Dubai Introduces A Regulatory Framework For Investment Tokens

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The DFSA has been performing as the financial watchdog in making Dubai a digital currency haven. Over the years, it has introduced several measures to stimulate the digital financial and technological environment while also striving to meet the market players’ demands and requirements.

According to a renowned investment group, Dubai has long established itself as one of the most digital currency-friendly cities, pushing the UAE towards being a blockchain hub. Sharing the stage with countries Malta and Switzerland that are offering fierce competition in the sector, DFSA has always recognised regulations as a critical factor in aiding the growth of digital currencies.

In its latest measures governing the market, the DFSA announced a new regulatory framework for investment tokens which the body believes is relevant to the market they monitor. Many digital asset investors confirmed that the announcement reflects proposals that were outlined in a consultation paper issued earlier this year in March.

The new regulatory framework is the first phase of the DFSA’s Digital Assets regime. As reported in March 2021, DFSA called on members of the public to submit comments on its proposed rules for cryptocurrencies considered to be security tokens. The new initiatives announced through the investment token framework are designed to safeguard investors and provide legal certainty for the market operators.

Scope Of Framework 

The new regulatory framework divides and defines investment tokens as either a security token or a derivative token. More specifically, the announcement specified investment tokens as security or derivative issued, transferred and stored using distributed ledger technology (DLT) or similar technology, in the form of what DFSA calls “a cryptographically secured digital representation of rights and obligations. Although the announcement emphasises cryptographically securing investment tokens through DLT, it does not define investment tokens as cryptocurrency.

The newly introduced regulatory framework will apply to anyone interested in marketing, trading, issuing or holding investment tokens in or from the Dubai International Financial Centre (DIFC). Compliance with the new regulations is also applicable to authorised firms seeking to offer financial services related to or concerning investment tokens. Some of these services include dealing, advising, and arranging transactions and managing portfolios and investment funds with investment tokens.

The Approach 

The approach taken by the DFSA through the new regulations for investment tokens is seen to bring investment tokens within the scope of the existing regime and not to establish an entirely separate regime for these instruments. The consultation paper that outlined the new regulatory framework proposed to direct this approach through four means,

  • By making use of the existing regulatory framework for “Investments”, while addressing specific risks associated with the tokens, especially those that have to do with technology risks.
  • By not being too restrictive or rigid, in a way that allows the DFSA to accommodate the evolving nature of the underlying technologies that have the potential to drive tokenisation of traditional financial products and services.
  • By addressing risks to investor or customer communication and market integrity, and systemic risks, which may arise in instances where new technologies are used in the provision of financial products or services in or from the DIFC
  • Remaining true to the underlying key framework, its characteristics and attributes of regulated financial products and services, as far as practicable.

In the context of investment planning, the DFSA is also formulating proposals for other tokens that are not touched by the recent regulatory framework –such as exchange tokens, or cryptocurrencies, utility tokens and certain asset-backed tokens such as stable coins. The DFSA mentioned it would issue its second consultation paper later this year.

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