The digital asset industry is maturing, and regulators are busy figuring out how to create a conducive framework for innovation whilst protecting the integrity of the market and consumers. The Virtual Assets Regulatory Authority (VARA) in Dubai has established itself globally as a leader in virtual asset regulation, with a clear structural regime that keeps future challenges at bay while also nurturing the compliance and commercial prospects of the industry.
Among the many regulatory classifications developed by VARA, one unique and increasingly prevalent form of classification is the Sponsored Virtual Asset Service Provider (Sponsored VASP). For anyone who is already a player in this fast-evolving region or who is contemplating entering the UAE virtual asset market, it is useful to know something about Sponsored VASPs.
This article will explore the concept of Sponsored VASPs, how Sponsored VASPs are different from other types of VASPs, what activities the Sponsored VASP can carry on in the UAE, and what the aspiring operator must do to become a Sponsored VASP.
What is a Sponsored VASP?
A Sponsored Virtual Asset Service Provider is a business that is under the regulatory oversight of an existing licensed VASP Sponsor. In simple terms, the Sponsor takes on the regulatory role, and the Sponsored VASP can conduct certain permissible virtual asset activities in Dubai while the Sponsor holds both legal and regulatory responsibility for those activities.
Sponsored VASPs are not licensed by VARA; rather, they are permitted to engage in certain activities within the parameters and conditions of their Sponsor’s license conditions. This arrangement provides an opportunity for smaller, new, or foreign virtual asset businesses to get their feet wet, potentially grow their business, and operate in a regulated environment without having to commit to a full licensing regime from day one.
It is a “regulatory sandbox in a sandbox” – controlled and supervised, but enables commercial use.
Who Can Be a Sponsor?
To become a Sponsor VASP, an entity must:
- Be licensed by VARA in one or more virtual asset activity categories (e.g., broker-dealer, exchange, custodian, etc.).
- Meet strict compliance, governance, and financial requirements.
- Have a demonstrated capacity to supervise, monitor, and take responsibility for the Sponsored VASP.
- Obtain explicit approval from VARA to sponsor other entities.
Sponsors are held accountable for the conduct, risk management, reporting, and compliance of any Sponsored VASP operating under their wing. This means Sponsors act as both regulators and risk managers for their Sponsored partners.
What Can Sponsored VASPs Do?
The activities a Sponsored VASP can engage in are limited to the specific scope approved under their Sponsor’s license. Typically, these may include:
- Marketing and promotional activities.
- Technology testing and service demonstrations.
- Limited, controlled onboarding of customers or counterparties.
- Offering VA services under supervision (e.g., wallet services, simple OTC trades).
VARA typically restricts Sponsored VASPs from engaging in:
- Independent custody of client funds or assets.
- Offering complex or leveraged financial products.
- Unsupervised client onboarding or KYC/AML operations.
Importantly, every activity must be pre-approved and continuously monitored by the Sponsor, who bears full regulatory responsibility.
Why Choose the Sponsored VASP Route?
For startups, foreign companies, or early-stage projects, becoming a Sponsored VASP offers several compelling advantages:
1. Faster Market Entry
Launching as a Sponsored VASP enables companies to operate under an existing regulatory framework without waiting months for a full VARA license. This accelerates go-to-market timelines while ensuring compliance.
2. Cost Efficiency
Full licensing under VARA can involve significant legal, consulting, and capital requirements. Operating under a Sponsor significantly reduces that initial burden.
3. Regulatory Familiarization
Sponsored VASPs gain firsthand experience operating within VARA’s regulatory regime, making future license applications smoother and better-informed.
4. Support and Supervision
Sponsors often provide infrastructure, compliance tooling, and business mentorship, de-risking the operational journey for younger firms.
5. Credibility
Being affiliated with a VARA-licensed Sponsor builds instant trust with customers, partners, and investors.
How to Become a Sponsored VASP
To become a Sponsored VASP in Dubai under VARA’s framework, here’s a general pathway:
1. Identify a Sponsor
Seek out a VARA-licensed entity that:
- Has Sponsor status.
- Operates in a complementary activity (e.g., custody, brokerage).
- Has the capacity and willingness to onboard new Sponsored entities.
Engage in detailed discussions to understand the commercial, legal, and operational terms of sponsorship.
2. Define the Activity Scope
Work with your Sponsor to define:
- Your business model.
- The specific virtual asset activities you plan to undertake.
- Technology stack, KYC/AML workflows, client segmentation.
The Sponsor must assess whether they can supervise and assume responsibility for your operations.
3. Submit to Sponsor Due Diligence
Before anything goes to VARA, your Sponsor will conduct:
- Fit and Proper assessments of your leadership.
- Financial and legal due diligence.
- Risk and compliance framework reviews.
Sponsors must be able to justify to VARA why they are willing to support your application.
4. Sponsor Applies to VARA
The Sponsor submits a formal application to VARA detailing:
- The nature of your business.
- The controls and oversight mechanisms in place.
- Any client-facing technology and marketing materials.
VARA reviews the submission, may request clarifications or additional documentation, and makes a decision.
5. Begin Operations (with Guardrails)
If approved, you can begin operations under the Sponsor’s oversight. All activity must:
- Stay within the approved scope.
- Be supervised in real time.
- Be documented, auditable, and reviewable by both VARA and the Sponsor.
Any deviation may lead to regulatory consequences for both you and the Sponsor.
What Comes Next?
Many Sponsored VASPs use the model as a launchpad. After 6–12 months of supervised operations, companies may pursue a full VARA license by:
- Demonstrating a track record of compliance.
- Expanding internal governance and compliance teams.
- Re-submitting with enhanced documentation and experience.
This pathway allows for risk-mitigated innovation, building operational maturity while remaining under regulatory oversight.
Final Thoughts
Ultimately, the Sponsored VASP model under VARA is among the most commercially viable regulatory instruments available in the global virtual asset sector. This form of regulation under VARA allows new ideas and enterprises to surface. It can help startups to build on those ideas and firms operating in a cross-border fashion to localize operations, while controlling regulatory risk.
For businesspeople and entrepreneurs seeking to enter Dubai’s expanding virtual asset ecosystem, leveraging the Sponsored VASP model may increase regulatory and commercial viability while giving you great flexibility in your operations and business vision.
As with all things in this sector, the key to running a successful business in this space for the long term is openness and accountability alongside your Sponsor and the regulator. And, in the case of Dubai, the team at VARA is keen on responsible operators getting themselves set up in good order to conduct credible, legitimate and responsible digital asset business – and has made this path very clear.
