DFSA publishes regulatory framework to oversee cryptocurrencies

Open for public consultation until May 6, the proposed regulations are aimed at protecting investors and ensuring market integrity

The Dubai International Finance Centre. The financial hub's regulator has released its proposed framework covering cryptocurrencies. Ruel Pableo / The National

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The Dubai Financial Services Authority, the regulator of the emirate’s financial hub, has published its regulatory framework overseeing crypto tokens, or cryptocurrencies, for public consultation.

The proposed regulations are aimed at protecting investors and apply to companies interested in marketing, issuing, trading or creating crypto tokens in or from the Dubai International Finance Centre, the DFSA said in the consultation paper released on Tuesday.

“The DFSA has also formulated proposals to address risks relating to, for example, consumer protection, market integrity, custody and financial resources for service providers,” the agency said.

Last October, the DFSA unveiled its regulatory framework overseeing investment tokens as part of a two-phase approach to its “digital assets regime” that began in early 2021.

Central banks around the world have been reluctant to endorse cryptocurrencies because of their high volatility, speculative nature, lack of value and regulatory oversight. The Central Bank of the UAE also does not recognise cryptocurrencies as legal tender.

The DFSA’s crypto token framework covers a range of cryptocurrencies including Bitcoin, Ethereum and Solana, asset-backed stablecoins, which are tied to fiat currencies, and hybrid utility tokens.

Hybrid utility tokens, such as Filecoin and Huobi Token, are typically offered to the public through initial token offerings and the funds raised are used to develop the digital coin’s blockchain or service.

However, under the proposed framework, the DFSA will ban providers of privacy tokens and devices, and algorithmic tokens from operating in the DIFC.

Privacy tokens hide, anonymise, obscure or prevent the tracing of the holder of a token, the DFSA said.

“All these features make it virtually impossible to identify accurately the holder or beneficial owner of a token or to trace a chain of transactions,” it said.

“On this basis, we propose to ban these types of tokens and devices and introduce a prohibition that no public offer or promotion of privacy tokens shall take place in or from the DIFC.”

Meanwhile, algorithmic tokens, such as Tether, are designed to achieve price stability through balancing the circulating supply of the digital coin through behind-the-scenes corrections, the DFSA said.

“In other words, these tokens use a method which can issue more coins when its price increases and buy them off the market when the price falls.

“These mechanisms are not immediately transparent to users, markets and regulators, and may not enable us to exercise effective oversight and supervision or users to understand how the value is corrected,” it said.

The DFSA is also proposing to exclude certain tokens — utility tokens, non-fungible tokens and Central Bank Digital Currencies — from its definition of crypto currencies. These will “not fall under the scope of its regulatory framework”, it said.

With more than 2,500 crypto tokens traded globally in mainly unregulated markets, the DFSA is proposing an “accepted crypto token” approach similar to that of Abu Dhabi Global Markets’ Financial Services Regulatory Authority (FRSA) and the Central Bank of Bahrain, the consultation paper said.

This means that any person wanting to provide a financial service in relation to a crypto token or a crypto token derivative will only be able to do so if the DFSA has accepted it for use in the DIFC, it added.

In 2018, ADGM's FSRA launched a comprehensive virtual asset framework for the trade of virtual assets by businesses, including platforms that it calls multilateral trading facilities, custodians and brokers.

DFSA's consultation paper is open to the public for comment until May 6.