Issuing Stablecoins Under VARA

Dubai’s Virtual Assets Regulatory Authority (VARA) permits the issuance of fiat-referenced stablecoins – termed Fiat-Referenced Virtual Assets (FRVAs) – within a clearly bounded regime. FRVAs are treated as a Category 1 VA Issuance and require a full VASP licence plus project-by-project approval, stringent reserve, redemption, audit and disclosure duties, and marketing guardrails. Critically, AED-referenced tokens sit outside VARA’s perimeter and fall under the Central Bank’s Payment Token Services Regulations (PTSR 2024).

This article maps the end-to-end pathway to launch a compliant stablecoin under VARA – from scoping and licensing to whitepaper content, reserve architecture, redemptions, audits, capital, and marketing – with cross-references to the relevant rule text.

1) PERIMETER: FRVAS VS. AED PAYMENT TOKENS

1. What counts as an FRVA? An FRVA is a virtual asset that purports to maintain a stable value relative to one or more VARA-approved Reference Currencies (fiat), where the reference currency is a legal tender not subject to sanctions under UAE AML/CFT laws.
2. What is not an FRVA? Tokens issued by central banks (e.g., CBDCs), tokenised interbank deposits, or equity-like instruments are excluded.
3. AED-referenced tokens are not under VARA. Any token that maintains a stable value relative to the AED is expressly reserved to the CBUAE and must comply with the PTSR 2024.
4. Use-case limitation. Even for non-AED FRVAs, use is restricted to the VA ecosystem – i.e., purchase/sale of virtual assets – and may not be used as a means of payment for goods or services in the UAE.
5. Sanctions overlay. A Reference Currency cannot be from a sanctioned country/territory under Federal AML-CFT laws.

2) LICENSING AND APPROVALS

1. Category 1 VA Issuance. Issuing an FRVA is a VA Activity. In addition to the FRVA Annex, the issuer must comply with five rulebooks: Company; Compliance & Risk Management; Technology & Information; Market Conduct; and the VA Issuance Rulebook.
2. Per-token approval. A VASP licensed for Category 1 must obtain VARA approval for each FRVA prior to issuance; VARA may impose bespoke conditions (e.g., business-line segregation, additional information, or modified requirements).
3. Significant issuer status. VARA can designate a VASP as a Significant FRVA Issuer (e.g., based on number of holders, supply, volumes, interconnectedness), triggering heightened governance, capital, audit and reporting expectations.

3) WHITEPAPER AND ONGOING DISCLOSURES

1. Initial whitepaper (FRVA-specific adds). Beyond the generic VA Issuance Rulebook, your whitepaper must include, among other items: (i) type(s) and composition of reference currencies and whether they can change; (ii) creation/redemption policy and its effect on reserves; (iii) type, composition and valuation methodology of Reserve Assets; (iv) custody setup with timely access to reserves; (v) compliance with redemption rules and related risks; (vi) detailed redemption procedures and timelines; and (vii) whether a client agreement is required to redeem directly from the issuer.
2. Monthly website disclosures. At least monthly, publish: (i) number and value of FRVAs in circulation; and (ii) the value and composition of Reserve Assets – as independently audited – plus an explicit statement confirming whether the FRVA is 100% backed at the time of the disclosure.

4) BACKING: RESERVE SUFFICIENCY AND COMPOSITION

Always 100% backed. The FRVA must be at least 100% backed by Reserve Assets at all times. Issuance (and burn) must be matched by corresponding changes in reserves, managed to avoid adverse market impact – even where third parties are involved in mint/redeem.

Permitted forms of Reserve Assets (denominated in the reference currency):

• Cash or cash equivalents (incl. central bank reserve deposits, bank deposits, CBDCs); and
• Highly liquid instruments with minimal market/credit/concentration risk that can be liquidated rapidly, e.g.:
  
  • government/central-bank or agency debt with residual maturity ≤90 days;
  • repos ≤7 days backed by such government paper; and
  • short-term government money market funds.

Reserve governance – where and how you hold it:

• Maintain reserves only with licensed financial services firms agreed with VARA; segregate from the issuer’s own funds.
• Put policies in place to ensure reserves are promptly accessible and convertible into the reference currency to process redemptions.
• Conduct regular risk assessments, including diversification adequacy.

Bankruptcy remoteness and control:

• Hold reserves so they are legally segregated and remote from the issuer’s estate; not rehypothecated or subject to liens/set-off.
• Structure custody so VARA can direct control, liquidation and distribution of reserves to meet regulatory obligations and has priority access.

5) REDEMPTION RIGHTS AND TIMELINES

1. Par redemption right. Holders must always have a valid, legally enforceable right to redeem at par.
2. Speed and fees. If the holder has a valid client agreement with the issuer, redemption requests must be processed and completed within one working day, or – if reserve settlement is materially disrupted – within one working day of normal settlement resuming. No redemption fees may be charged.
3. Internal procedures. Issuers must maintain detailed policies to ensure continuous compliance with the redemption rule.

6) INDEPENDENT AUDITS AND SENIOR-MANAGEMENT ATTESTATION

1. Monthly independent audits of circulating supply and reserve composition/value are required, with the issuer’s Senior Management submitting an attestation to VARA on the accuracy of each audit.
2. Public alignment. The monthly public website disclosure must tie back to the independent audit.

7) CAPITAL

A VASP licensed to issue FRVAs must maintain Paid-Up Capital = AED 1,500,000 + 2% of the value of available supply of the FRVA.

8) MARKETING RULES

1. Don’t imply “stability” unless you’re licensed and compliant. Marketing of an FRVA cannot include language suggesting stability relative to its reference currency unless: (a) you hold a current VARA licence to issue the FRVA; and (b) the FRVA is issued and maintained in accordance with the FRVA Rules.
2. Mandatory statements. All FRVA marketing must clearly state: (i) the right to redeem at par, and whether this right is directly enforceable against the issuer; and (ii) that the FRVA is not covered by investor-protection or deposit-guarantee schemes.

9) INTERPLAY WITH THE CENTRAL BANK’S PTSR (AED AND ALGORITHMIC BANS)

If you are considering an AED-referenced token, you must comply with the CBUAE PTSR 2024. Among other things:

• Reserve of Assets: As a baseline, the reserve must be held as cash in a separate escrow account in the same currency, with a UAE-licensed bank, ring-fenced for the reserve.
  
• Alternative mix for bank-owned issuers: If the issuer is a wholly-owned bank subsidiary, at least 50% cash with the remainder in UAE government bonds or CBUAE M-bills ≤6-month average duration (with corresponding capital).
  
• Transfers and promotions: Payment token transfers and promotions are tightly scoped; the CBUAE prohibits the issuance or promotion of algorithmic stablecoins (and privacy tokens) in or to the UAE.

Bottom line: Non-AED FRVAs → VARA; AED tokens → CBUAE; algorithmic stables → prohibited in issuance or promotion in the UAE.

10) IMPLEMENTATION ROADMAP FOR A VARA-REGULATED FRVA

A. Scoping and structuring

• Confirm the reference currency (non-AED; not sanctioned); confirm use-case is VA-ecosystem only.
• Map the issuance stack across the five rulebooks and identify any Significant Issuer triggers (e.g., target circulation).

B. Licence and per-token approval

• Hold a VARA VASP licence for Category 1 VA Issuance and submit a per-FRVA approval dossier (expect bespoke conditions on segregation, information and controls).

C. Whitepaper and public disclosures

• Draft the FRVA whitepaper with all FRVA-specific items (reserves, custody, creation/redemption mechanics, risks, client-agreement condition for redemption, etc.), aligned to the VA Issuance Rulebook.
• Prepare a monthly disclosure dashboard tied to the independent audit results.

D. Reserve architecture and custody

• Build a 100% reserve in permitted instruments only, denominated in the reference currency. Implement multi-custodian arrangements with legal segregation, no rehypothecation, and priority control for VARA in contingency.
• Document policies for prompt conversion of reserves for redemptions and perform periodic diversification/liquidity risk reviews.

E. Redemptions

• Codify T+1 working day par redemptions (or T+1 from resolution of exogenous settlement disruptions) with zero fees and clear client-agreement pathways.

F. Assurance and attestations

• Commission monthly independent audits of supply vs. reserves and arrange Senior Management attestations to VARA.

G. Capital and treasury

• Maintain AED 1.5m + 2% of available supply as Paid-Up Capital and align treasury governance to the reserve policy, redemption liquidity and audit cadence.

H. Marketing governance

• Implement approval workflows that avoid “stability” language unless the FRVA is licensed and fully compliant; embed mandatory statements on par redemption and absence of deposit-guarantee coverage in all marketing.

11) DESIGN CHOICES THAT WILL MATTER TO VARA

1. Reference currency and liquidity. Choosing a major, liquid, non-sanctioned fiat currency simplifies reserve composition and redemption logistics.
2. Reserve composition and custody topology. Over-reliance on a single MMF or custodian introduces concentration risk; VARA expects prudent diversification, robust access and bankruptcy-remote custody.
3. Disclosure discipline. VARA’s model pairs independent monthly audits with public monthly disclosures – your operational processes must produce audit-ready evidence and website-ready summaries every month.
4. Redemption operations. The T+1 redemption commitment is real; stress-test settlement pipelines and pre-arrange liquidity lines to handle redemption clusters without market impact on reserves.
5. Communication hygiene. A single piece of marketing that implies stability without meeting the conditions – or that omits mandatory warnings – can create supervisory friction.

12) COMMON MISSTEPS (AND HOW TO AVOID THEM)

• Treating FRVAs as payment tokens. Remember: FRVAs are not for real-economy payments in the UAE; AED-pegged products must go to CBUAE (PTSR).
• Under-specifying the whitepaper. Missing creation/redemption mechanics, reserve methodology, custody access, or the client-agreement condition will draw comments.
• Reserves outside the perimeter. Holding assets that aren’t cash/cash-equivalents or approved short-dated sovereign risk can breach Rule III.B.
• Redemption frictions or fees. VARA prohibits redemption fees and expects T+1 processing (subject to defined disruption carve-outs).
• Marketing shortfalls. Using “stablecoin” language without meeting FRVA conditions, or omitting required warnings, is non-compliant; separately, algorithmic stablecoins are off-limits to issue or promote in the UAE.

13) QUICK CHECKLIST FOR YOUR INTERNAL PROJECT BRIEF

• Scope: Non-AED reference currency; VA-ecosystem use only.
• Licence: VASP with Category 1 VA Issuance; confirm any Significant Issuer risk.
• Approval: VARA per-FRVA approval with conditions as required.
• Whitepaper: Include all FRVA-specific items (reserves, custody, redemption, risks, client-agreement).
• Reserves: 100% backed; permitted instruments only; segregated, bankruptcy-remote; priority access for VARA.
• Redemptions: Par; T+1 working day (or T+1 from disruption resolution); no fees.
• Assurance: Monthly independent audits + Senior Management attestation; monthly public website disclosures aligned to audit.
• Capital: AED 1.5m + 2% of available supply.
• Marketing: Only imply stability if licensed and fully compliant; include par-redemption & no-guarantee statements.

For non-AED stablecoins, VARA offers a clear, prudentially grounded regime designed to deliver par redemptions, full backing, and transparent disclosures – while tightly delimiting the use-case and marketing narrative to protect consumers and market integrity. For AED-pegged products, the CBUAE is the door you must knock on; and algorithmic designs are simply out of scope for issuance or promotion in the UAE. With a well-built treasury architecture, redemption operations, and disclosure machine, an FRVA can be launched in Dubai within a framework that is both investor-protective and innovation-enabling.

Disclaimer: This article is for general information only and does not constitute legal advice. Requirements apply cumulatively and may change. Always confirm against the latest rulebooks, your specific licence conditions, and regulator guidance.

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