Dubai Regulator Balances DeFi Risks with Licensing Boom

Established in 2022, VARA oversees virtual asset activities across most of Dubai outside the Dubai International Financial Centre. It currently supervises nearly 50 firms under its Virtual Asset Service Provider (VASP) regime. Applications accelerated after the introduction of tiered token rules and derivatives guidelines, reflecting Dubai's appeal to real-world asset (RWA) tokenization projects and institutional players.

DeFi exploits drive cybersecurity push

DeFi protocols, which enable lending, trading and yield services without central intermediaries, suffered major blows in April. North Korean-linked hackers allegedly carried out two exploits totalling nearly $578mn.

On 1 April, Solana-based Drift lost $280mn–$285mn from its vault. Weeks later, on 18 Apr, the Kelp restaking exploit drained roughly $292mn–$296mn, triggering $16.5bn in outflows from Aave (AAVE), one of the largest DeFi lending platforms. These incidents left Solana’s derivatives sector with a $308mn deficit, according to Token Terminal data.

VARA General Counsel Ruben Bombardi said the authority applies a broad approach to cybersecurity. "We are looking at cybersecurity through a horizontal lens, not just for DeFi," he told Sandmark.

VARA is advancing pilot programmes on liquidity pools, liquid staking and related areas. These efforts tie directly to recent exploits by strengthening smart contract audits and security standards without eroding DeFi’s decentralized principles.

Learning from past crises on leverage

Bombardi, who witnessed the 2008 crisis after the Lehman Brothers collapse, sees parallels in crypto’s overcollateralized structures.

"I'm old enough to have been in the middle of Lehman, and this looks very much like what we were doing back in the day," he said.

VARA prioritizes leverage and margin controls to avert systemic risks. It recently issued derivatives rules focused on client suitability, margin requirements, asset segregation and investor protections.

Prediction markets under review

Prediction markets, popular for event-based trading that blurs betting and finance, pose challenges under Sharia principles that prohibit gambling. VARA said it will assess platforms case-by-case. "The taxonomy is going to be a crucial element around prediction markets because it's such a big product that you can't really put it in one box," Bombardi explained.

Global edge amid pipeline growth

Unlike more restrictive regimes such as the US SEC, VARA offers a tailored, innovation-friendly framework that attracts serious TradFi and RWA participants. Licensing timelines typically span six to 12 months for prepared applicants, with emphasis on compliance support rather than outright rejections.

The authority holds more than 400 applications, many from Category 1 RWA tokenization firms. It projects an eightfold increase in licensed entities over the next two to three years. This growth could solidify Dubai’s competitive position against Singapore’s Monetary Authority (MAS), Hong Kong’s Securities and Futures Commission (SFC), and Abu Dhabi’s Global Market (ADGM) by combining regulatory clarity with faster market access and strong banking integration potential for compliant firms.

A VARA spokesperson noted the collaborative approach: "We don't have a rejection rate per se. We actually focus on helping as many VASPs along in the process as possible, as long as they commit to working with us in a fair and equitable manner."

Industry participants welcome the balance. Licensed operators in Dubai report that VARA’s pragmatic stance, paired with enforcement against unlicensed entities, creates a clearer operating environment for institutional crypto activities.