04 Nov 2022

DFSA Crypto Token Regime

Authored by: Catriona McDevitt

In our previous article titled The Cryptosphere and the UAE , we discussed The Dubai Financial Services Authority’s (DFSA) Consultation Paper No. 143 (CP 143) in relation to the regulation of Crypto Tokens in the Dubai International Financial Centre (DIFC).

The DFSA have completed their consultation and enacted a new regime with respect to Crypto Tokens in the DIFC (the Crypto Token Regime), which takes effect from 1 November 2022. Substantial changes have been made to the DFSA Rulebook in order to include reference to Crypto Tokens. The recent developments by the DFSA in relation to Crypto Tokens marks another progressive step in the adoption of crypto related assets in the UAE and is the second phase of DFSA regulations following the Regulation of Investment Tokens regime introduced by the DFSA in October 2021.

The DFSA noted in its media release on 1 November 2022 that the new regime means that the scope of several current financial service activities- such as advising, dealing, arranging, trading and custody- is now extended to allow firms in the DIFC to be able to provide products and services in relation to Crypto Tokens.

Rule A2.5.1 of the DFSA Rulebook (General Module) states that a token is a Crypto Token if it:

(a) is used, or is intended to be used, as a medium of exchange or for payment or investment purposes; or

(b) confers a right or interest in another Token that meets the requirements in (a).

A Token is not a Crypto Token if it is an Excluded Token (such as NFTs, utility tokens or a Central Bank digital currency) or an Investment Token (that is, a security token or derivative token) or any other type of Investment.

Following the implementation of the Crypto Token Regime, any person proposing to carry out certain activities in or from the DIFC, in relation to Crypto Token financial related services, will require DFSA approval or prior authorization.

The DFSA have also published a list of Crypto Tokens which are “recognized” by it and which can be used in connection with a financial promotion, financial service or public offering in the DIFC- namely, Recognised Crypto Tokens. These are Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC). Rule 3A.4.1(2) (General Module) of the DFSA Rulebook notes that the DFSA must publish any Initial List within 30 days of the commencement date (1 November 2022). The DFSA may include a new Crypto Token on the Initial List if an application is made to the DFSA for recognition under GEN section 3A and the DFSA is satisfied that it meets the requirements in Rule 3A.3.4 (General Module) of the DFSA Rulebook.

The Crypto Token Regime is a very welcome step in the development of regulatory frameworks by the DFSA in relation to crypto assets and builds on its previous Investment Token regulations. The DFSA’s recognition of the continually evolving nature of crypto assets is evident in its media release statement on 1 November 2022 in which it states that it will consider further changes and amendments to the Crypto Token Regime in accordance with best practice and standards and that ultimately, it aims to strike a balance between encouraging innovation and consumer protection.

Please contact the Banking & Finance team for any queries in relation to the regulation of crypto assets in the UAE.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.