RELATED — Dubai adopts first law regulating virtual assets
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.
The Outsider
Stephen King, Penguin
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The biog
Hobbies: Salsa dancing “It's in my blood” and listening to music in different languages
Favourite place to travel to: “Thailand, as it's gorgeous, food is delicious, their massages are to die for!”
Favourite food: “I'm a vegetarian, so I can't get enough of salad.”
Favourite film: “I love watching documentaries, and am fascinated by nature, animals, human anatomy. I love watching to learn!”
Best spot in the UAE: “I fell in love with Fujairah and anywhere outside the big cities, where I can get some peace and get a break from the busy lifestyle”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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