DFSA starts 30-day public consultation on security tokens regulations

Proposed regulations include safeguards to tackle investor protection issues and misconduct risks

United Arab Emirates - Dubai - January 20, 2011.

BUSINESS: A woman walks past the lobby of the Dubai Financial Services Authority offices located in the Dubai International Financial Centre in Dubai on Thursday, January 20, 2011. Amy Leang/The National
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The Dubai Financial Services Authority, the regulator of the emirate’s financial hub, Dubai International Financial Centre, has published its framework to regulate security tokens for public consultation.

The proposed regulations include safeguards to tackle investor protection issues and misconduct risks, the DFSA said in a statement on Monday. They also address market integrity, financial stability as well as money laundering and terrorism financing threats in the direct access environment.

Security tokens are a new and growing area of interest and the DFSA is actively engaged with key stakeholders in Dubai and across the world on the future of finance and financial technology, including distributed ledger technology (DLT) applications, it said.

“The proposal for regulation of security tokens is a key milestone in paving a clear and certain path for those issuers who wish to raise capital in or from the DIFC using DLT and similar technology, and for those firms who intend to be involved in this market, by conducting or providing financial services,” Bryan Stirewalt, chief executive of the DFSA, said.

Security tokens create rights and obligations that are the same as, or are substantially similar to conventional investment instruments.

However, the DFSA’s proposed framework goes beyond typical securities to cover derivatives as well. This enables the use of DLT and similar technologies across the full spectrum of investments in a consistent manner, the regulator said.

“We have drawn on the experience of other regulators who have taken cautious steps in this rapidly developing area, while addressing DIFC specific needs,” Mr Stirewalt said.

The DFSA, which will receive public comments for a 30-day period, said the proposed regulations cover offerings of security tokens to the public and the trading of security tokens. They also address the provision of other financial services relating to security tokens, such as providing custody to digital wallets holding security tokens.

Some of the key changes proposed by the DFSA include allowing facilities that trade security tokens to have direct access members, including retail clients, enhanced disclosure in prospectuses and increased requirements for those providing custody of digital wallets.