DFSA unveils new crypto token regime for DIFC

Crypto tokens are a class of token that can be used as a medium of exchange, or for payment or investment purposes – excluding investment tokens which are regulated under a separate regime. Crypto tokens represent their owner’s stake in the cryptocurrency company but can also be exchanged for goods and services. They are traded on blockchains and are based on the same underlying technology as cryptocurrencies.

Barkha Doshi of Pinsent Masons said the new regime was evidence of how swiftly the United Arab Emirates (UAE) has become one of the major crypto hubs in the world. “After the establishment of the Virtual Assets Regulatory Authority (VARA) and governing regulations published by Financial Services Regulatory Authority (FSRA) and the Securities and Commodities Authority (SCA), the Dubai International Financial Centre (DIFC) has now started its foray into the crypto sector by introducing a regulatory regime for crypto tokens,” Doshi said.

She added: “The regulation on crypto tokens demonstrates the regulator has its eye on the key issues that need to be addressed in order to establish a robust and compliant virtual asset industry which will attract more businesses in the UAE operating in this space.” It comes after the regulator launched its separate regulatory regime for ‘security tokens’ and ‘derivative tokens’ – known collectively as ‘investment tokens’ – in October 2021. Investment tokens are crypto assets that have a similar purpose or effect as conventional financial investments.

The crypto token regime covers a broader scope of crypto assets than the investment token regime, bringing them inside the DFSA's regulatory perimeter. The DFSA said the reform was necessary to mitigate anti-money laundering (AML) risks, as well as wider issues relating to consumer protection, market integrity and safe custody. DFSA will publish an initial list of ‘pre-recognised’ crypto tokens that will be immediately available for firms to use to conduct financial services in or from the DIFC. Crypto tokens that are not on the pre-recognised list must apply to the DFSA. Recognition must be granted before it is available for use by a DFSA-authorised firm.

The DFSA said it will base its decision to recognise a crypto token on the size, liquidity and volatility of that token, as well as the suitability of the technology used in connection with it. Officials will also consider whether risks associated with the crypto token are adequately mitigated – including risks relating to governance, legal and regulatory issues, cybersecurity, money laundering, market abuse and other financial crime.

The DFSA will examine the regulatory status of a crypto token in other recognised jurisdictions before making its decision. It said it may reject a token if there is insufficient transparency around its purpose, protocols, consensus mechanism, governance arrangements, founders, key persons, miners or significant holders.

NFTs and utility tokens, referred to by the regulator as ‘excluded’ tokens, will remain outside the scope of financial services regulation, but they will have to comply with the DFSA’s AML and counter-terrorist financing regime. Issuers of these tokens must register with the DFSA as a designated non-financial business or profession (DNFBP), unless their issuance is worth $15,000 or less. Service providers such as auction houses, issuance platforms and safekeeping services must also register as DNFBPs, unless they are solely providing technology support or advice to an issuer. They must also comply with the regulator’s AML regime.

Authorised persons will be able to carry out services related to crypto tokens, including dealing in investments as a principal or agent, managing assets, advising on financial products and providing custody. To distinguish between regulated and unregulated crypto asset activities, authorised persons will not be allowed to provide services in relation to both crypto tokens and excluded tokens.

Doshi said the DFSA's assessment of recognised crypto tokens was similar to the FSRA's assessment of ‘accepted virtual assets’. “In its feedback statement, the DFSA reiterated that no financial services or activities can be undertaken in relation to crypto tokens unless it is recognised by the DFSA. Financial promotion in relation to crypto tokens that are not considered recognized crypto tokens by the DFSA is also prohibited,” Doshi said.