Everyone is talking about SCA Category 5 - but what about Category 7?

While Category 5 is widely discussed and preferred by several brokers worldwide intending to market and advertise within the UAE, Category 7 has recently gained attention by the public following its solidified introduction by the Securities and Commodities Authority (SCA). Category 7 was established following a series of regulatory enhancements, amendments and updates aimed to align the UAE’s financial regulatory framework with the evolving needs of the industry worldwide.

In particular, Category 7 is relevant to the Virtual Asset Service Providers (VASPs). Although Category 7 is a completely different licence from Category 5 in terms of activities, while Category 5 previously attracted significant attention by the public, it is now widely believed that Category 7 is becoming the industry’s next focus.

Entities intending to carry out any of the following activities, must obtain a Category 7 licence from the SCA:

a. Provision of virtual asset platform’s operation and management services;
b. Provision of exchange services between one or more forms of virtual assets;
c. Provision of virtual asset transfer services;
d. Provision of brokerage services in trading operations in virtual assets;
e. Provision of virtual asset custody, management and control services; and
f. Provision of financial services related to offering and/or selling by the issuer of virtual assets, or participating in providing those services.

For avoidance of doubt, SCA defines “Virtual Assets” as a digital representation of value that can be traded or digitally transferred and can be used for investment purposes, and does not include digital representations of paper currencies, securities or other money.

In essence, the SCA regulates the use of virtual assets as investment instruments, when such activities are conducted within the state (UAE), with the exception of financial free zones. The issued guidelines apply to virtual asset platform operators, custodians of virtual assets, virtual asset consultants, virtual asset portfolio managers, virtual asset brokers, virtual asset dealers and any other activities that may become licensed functions by the SCA in the future, with regard to regulating virtual asset activities.

It is highly important to mention that the regulatory framework in the UAE, continues to evolve in response to the technological developments which are positively affecting the financial services industry. The SCA’s actions in improving the existing regulations and/or issuing new regulations for the subject matter, shows clearly its ongoing commitment to adopting globally recognised best practices in all aspects, including but not limited to licensing, governance and supervision.

The process of licensing for Category 7, is broadly similar to that of Category 5, in terms of timeframes and procedural steps. However, differences arise depending on the specific activities the applicant intends to conduct under Category 7. For example, Category 7 licences generally require a higher number of senior and/or key function personnel to be appointed in order to activate the license. As all license categories introduced over the time by SCA, Category 7 has its own capital thresholds.

Capital requirements under Category 7 are as follows:

a. 2 million AED if you operate as a virtual asset broker;
b. 4 million AED plus 6 months of operating expenses if you operate in custody of virtual assets;
c. 1 million AED plus 6 months of operating expenses if you operate solely as a virtual asset platform operator without practising any other activity related to the virtual asset service provider;
d. 5 million AED plus 6 months of operating expenses if you operate as a virtual asset platform provider, in addition to any of the other activities of the virtual assets service provider.

As a final note, there are a lot of questions as to why applying to SCA for a VASP license rather than to any other UAE regulator, such as VARA. Well, the answer is, where an entity is licensed and regulated by the SCA, it is permitted to operateacross the UAE mainland and all seven Emirates, subject always to compliance with applicable laws and regulations.

In contrary, entities licensed by VARA are restricted to VARA’s designated jurisdiction and must obtain separate licenses or approvals accordingly, to conduct activities on the UAE mainland. Same applies for other UAE regulators.

The SCA definitely serves as one of the most reputable and valuable regulators in the industry, offering its licensees credibility, regulatory certainty, and market confidence.
For more information on establishing an SCA Category 7 entity, feel free to contact us at a.ioannou@stefanilegal.ae or at s.hadjitheodosiou@stefanilegal.ae.