Legal Insights
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Dubai’s Virtual Assets Regulatory Authority (VARA) has introduced a significant addition to its licensing framework through the Sponsored Virtual Asset Service Provider (VASP) model, formalized in Part VII of the Compliance and Risk Management Rulebook (updates as of May 19, 2025).
This article outlines the core regulatory obligations and framework governing Sponsored VASPs, supplemented by direct commentary from a senior VARA official during a recent consultation.
The Sponsored VASP regime represents a strategic effort by VARA to support innovation, scalability, and broader market inclusion within a tightly regulated environment. It enables smaller, earlier-stage or resource-constrained virtual asset operators to participate in the regulated ecosystem under the supervision and regulatory infrastructure of a fully licensed VASP.
Regulatory Objective and Structure
The Sponsored VASP model allows entities that are not independently licensed by VARA to carry out certain virtual asset activities under the umbrella of a “Sponsoring VASP.”
The Regulated Sponsor must be an entity already holding a valid VARA license and will be held fully accountable for the sponsored entity’s compliance with all applicable regulations.
This structure is intended to lower the entry barriers for new market entrants without compromising the integrity of VARA’s oversight regime. It creates a pathway for novel business models and experimental ventures to operate legally within the UAE while ensuring that the overall risk to the system remains contained through centralized oversight.
A parallel can be drawn to the UK’s Financial Conduct Authority (FCA) Appointed Representative regime, though the framework introduces stricter safeguards.
One of the key distinctions is that VARA requires the Regulated Sponsor to have actual operational control over the Sponsored VASP. This requirement is designed to address weaknesses observed in other jurisdictions, where regulators have limited visibility over appointed representatives.
Venture Studios and strategic ecosystem builders can be ideal candidates for becoming Regulated Sponsors. These firms can obtain a license from VARA and extend regulatory coverage to their portfolio companies.
Such models may become increasingly common as institutional capital seeks to nurture emerging blockchain-native startups in a compliant environment.
Licensing and Pre-Approval Requirements
Before a Regulated Sponsor may commence operations, they must obtain explicit approval from VARA. The application must include detailed information on the identity and activities of the Sponsored VASP, the nature of the proposed business model, and the compliance and governance measures in place to ensure regulatory alignment. The two parties must also enter into a legally binding agreement that outlines their respective responsibilities, the scope of activities to be undertaken, and the controls that will govern their relationship.
VARA must be satisfied that the sponsoring arrangement is not only operationally viable but also capable of withstanding regulatory scrutiny, particularly with respect to anti-money laundering (AML), cybersecurity, and consumer protection standards.
Compliance and Legal Liability
The Regulated Sponsor bears full legal and regulatory responsibility for the activities of the Sponsored VASP. This includes ensuring the sponsored entity’s ongoing compliance with the Rulebooks, performing continuous supervision, and acting as the single point of accountability to VARA.
A designated Responsible Officer within the Regulated Sponsor must oversee the activities of the Sponsored VASP and serve as VARA’s primary contact for regulatory reporting and issue resolution. The Sponsored VASP must also operate under the internal governance structure, compliance protocols, and operational controls of the Sponsoring VASP, subject to audit and review by VARA.
Financial Requirements and Risk Management
To support this model, Regulated Sponsors must demonstrate that they maintain sufficient financial and operational resources to cover both their own risk exposure and that of their sponsored entities. The regulatory capital position, risk management framework, and internal controls must be calibrated to absorb the additional burden of supervising another regulated entity.
VARA reserves the right to conduct audits or request additional information at any time to assess the soundness of the sponsor’s oversight systems.
Marketing, Disclosures, and Brand Clarity
Sponsored VASPs are prohibited from misrepresenting their regulatory status. All public communications, including websites, pitch decks, and marketing materials, must clearly disclose that the entity operates as a Sponsored VASP under the license of a specified Regulated Sponsor. The objective is to ensure that end users, investors, and counterparties are not misled about the level of regulatory authorization held by the entity.
Misrepresentation in this regard may lead to immediate suspension or revocation of the sponsorship arrangement and other regulatory penalties.
Strategic Industry Implications
The Sponsored VASP framework opens a regulatory channel for incubators, venture funds, and infrastructure providers to foster innovation while maintaining Dubai’s status as a globally trusted jurisdiction. However, this opportunity also creates heightened legal and reputational risks for the sponsoring parties. Any entity contemplating this role must undertake a comprehensive review of its risk systems, governance, capital adequacy, and compliance workflows.
Book a free legal consultation to explore your options under VARA’s new Sponsored VASP regime.
