoins in the EU, issuers must register as an electronic money institution or credit institution. There are several key obligations, such as publishing a whitepaper, holding liquid reserves with a third-party custodian, and reporting on the value and composition of the reserves.

Many cryptocurrency exchanges operating within the EU have already taken action before the new rules come into effect. They have announced changes to their stablecoin policies and product offerings, creating significant opportunities for licensed electronic money platforms. Major cryptocurrency exchanges such as Uphold, Binance, Bitstamp, Kraken, and OKX have already started delisting non-compliant stablecoins such as Tether and Dai for their European customers, or have started restricting services to EU and EEA users, while other exchanges have promised to do so in the coming months.

Uphold

In June, Uphold, a cryptocurrency exchange and custody platform headquartered in New York, announced that it has decided to discontinue support for multiple stablecoins in preparation for the MiCA regulations. These stablecoins include Tether, FRAX, GUSD, USD, and TUSD. Starting July 1, 2024, these digital assets will no longer be available on the Uphold platform. We encourage users holding these stablecoins to exchange them for other cryptocurrencies before June 28th, after which the cryptocurrency exchange will automatically convert them to USD Coin. If they fail to exchange them within this deadline, these stablecoins will be automatically converted to Circle's USD.

3. HashKey's attitude: "License first"

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In a recent interview, Livio Weng, Chief Operating Officer of HashKey Group and Chief Executive Officer of HashKey Exchange, stated: "We firmly believe that unregulated financial activities should not be attempted lightly, which is closely connected to our 'long-termism' principle. All of HashKey's businesses follow the principle of 'licensing first, then operation'. We have obtained licenses in Japan, Singapore, Hong Kong, and more licenses are in the application process. We always insist on conducting business only after obtaining regulatory licenses, adhering to the principle of 'no regulation, no finance'."

It can be foreseen that in the future, the concept of 'licensing first' will also penetrate the industry and become an indispensable part of Web3 companies' business expansion.

Conclusion

This article uses the MiCA and VARA licenses as entry points, compares the differences in licensed businesses, and analyzes the necessity for Web3 companies to apply for licenses, combining practical cases. Of course, the regulatory framework is not immutable. As pioneers, MiCA and VARA have provided a good template for licensing policies around the world, which will have a far-reaching impact on the future Web3 industry. For Web3 companies, whether they already have licenses or have not yet applied for licenses, they should re-evaluate the strategic value, risks, and costs of licenses to support the long-term development of the company.

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