Metaverse in the Emirates – DMCC vs. ADGM

Games have always been the most rewarding entertainment and modern day play to earn (hereinafter - “P2E”) games (also referred to as (NFT games or GameFi) are gaining increasing popularity among the users of the borderless internet with the spread of crypto, blockchain technologies, and virtual assets.

Technological advancements open a range of opportunities for game developer companies to meet the demand of the new generation of gamers, while they might be challenged trying to establish the legality of Web 3.0 projects.

The United Arab Emirates has been supporting and welcoming IT companies and shows tremendous support to the web3 community and is promised to be a main hub for blockchain technologies with a regulatory certainty. In this article, we shed light on main considerations for choosing a jurisdiction for establishing Metaverse as a service (hereinafter: MAAS) provider company, by examining two leading free-zones in UAE, namely Dubai Multi commodities Center (DMCC) and Abu Dhabi Global Market (ADGM).

Legal nature of in-game assets

With the introduction of blockchain technology, in modern P2E games, gamers can receive rewards for their progress and wins in addition to a pleasure they receive while playing. These rewards in play-to-earn games are referred to as – in-game assets and they can be in the format of either non fungible tokens (NFTs) or utility tokens. These virtual assets authenticate ownership and players can earn money as they perform better and as the value of assets is increased. NFTs with an increased value can be traded within the game or go beyond the metaverse and sold in NFT marketplaces, which is a focal point of P2E economy; as in-game assets can be exchanged into real world assets, including fiat currencies.

As metaverse companies are the ones who initially issue such in-game assets, it is important to understand whether such offerings are compliant with the laws. While utility tokens are mainly in-game assets used within a certain ecosystem, they are largely unregulated in many jurisdictions, including in the UAE. However, issuance and offering of NFTs might be subject to regulatory restrictions. Thus it is important to consider the following matters before choosing the place of incorporation for a MAAS company:

  • Means of receiving payments from users;
  • Issuance of NFTs and utility tokens (which are the company’s main income generating tools) significantly influence on the choice of jurisdiction;
  • A lot of P2E games create and operate their own NFT marketplaces, hence it is important to take it into consideration as some jurisdictions require a separate license/ business permit for NFT marketplace.
  • Incorporating a company for P2E games might require different fundraising and investment plans, so it is important to choose a reliable jurisdiction for future investment attraction purposes.

Currently, the business of the metaverse service providers has been legalized by two leading Free Zones in the United Arab Emirates. We will discuss the regulatory environment of the Dubai Multi Commodities Center and Abu Dhabi Global Market to clarify the prospects of establishing business in these jurisdictions.

Metaverse Service Provider License in DMCC

Play to earn game operators can obtain MaaS providers license to legally operate in Dubai Multi Commodities Center free zone. The process of the filing license is quite simple, and foreign companies can file their license applications even before incorporating their companies in DMCC.

By definition, MAAS license holders engage in the development and hosting of digital virtual environments, which enable simulated interactions between individuals. However, companies with this activity are not permitted to issue tokens which are traded on exchanges or trade in crypto commodities. It is vital to note that this licence also does not permit companies to trade and promote crypto assets, However, DMCC allows trading some NFTs in an NFTs e-marketplace platform. Basically, this licence allows providers to conduct business operations related to the metaverse, while allowing MaaS license holders to issue in-game assets which are equal to utility tokens.

In February 2022, Dubai rolled out the Regulation of Virtual Assets law (or VAL), and formed the Dubai Virtual Assets Regulatory Authority (VARA) to enhance the Emirate’s commitment to creating a digital asset-friendly ecosystem, which would be in charge of regulating virtual assets. The VAL is applicable throughout the emirate, including DMCC. VAL defines a virtual asset as a “digital representation of value that can be traded, transferred, used as an exchange or payment tool, or for investment purposes”, and a virtual token as a “digital representation of a group of rights that can be issued and traded digitally through a virtual asset platform (a platform operated by a virtual asset provider licensed by VARA). Up to date, the special VARA committee is not yet fully operative and we may expect some changes to the regulation of in-game utility tokens and NFTs.

It is also important to verify if the company needs to obtain a VARA license. As VARA is responsible for regulating, supervising and overseeing the issuance, offering and relevant disclosure processes of virtual assets and NFTs. VARA is entitled to classify and determine the virtual assets and prescribe the standards and rules for trading in them. Besides, prior to issuance of in-game utility tokens, it is important to examine the nature of the token to be offered, as the company needs to analyze the legal nature of its tokens to ensure that it doesn’t have any similar elements with that of virtual assets and tokens which are traded on exchanges or trade in crypto commodities.

Process of establishing MaaS .To begin a metaverse business in Dubai, the following actions must be taken:

  1. Creating a 3D universe for the brand;
  2. Creating metaverse on the website;
  3. Publishing some other metaverse applications in the metaverse site;
  4. Applying to register for a metaverse licence.

Before obtaining the licence there is also a need to calculate the cost of launching the company in Dubai. Also, there is a need to determine how and when to launch the metaverse company in UAE. Having analyzed these issues and completed all above mentioned steps, the company can be incorporated in DMCC, it is possible to set up a company remotely from anywhere in the world, no physical presence is required during the process of incorporation. DMCC authority may require following additional documents to be submitted prior to the registration to the MaaS license application in DMCC, such as: questionnaire and undertaking subject to prior approval by the management.

The process of incorporation:

  1. After the query for company registration, DMCC’s representative will create and send access to the applicant’s unique portal account, so they can start the online application. Complete the form, pay the initial application fee of AED 1,035 (EUR 266.16) and submit application;
  2. DMCC will then complete the company name reservation, management and compliance approval;
  3. Thereinafter, the Company can finalize the process of the incorporation by paying relevant registration and license fees and signing the legal documents;
  4. DMCC will issue a provisional approval and bank letter (to open a company bank account).

DMCC allows a fully digital setup and application filing process. For successful license applications, DMCC will issue E-Licence, to enable doing business in DMCC. The average timeline to set up a company takes around 10 working days. However, it is worth to note that there are restrictions as to the operation of the license holder, specifically, standalone license activity allowed for new companies only and cannot be conducted with other activities under the same company.

Associated fees. Minimum share capital required for DMCC company is AED 50,000 (EUR 13,223). The total cost of a Metaverse Services license varies from AED 14,999 (3948,26 euro) to AED 26,395 (6948,08 euro). The pricing is determined by the type of business that the provider wants to establish in the metaverse, as well as the service or goods to be offered.

ADGM Reglab

Abu Dhabi Global Market (“ADGM”) is an international financial center in the capital of the United Arab Emirates, which fully opened for business from October, 2015. The three independent bodies of the ADGM (Registration Authority, Financial Services Regulatory Authority (“FSRA”), and the ADGM courts) create a coherent environment for registered companies to conduct business and operate with confidence. We earlier discussed cryptoregulation in ADGM and further confirmed that utility tokens are treated as commodities, thus not deemed specified investments under the Financial Services and Markets Regulations (FSMR).

The ADGM RegLab is a specially-tailored regulatory framework which provides a controlled environment for FinTech companies to develop and test innovative FinTech solutions. As the first RegLab in the gulf region and the world’s second most active FinTech sandbox, the RegLab is designed to foster innovation within the United Arab Emirates financial services market for both new market entrants and existing financial institutions. By creating a regulated, safe environment RegLab has been designed to allow FinTech innovation to be tested without being subjected to the full suite of regulatory requirements that would otherwise apply to traditional financial services firms. The set-up will allow FinTech participants to explore and develop FinTech solutions in a risk appropriate and cost-effective environment.

The ADGM RegLab is for all participants active in the FinTech space, from startups to existing, regulated companies. To qualify, FinTech participants must demonstrate an innovative technological solution that is at the stage of development ready for testing. The solution should also contribute to the development of the financial sector in the UAE, to be more precise, the proposed project must promote growth, efficiency or competition, promote risk management and better regulatory outcomes and last but not least, improve consumer choices.

Application process. Application and submission of files to the ADGM RegLab is done in cohorts. ADGM will publicly announce when it starts accepting applications for the next cohort. Upon completion of cohorts, there will be following steps with applications:

  • Interviews: Applicants will be invited to discuss their proposal, which will help the ADGM RegLab team better understand the proposal and assist with completion of application.
  • Review: Once the application has been submitted, the FSRA will assess the applicant’s proposal in accordance with the qualification criteria for inclusion in the RegLab.
  • Notification. Once the application is successful, the applicant will receive a notification of acceptance.
  • Bespoke approach. The ADGM RegLab team will work closely with the Applicant to build a bespoke set of regulatory requirements and conditions that will apply to their FinTech proposal.
  • Incorporation. Once regulatory requirements and conditions have been confirmed, the applicant must apply for a commercial license in ADGM.
  • Authorisation. Once the RegLab and the commercial license applications are finalized and approved, an authorisation will be granted directly to the applicant.
  • Launch. Upon authorization and admission into the RegLab, FinTech participants are eligible to operate within the RegLab for a period of up to two years to a point where their FinTech solution can be commercially launched.

Decision is yours

Both DMCC and ADGM have created an excellent platform for fintech and metaverse industry participants who are wishing to test their innovative solutions in tax efficient environments. ADGM has more regulatory certainty and established clear guidance on ICO, where the utility tokens are not regulated, thus de-juro metaverse businesses can sell their in-game assets in NFT platforms, unless such utility tokens are caught under regulation as accepted virtual assets in spot trading. While in DMCC, Metaverse service providers can issue in-game assets which can not be traded on exchanges or trade in crypto commodities. Our team is ready to analyze your projects from the legal perspective and help you to find a perfect jurisdiction to launch your business in the UAE, so you can rest assured that your projects are compliant with local laws and regulations.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.

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