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VA Proprietary Trading Licence Code — Requirements and Compliance Brief

Brief on VARA's dedicated licence code for virtual asset proprietary trading created May 2023.

Summary

In May 2023, VARA published a circular creating a new licence code specifically for virtual asset proprietary trading. This development established a distinct regulatory category for entities that trade virtual assets using their own capital, separate from broker-dealer or exchange services conducted on behalf of clients. The creation of a dedicated licence code reflects VARA’s recognition that proprietary trading presents different risk profiles than customer-facing activities and warrants specific regulatory treatment.

Background and Context

Proprietary trading — where a firm trades financial instruments using its own capital rather than clients’ funds — has historically been subject to distinct regulatory treatment in traditional financial markets. The 2008 financial crisis prompted significant regulatory attention to proprietary trading by financial institutions, with the Volcker Rule in the United States and similar provisions in other jurisdictions restricting or separating proprietary trading from customer-facing banking services.

In the virtual asset context, proprietary trading takes several forms: market-making activities (providing liquidity by quoting bid and ask prices), directional trading strategies (taking positions based on market views), arbitrage (exploiting price differences across exchanges or markets), and algorithmic trading (using automated systems to execute trading strategies).

VARA’s May 2023 circular created the regulatory infrastructure to license and supervise these activities within its jurisdiction, complementing the existing seven regulated activity categories established by the Virtual Assets and Related Activities Regulations 2023.

Regulatory Details

Licence Code Structure

The proprietary trading licence code sits alongside other activity-specific authorisations within VARA’s licensing framework. An entity seeking to conduct proprietary trading must apply for this specific licence code, which may be obtained independently or in addition to other activity authorisations (such as exchange or broker-dealer licences).

The two-step licensing process applies: entities must first obtain an MVP Preparatory Licence before progressing to an MVP Operational Licence that permits active proprietary trading.

Risk Management Requirements

Proprietary trading presents specific regulatory risks that VARA’s framework must address:

Market Risk: Exposure to adverse price movements in virtual asset positions, requiring capital adequacy and position limit controls
Operational Risk: Technology failures, algorithmic errors, and execution risks associated with trading systems
Liquidity Risk: The ability to exit positions in volatile or illiquid virtual asset markets
Conflict of Interest: Potential conflicts between proprietary trading activities and customer-facing services, particularly for entities licensed for multiple activities

The Version 2.0 rulebooks published in May 2025 — which strengthened “market integrity and risk oversight” — likely incorporated enhanced requirements for proprietary trading risk management.

Capital Requirements

Entities conducting proprietary trading must maintain adequate financial resources to absorb trading losses. The capital requirements for proprietary trading entities may differ from those for customer-facing services, reflecting the different risk profiles. The fee structure and ongoing capital requirements are addressed in VARA’s licensing framework.

Impact on Licensed Entities

The proprietary trading licence code is relevant to several categories of entities:

Licensed Exchanges: Entities like Binance Dubai, OKX Middle East, Bybit Dubai, and Crypto.com Dubai may seek proprietary trading authorisation to conduct market-making or principal trading alongside their exchange operations
Specialised Trading Firms: Quantitative trading firms, market makers, and algorithmic trading operations seeking to operate in Dubai’s regulated virtual asset market
Investment Firms: Entities managing proprietary virtual asset portfolios for investment purposes

A July 2025 VARA circular issued a “reminder on the use of Licence Code for VA Proprietary Trading,” indicating that VARA identified the need to reinforce compliance with the proper use of this licence category — suggesting some entities may have been conducting proprietary trading activities without the appropriate authorisation.

Compliance Obligations

Entities licensed for proprietary trading must maintain the full suite of VARA compliance obligations, including:

AML/CFT programme requirements, since proprietary trading may involve receiving or sending virtual assets that require compliance monitoring
Marketing regulations if the entity markets its trading services
Regulatory reporting specific to trading positions, volumes, and risk exposures
FATF high-risk jurisdiction screening for counterparty transactions
Travel Rule compliance for qualifying transfers

International Comparison

The regulatory treatment of proprietary virtual asset trading varies across jurisdictions:

ADGM FSRA: Abu Dhabi’s FSRA regulates proprietary trading under its broader financial services framework
EU MiCA: MiCA’s treatment of proprietary trading depends on the classification of the activity under the regulation
Singapore: MAS regulates proprietary trading in digital payment tokens through its existing financial services framework

VARA’s creation of a specific licence code represents a more granular regulatory approach than most international comparators, providing dedicated regulatory infrastructure rather than fitting proprietary trading into broader activity categories.

What Proprietary Trading Means Under VARA

Proprietary trading in virtual assets refers to a licensed entity using its own capital to trade virtual assets for profit, as distinct from executing trades on behalf of clients. The May 2023 circular created a dedicated licence code for this activity, recognising that proprietary trading presents distinct risk profiles compared to customer-facing services like exchange operations or broker-dealer activities.

The distinction matters because proprietary trading introduces market risk (exposure to adverse price movements), counterparty risk (where trades involve bilateral agreements), and potential conflicts of interest (when the same entity also serves customers). VARA’s approach of creating a separate licence code enables the authority to apply tailored prudential requirements — including capital adequacy standards, position limits, and risk management frameworks — specifically calibrated to proprietary trading risks.

Types of Proprietary Trading Activity

Several categories of proprietary trading may fall within this licence code:

Market Making: Providing liquidity by maintaining bid and ask quotes on virtual asset markets. Market makers earn the spread between buy and sell prices and play a critical role in maintaining liquid, orderly markets. For VARA-regulated markets, authorised market making contributes to the price discovery and liquidity that supports healthy market functioning.

Directional Trading: Taking long or short positions based on market analysis, technical indicators, or fundamental research. Directional trading on a proprietary basis is a core activity of trading firms and may also be conducted by exchanges using their own capital alongside their order book operations.

Arbitrage: Exploiting price differences for the same virtual asset across different exchanges, markets, or trading pairs. Arbitrage activity helps maintain price consistency across markets and represents a lower-risk form of proprietary trading.

Algorithmic and High-Frequency Trading: Automated trading strategies executing large numbers of trades at high speed. These strategies require robust technology infrastructure, risk controls, and regulatory oversight to prevent market disruption.

The July 2025 Reminder Circular

VARA issued a “reminder on the use of Licence Code for VA Proprietary Trading” in July 2025. This circular suggests that the authority identified instances where entities were either conducting proprietary trading without the appropriate licence code or misusing the code. The need for a reminder circular indicates that VARA’s supervisory function was actively monitoring compliance with the proprietary trading framework and that some entities required corrective guidance.

This supervisory intervention is consistent with VARA’s broader enforcement pattern, where circulars and guidance precede formal enforcement action. Entities that fail to heed such reminders risk enforcement action including supervisory warnings, enforcement notices, or financial penalties.

Capital and Risk Management

Proprietary trading requires dedicated risk management frameworks that go beyond the standard compliance requirements applicable to all VASPs. Key risk management elements include:

Capital Adequacy: Maintaining sufficient own funds to absorb potential trading losses, with capital requirements calibrated to the entity’s trading volume and risk exposure
Position Limits: Maximum exposure limits for individual virtual assets, asset classes, and aggregate portfolio positions
Stop-Loss Controls: Automated mechanisms to close positions when losses exceed predefined thresholds
Stress Testing: Scenario analysis examining portfolio performance under adverse market conditions, including extreme volatility, liquidity crises, and correlation breakdowns
Segregation Controls: Clear separation between proprietary trading capital and customer assets (for entities also licensed for customer-facing activities)

Relevance to Licensed Exchanges

For entities like Binance Dubai and OKX Middle East that hold exchange licences, the proprietary trading licence code addresses a specific regulatory question: may a licensed exchange trade on its own account? The creation of a separate licence code provides the answer — proprietary trading is a distinct regulated activity requiring its own authorisation, even for entities already licensed for exchange operations.

This separation ensures that VARA can impose activity-specific conditions on proprietary trading (such as enhanced disclosure when an exchange’s proprietary trading desk interacts with its own order book) and monitor potential conflicts of interest between proprietary and customer-facing activities.

Impact on the DWTCA Ecosystem

The proprietary trading licence code expands the types of entities that may establish regulated operations within the DWTCA free zone and broader Dubai ecosystem. Specialised trading firms, quantitative funds, and market-making operations — entities that might not otherwise seek exchange or broker-dealer licences — now have a regulatory pathway for operating in Dubai’s virtual asset market.

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