Introduction
On 1 November 2022, the Dubai Financial Services Authority’s (DFSA) much anticipated cryptocurrency token regime came into force, extending the scope of current financial services activities to allow firms in the Dubai International Financial Centre (DIFC) to be able to provide products and services relating to ‘Crypto Tokens.’
The Crypto Token Regime
In November 2021, we gave an overview of the first phase of the DFSA’s intended Digital Assets regulatory regime, and in March 2022, the DFSA published Consultation Paper No. 143 – Regulation of Crypto Tokens – which sought public comment on their proposals. Following the consultation, which received 23 sets of comments from a range of stakeholders, the DFSA has implemented its Crypto Token Regime for firms providing financial services and carrying on other activities relating to Crypto Tokens in or from the DIFC.
The DFSA has recognised the growing interest in innovative financial products in Dubai and explained that the intention behind the regime is to “foster innovation in a measured, responsible and transparent manner while still meeting the DFSA’s regulatory objectives” and that it “aims to strike a balance between encouraging innovation in the DIFC and protecting the consumers of these financial products”.
These types of products are complex (as are the platforms and technology involved in their usage), and the regime has been carefully prepared to address the key regulatory issues and related risks, including:
- classification of Crypto Tokens - the DFSA considers a token to be a ‘Crypto Token’ if it (i) is used, or is intended to be used, as a medium of exchange or for payment or investment purposes; or (ii) confers a right or interest in another token that meets the requirements set out in the definition at (i). Certain tokens, including NFTs and investment tokens, are not classed as Crypto Tokens;
- recognition of other jurisdictions with an equivalent regime;
- anti-money laundering and combatting the finance of terrorism;
- technology governance;
- custody;
- consumer protection; and
- market integrity.
The Crypto Tokens regime further strengthens Dubai’s position as a global hub for technology and digital assets and as we are seeing a related increase in the number of cryptocurrency related enquiries and disputes, the regulatory regime is a welcome development.
DFSA Licensing
From 1 November 2022, all firms who are currently providing, or want to provide, financial services or products relating to Crypto Tokens in or from the DIFC will need to obtain the appropriate authorisations or licence from the DFSA. This can be done directly through the DFSA website.
Financial services and other activities can only be undertaken with a Crypto Token that the DFSA recognises in one of two ways:
1. If it is included in the one-off initial list of Crypto Tokens published by the DFSA, which consists of Bitcoin, Ethereum and Litecoin; or
2. If an application is made (for example, by an issuer or developer) to the DFSA for recognition of a specific Crypto Token, and the DFSA recognises that Crypto Token (in which case the DFSA will publish notice of such recognition on its website).
What do you need to do?
- If you are a DFSA Authorised Firm and already carry-on business relating to Crypto Tokens, you have six months (from 1 November 2022) to obtain the appropriate approvals in order to continue to do so. During which time, the DFSA has confirmed you may continue to carry on that activity but may not expand those activities.
- If you are based in the DIFC but are not a DFSA Authorised Firm, and you carried on financial services business in relation to Crypto Tokens (before 1 November 2022), you will need to obtain the relevant authorisation from the DFSA before continuing to carry on that activity.
Failure to do so will be a breach of the laws and the DFSA Rules.
If you would like to discuss how the introduction of the Crypto Token regime may impact your business, please contact Alexandra Lester or Lucy Nash.
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