What is the DFSA’s approach to the regulation of cryptocurrencies?

Companies can apply to the DFSA to be licensed before the regulations go live on November 1

The Dubai Financial Services Authority published its framework to regulate security tokens for public consultation earlier this year. Amy Leang / The National

The regulation of crypto tokens has been a hot topic globally, as investment in digital coins becomes more widespread.

As part of their mandate to protect users of financial services, central banks have begun to assess how they can regulate the use of these tokens.

In March this year, the Dubai Financial Services Authority, the regulator of the emirate’s financial hub, issued its Regulation of Crypto Tokens consultation paper.

The paper set out proposals for the regulation of companies wanting to provide financial services in respect of crypto tokens in or from the Dubai International Financial Centre. After reviewing responses to the paper, the DFSA has published a feedback statement explaining:

• Our thinking in areas where changes were made, or where we had reasons not to make changes.
• Our plans for implementation of the crypto token regime, including how we will deal with firms applying to be licensed by the DFSA in this area.
• Our plans for future work in the crypto area to develop our regulation further.

Here are 10 things you need to know about our feedback statement and proposed regulations:

1. Proposed regulations

Our proposed regulations encourage companies to balance innovation in the crypto area while paying appropriate attention to the needs of their customers and the risks in the crypto market.

2. Crypo token definition

Crypto tokens are defined as a token that is used, or is intended to be used, as a medium of exchange or for payment or investment purposes but excludes an investment token, or any other type of investment, or an excluded token.

We have included a “Token Decision Tree” to help market participants classify different types of tokens. Common types of crypto tokens are cryptocurrencies, stablecoins and utility tokens.

3. DFSA-recognised crypto tokens

Not all crypto tokens can be used. Only DFSA-recognised crypto tokens, which meet certain criteria, can be used in the DIFC. The DFSA will publish a short initial list of “Recognised Crypto Tokens”, which will be available on our website when the regime comes into force.

4. NFTs

For now, non-fungible tokens (NFTs) do not fall within the scope of financial services regulation.

NFTs that fall within the definition in our rules are considered to be “Excluded Tokens” and will be outside the scope of financial services regulation.

Issuers of NFTs, and persons providing services in relation to NFTs (or utility tokens), such as auction houses and issuance platforms, will be required to register with the DFSA as a Designated Non-Financial Business or Profession (DNFBP) and comply with the anti-money laundering regime.

Just because a token is called an NFT will not necessarily make it one and we will take a substance-over-form approach in determining its classification.

If it displays characteristics beyond the precise definition that we have put in place, then it is likely to fall under DFSA financial services regulation, as a crypto token or an investment token.

Consequently, any financial service provided with these tokens will be regulated and require appropriate DFSA authorisation.

5. Prohibited tokens

Certain crypto tokens are prohibited. No financial services activities can be carried out with what we call “Prohibited Tokens”. These include algorithmic tokens and privacy tokens.

6. Company licences

Companies can apply to be licensed. The regime will go live on November 1 and firms may submit early application to the DFSA. This form can be found on the DFSA’s website, and answers provided will help us determine a company’s readiness to be regulated and operate a crypto token business.

7. Companies must be based in the DIFC

We expect all companies that want to be licensed by the DFSA and provide services in relation to crypto tokens to have a substantial presence in the DIFC and have their day-to-day management and oversight of their business carried out in the Dubai financial hub.

8. Financial services activities

A range of financial services activities can be carried out with crypto tokens. This includes the provision of custody, managing assets, trading and arranging and advising, for example.

However, we have not allowed some financial services activities to carry out crypto token business, including those that are providing money services, those that are providing crowdfunding services and those operating a representative office.

9. Be well prepared

Companies wanting to provide a crypto token business should be well prepared. In addition to completing the appropriate application forms, we expect companies to prepare well thought-out regulatory business plans, business continuity plans, and AML risk assessments (or amendments to these documents if they are already authorised by the DFSA), for example.

We would also expect to see evidence of how companies will comply with the new requirements in the crypto token regime, for example, technology governance, consumer disclosure and risk warnings.

10. Future areas of policy focus

To enable us to continue developing our regulation in the crypto area, we will include AML/CFT, staking and decentralised finance. Again, we will focus on the balance between innovation and market development, and consumer protection and risk management.

Peter Smith is the managing director of strategy, policy and risk at the DFSA