Which is a better Web3 Hub, Abu Dhabi or Dubai?
Choice between ADGM and VARA
TL;DR
Abu Dhabi and Dubai offer friendly policies for blockchain and Web3 companies through their crypto regulatory bodies, ADGM and VARA, respectively, each with its own unique features and advantages.
While the ADGM covers a broad range of financial sectors and is strongly linked to traditional finance, VARA is a crypto-specific regulator with a more granular and clear set of guidelines.
Organizations should consider the nature of their business, target markets, and support needs when choosing between ADGM and VARA, and should keep abreast of the latest regulatory developments from each organization.
1. Introduction
As more businesses utilize blockchain technology and cryptocurrencies, many projects face the question of where to establish their headquarters. There is a growing trend away from Singapore and toward Dubai and Abu Dhabi, which offer clear regulations and business-friendly policies. However, the two regions have distinctly different strengths. Project managers considering setting up headquarters should have a clear understanding of the Virtual Assets Regulatory Authority (VARA) in Dubai and the Abu Dhabi Global Market (ADGM) in Abu Dhabi, as these entities are responsible for the policies in each region.
2. Understanding the regional characteristics of the UAE
The UAE is a federal state composed of seven emirates, each with its own economic characteristics. Abu Dhabi is the economic center of the UAE, accounting for about 60% of the country's GDP. It is rich in oil and natural gas resources and has a well-developed industrial base. Dubai, on the other hand, focuses on trade, tourism, and services, serving as a hub for international trade.
Based on these resources, most of the emirates in the UAE have sovereign wealth funds. The Abu Dhabi Investment Authority (ADIA) is one of the largest sovereign wealth funds in the world, managing significant assets through overseas investments. Dubai is also home to large-scale investors such as the state-owned conglomerate Dubai World, which has a strong presence in international financial markets.
The UAE also has policies that actively encourage foreign investment. Each emirate has established a number of free zones that allow foreign companies 100% ownership and tax incentives. Additionally, the UAE organizes roadshows to attract promising companies from different countries.
Finally, the UAE is ideally situated geographically, with a well-developed transportation and logistics infrastructure, particularly between the Eastern and Western Hemispheres. With 33% of the world within a four-hour flight and 80% within an eight-hour flight, it also benefits from a convenient time zone for business (GMT +4), making it an attractive international business center.
3. Key Aspects of Abu Dhabi Global Market (ADGM)
3.1. What does it do?
ADGM was established in 2013 and became operational in 2015, located in the capital city of Abu Dhabi. It is a financial free zone with a legal framework that meets global standards. The center is home to some of the world's leading advisors and is comprised of three independent bodies: 1) the Registration Authority, 2) the Financial Services Regulatory Authority, and 3) the ADGM Court.
3.2. Benefits of setting up a business
1) Business-friendly environment: ADGM offers an environment conducive to business growth, including an efficient business registration process, 100% foreign ownership approval, and corporate tax exemption. Notably, it has a business-friendly tax regime with a 50-year corporate tax exemption, which is highly attractive to businesses. For Web3 projects, token issuance can be recognized as corporate revenue, potentially resulting in a hefty corporate tax bill. Thus, a tax-friendly business environment is particularly appealing to many companies.
2) Sandbox support: Through organizations such as RegLab and ADGM Digital Lab, ADGM provides a sandbox environment to create innovative services that are not bound by existing financial legislation. It also connects established financial institutions with innovative companies to accelerate the development and adoption of new technologies. Additionally, through the accelerator program at Hub71, ADGM offers full support in the form of resources, networks, and expertise.
3) Friendly legislation: The ADGM is governed by English Common Law, including internationally recognized jurisprudence, providing a familiar legal environment for global businesses. It also has its own civil and commercial laws, allowing for a flexible and responsive regulatory framework that reflects the unique nature of the rapidly developing blockchain industry. Furthermore, international cooperation is essential for effective regulatory oversight, and ADGM's financial services regulator, the Financial Services Regulatory Authority (FSRA), actively promotes international cooperation.
4) Broad scope of business: ADGM recognizes and licenses a wide range of products, including digital securities, stablecoins, derivatives/funds, and cryptocurrencies, through its regulator, the FSRA. There are two main types of businesses:
Multilateral Trading Facilities (MTFs): These are exchanges.
Non-Exchange Businesses: These include dealers, custodians, and other similar activities.
A significant advantage is that companies do not need to obtain separate licenses for each category of activity. For instance, if a company wants to engage in both crypto brokerage and custody, it can do both activities under one license. However, certain areas, such as MTFs, may be subject to additional regulatory requirements.
4. Key aspects of the Dubai Virtual Assets Regulatory Authority (VARA)
4.1. What does it do?
With the entry into force of Law No. 4 of March 2022, VARA (Virtual Assets Regulatory Authority) became the world's first dedicated virtual asset regulator established by the Dubai government. It is responsible for the regulation and supervision of virtual assets and related activities, including NFTs, in all areas of Dubai except the Dubai International Financial Center.
4.2. Benefits of setting up a business
1) Dedicated agency: VARA is a dedicated agency focused exclusively on virtual assets, providing detailed regulations and support for the types of licenses, procedures, qualifications, and obligations required for companies wishing to operate related businesses. This specialized focus allows VARA to offer comprehensive guidance and support tailored specifically to the virtual asset industry.
2) Segmented licensing system: VARA categorizes the services related to virtual assets and provides a license type for each. There are individual licenses for each of the following services: 1) Advisory, 2) Broker-Dealer, 3) Custody, 4) Exchange, 5) Lending/Borrowing 6) VA Management and Investing Service, 7) VA Transfer and Settlement Service, and 8) Virtual Asset Issuance. Companies can legally operate by obtaining the license(s) that match the services they want to provide and can also apply for multiple licenses simultaneously, offering a one-stop service.
3) Promoting Both Market Health and Innovation: VARA encourages the development of new technologies while proactively controlling the risks that innovation can bring. To this end, VARA has established specific regulations for the issuance of new virtual assets, such as ICOs and IEOs, and imposes due diligence and information disclosure obligations on issuers. The regulatory guidelines even mention specific marketing requirements for staking services. Additionally, VARA provides a sandbox system for new license applications that are not regulated, allowing innovative business models to be tested.
4) Tax benefits: The Dubai Multi Commodities Centre (DMCC) and Dubai International Financial Centre (DIFC), which are part of the Free Zone, offer significant tax incentives for businesses. No income or corporate tax is payable until 2054, and for foreign financial companies, these tax breaks are available for 50 years from the time of occupancy. Additionally, companies in DMCC and DIFC are not subject to repatriation tax or remittance tax and are exempt from import and export duties. This provides a significant advantage for international trade and capital mobility.
5. Choosing the right regulatory framework: ADGM or VARA?
While both ADGM and VARA have established favorable tax environments, business-friendly conditions, and proactive cryptocurrency regulations, each has its own distinctive features.
ADGM
Jurisdictional Scope and Regulatory Clarity: ADGM regulates a wide range of financial environments, enabling diverse business development through ongoing communication with regulators. However, the clarity of licensing can be relatively low.
Support for Traditional Finance Integration: ADGM is characterized by its support for integrating traditional finance with innovative financial technologies.
VARA
Specialization in Virtual Assets: VARA is a regulator focused exclusively on virtual assets, providing clear and detailed guidelines.
Regulatory Certainty: For businesses with a clear plan, VARA offers reduced uncertainty due to its precise and specialized regulatory framework.
If your business plan involves traditional financial activities alongside virtual assets, ADGM might be more suitable due to its broader regulatory scope and integration support. Conversely, if your focus is solely on virtual assets and you prefer a regulatory environment with clear guidelines, VARA may be the better choice.
Next, a look at recent news from each regulator will provide a broader understanding. In 2023, ADGM launched ‘Hub71+ Digital Assets’, a $2 billion-plus fund to support Web3 startups and blockchain technology. On the other hand, VARA recently introduced a program where larger firms subsidize a portion of the licensing costs to ease financial burdens on smaller firms, making it easier for them to obtain licenses. Both regulators are actively attracting companies, with regional variations: Dubai is attracting Japanese Web3 companies, while Abu Dhabi is drawing in Korean Web3 companies, including Neopin and WeMade.
Both Dubai's VARA and Abu Dhabi's ADGM are actively supporting the development of the Web3 industry, though their regulatory frameworks and support vary. Companies looking to enter the market should choose the regulator that best aligns with their goals and needs. Additionally, the regulations of both organizations are constantly being updated to keep pace with the rapidly changing Web3 ecosystem. Therefore, businesses should closely review the latest regulatory compendiums to ensure they have an accurate understanding of their entry strategy.
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