UAE Financial Center Authority unveils regulatory framework for digital assets

Digital assets have been further embraced today by the Dubai Financial Services Authority (DFSA), which introduced a framework to oversee investment tokens.

The regulatory framework for investment tokens will regulate derivative and security tokens. This is the first of two phases of the DFSA Digital Assets Regime. The framework reflects regulations proposed earlier this year in DFSA consultation document 138.

DFSA CEO, responsible for strategy, policy and risk, Peter Smith, noted that the framework is relevant to the market thanks to the investment token consultations. The consultations allowed the DFSA to understand what businesses were looking for in a regulatory framework.

Smith stressed that creating ecosystems that allow innovative businesses to thrive is a key priority for the governments of Dubai and the United Arab Emirates when introducing the framework. The DFSA regulates the UAE’s financial center, the Dubai International Financial Center (DIFC).

The DFSA previously released the proposed framework to regulate security tokens in March for public comment. It included clauses to address issues in the cryptocurrency industry, including issues of investor protection, financial stability, market integrity, terrorist financing, and money laundering threats.

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What the regulation covers

In the regulatory framework, investment tokens are defined as derivative tokens or security tokens. They are:

  • A derivative or security in the form of cryptographically secure digital representations of obligations and rights transferred, issued and stored through Digital Ledger (DLT) technology or other technologies or
  • Cryptographically secure digital representations transferred, transmitted and stored using DLT or similar technology and;
  1. Confer obligations and rights of a nature substantially similar to those conferred by a derivative or a security or
  2. Has an effect or purpose substantially similar to that of a derivative or security.

The regulatory framework for investment tokens applies to anyone interested in marketing, trading, issuing or holding investment tokens in or from the DIFC. It also applies to authorized companies interested in providing investment token financial services, including:

  • Advice, negotiation or organization of transactions relating to investment tokens.
  • Management of discretionary portfolios or collective investment funds investing in investment tokens.

Take the lead in regulation

The regulatory framework for investment tokens is welcome as great news for the UAE crypto industry. The UAE is at the forefront of regulating the rapidly growing digital asset space. The DFSA makes other token proposals not covered by the regulatory framework for investment tokens.

They plan to release a second consultation paper later this year to cover utility tokens, exchange tokens or cryptocurrencies, and banknote-backed tokens like Stablecoins. This move is a step in the right direction, and the underlying regulation will help blockchain to further integrate into the mainstream.

Currently, cryptocurrencies like bitcoin are not authorized by the Central Bank of the United Arab Emirates. However, different cryptocurrency exchanges are allowed to operate in finance-free areas.

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