On 25 October 2021, the Dubai Financial Services Authority (DFSA), the regulatory body of the Dubai International Financial Centre (DIFC), announced that it implemented a regulatory framework for investment tokens issued or traded within the DIFC (Regulatory Framework for Investment Tokens), which follows from the Consultation Paper No. 138 (Regulation of Security Tokens) it issued earlier in March this year. Consequently, the UAE advances its status as a hub for technological innovation (and entrepreneurs); it fully embraces the global adoption of cryptocurrencies and blockchain technologies, as well as the demand for Investment Tokens, and the number of companies within the DIFC that are eager to issue, and trade in them, is steadily on the rise.
What does the Regulatory Framework for Investment Tokens do?
It comes from a number of “false starts” in the security token arena over the last few years, as Binance’s MENA director states, and is viewed by players in the market as a step in the right direction, especially as the crypto market is ever growing. Peter Smith, Managing Director of the DFSA, views this as creating an ecosystem for innovative firms to thrive in the UAE and introduce a framework that is relevant to the current market.
The UAE has been cementing its presence in the digital asset industry recently, with the UAE Minister of Economy Abdulla Bin Touq Al Marri declaring last April—at a panel for the World Economic Forum’s Global Technology Governance Summit—that cryptocurrencies and asset tokenization will be key to the country’s plans to double its economy in 10 years. In July, the UAE joined the global central bank digital currency race.
Key features of the Regulatory Framework for Investment Tokens include:
- facilitating the admission to trading of Investment Tokens on DFSA-regulated exchanges and multilateral trading facilities;
- systems and controls’ requirements applicable to trading venue operators, including a requirement for an independent technology audit;
- providing direct access to trading venues, including by retail clients, which is a significant deviation from the current intermediated model of trading;
- putting in place additional requirements for digital wallet providers, who hold Investment Tokens;
- additional disclosure requirements for prospectuses and other offer documents which are used for offering and marketing Investment Tokens; and
- additional requirements for other financial services providers who are dealing, arranging, advising on, and conducting asset management activities that involve Investment Tokens.
What is an Investment Token?
The Regulatory Framework for Investment Tokens defines an “Investment Token” as either a Security Token or a Derivative Token. Essentially, these are:
- a Security or Derivative in the form of a cryptographically secured digital representation of rights and obligations that is issued, transferred, and stored using Distributed Ledger Technology (DLT) or other similar technology; and
- a cryptographically secured digital representation of rights and obligations that is issued, transferred, and stored using DLT or other similar technology and: (a) confers rights and obligations that are substantially similar in nature to those conferred by a Security or Derivative; or (b) has a substantially similar purpose or effect to a Security or Derivative.
The key factors that the DFSA look to as the difference between conventional securities or derivatives and Investment Tokens is that the latter confer rights and interests that are attributable to its holders that are issued, stored, and transferred using cryptography and DLT whilst addressing investor and consumer protection needs and covering market integrity risks, complying with anti-money laundering and counter-terrorism financing laws and regulations.
Who does it apply to?
The Regulatory Framework for Investment Tokens covers all parties interested in market, issue, trade, or hold Investment Tokens in or from the DIFC and authorized firms wishing to undertake financial services relating to Investment Tokens. Parties who are interested in trading in Investment Tokens at DIFC must present a detailed analysis to the DFSA to obtain approval or authorization to conduct activities related to that Investment Token. As such, it provides guidance and assistance to the person/entity wanting to carry out financial activities in relation to the Investment Tokens and in determining whether the token is in fact an Investment Token and (if so) what type it is.
In addition, the DFSA recently formed a framework that allows the Dubai World Trade Centre Authority to issue all approvals and licenses needed for financial activities relating to crypto-assets, and is now drawing up proposals for tokens not covered by the Regulatory Framework for Investment Tokens. These are expected to cover exchange tokens (also known as cryptocurrencies), utility tokens, and certain asset-backed tokens (stablecoins).
Hunton Andrews Kurth LLP will continue to monitor further developments in the Regulatory Framework for Investment Tokens and share our insights and experience as our clients navigate through the same. Please feel free to contact the authors for further information and assistance.