The new DIFC crypto token regime
Written By
Partner
United Arab Emirates
I am the head of our Finance & Financial Regulation team in the Middle East and am also the global head of Islamic finance.
Associate
United Arab Emirates
I am an associate in the Dubai Finance & Financial Regulation practice group. I specialise in financial regulation for both traditional and digital asset types in the Middle East, with a particular focus on the United Arab Emirates in the technology, payments and fintech sectors.
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The Dubai Financial Services Authority (DFSA) has recently implemented the Crypto Token Regime in the Dubai International Financial Centre (DIFC).
The Crypto Token Regime has:
- extended the scope of many existing financial services activities including advising, dealing, arranging, trading and custody, to apply to the provision of products and services in relation to Crypto Tokens;
- implemented a wide range of amendments to existing laws and rulebook modules in the DIFC; and
- limited the use of Crypto Tokens to be those which are “recognised” by the DFSA.
What you need to do
If you are looking to develop or continue an existing virtual asset business in the DIFC you should seek advice on whether a licence is required to be issued by the DFSA under the Crypto Token Regime.
You should also consider whether the DIFC remains to be the best financial regulatory jurisdiction in the United Arab Emirates for your business model and offering.
Background
The Crypto Token Regime is the second phase of the DFSA’s updated regulatory regime for virtual assets and joins the Investment Token Regime which was introduced in 2021. The new regime has extended the scope of many existing financial services activities including advising, dealing, arranging, trading and custody to apply to the provision of products and services in relation to Crypto Tokens.
Under the new regime, financial services and activities can only be carried on in relation to “recognised” Crypto Tokens and an initial list has been published which sets out that the DFSA has initially recognised Bitcoin, Ethereum and Litecoin. It is expected that this public list will continue to expand as applicants apply to the DFSA to conduct business with additional Crypto Tokens.
Utility tokens and non-fungible tokens (NFTs) are excluded from financial regulation under the Crypto Token Regime. However, the DIFC AML / CTF regime will apply to both utility tokens and NFTs. The DFSA has prohibited the use of privacy tokens and algorithmic tokens and excluded central bank digital currencies.
The DFSA has stated that its next phase will be to issue public consultations on other areas including staking, DeFI and AML / CTF issues such as the travel rule.
The Crypto Token regime has some similarities to the existing virtual asset regime established by the Financial Services Regulatory Authority (FSRA) in the Abu Dhabi Global Market (ADGM).
However, some key difference in relation to the regimes are:
| DIFC | ADGM | |
| Recognised Crypto Tokens and Accepted Virtual Assets | The DFSA will expand its initial list of “recognised” Crypto Tokens for the DIFC. This list is public and applies to all entities in the DIFC and once a Crypto Token is “recognised” by the DFSA an application for recognition does not need to be made by another entity. | The FSRA assesses virtual assets on an entity-by-entity basis. An accepted virtual asset may be deemed suitable for use by more than one entity, but each entity is required to make an individual application to the FSRA. There is no public list of accepted virtual assets in the ADGM. |
| Fiat | Fiat Crypto Tokens must be “recognised” by the DFSA in order to be accepted for use in the DIFC. | In the ADGM, fiat tokens are treated as a form of digital representation of fiat currency and are carved out of the FSRA virtual asset regime. Where fiat tokens are used for the purposes of Money Transmission, then the activity is regulated by the FSRA as Providing Money Services. |
| Derivatives and funds | The Crypto Token Regime applies to derivatives transactions relating to Crypto Tokens, and to funds of portfolio managers that invest directly or indirectly in Crypto Tokens (e.g., through other fund structures, including ETFs, or indices). | Derivatives and collective investment funds of virtual assets, digital securities and utility tokens are regulated as specified investments in the ADGM. This means that they are carved out of the FSRA virtual asset regime. |
What should entities in or hoping to enter the DIFC be doing?
The DFSA expects full compliance with the new Crypto Token Regime. For new entrants to the DIFC this applies from the introduction of the regime on 1 November 2022. For existing licence holders that already provide services in relation to Crypto Tokens, there is a 6-month transition period in which to submit their Crypto Token recognition applications and have them assessed by the DFSA.
The Crypto Token Regime is the latest evolution we are seeing in the UAE’s development into a leading global jurisdiction for virtual assets. For new and existing entrants, it is important to consider whether the DIFC is the most appropriate jurisdiction in the United Arab Emirates for your business model and activities.
If you require further information or have any further questions, please contact our FinTech team
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