On November 1, 2022, the Dubai Financial Services Authority (DFSA) the highly anticipated Cryptocurrency Token Regime has come into force, expanding the scope of current financial services activities to enable businesses in the Dubai International Financial Center (DIFC) to be able to provide products and services related to “crypto tokens”.
The Crypto Token Regime
In November 2021, we provided an overview of the first phase of the DFSA’s planned digital asset regulatory regime, and in March 2022, the DFSA released Consultation Paper No. 143 – Regulation of Crypto Tokens – which sought public comments on its proposals. Following the consultation, which received 23 rounds of comments from a range of stakeholders, the DFSA has implemented its Crypto Token Regime for companies providing financial services and carrying out other activities related to crypto tokens in or from the DIFC.
The DFSA acknowledged the growing interest in innovative financial products in Dubai and explained that the intention behind the scheme is to “drive innovation in a measured, accountable and transparent manner while meeting DFSA regulatory objectives“and that he”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 use), and the regime has been carefully prepared to address key regulatory issues and associated 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 in (i). Some tokens, including NFTs and investment tokens, are not classified as crypto tokens;
- the recognition of other jurisdictions with an equivalent regime;
- the fight against money laundering and the financing of terrorism;
- technology governance;
- 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 see a related increase in the number of cryptocurrency-related inquiries and disputes, the regulatory regime is a welcome development.
From November 1, 2022, all companies that currently provide or wish to provide financial services or products related to crypto tokens in or from the DIFC will need to obtain the appropriate permissions or licenses 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 recognizes in one of two ways:
1. If included in the unique initial list of Crypto Tokens published by the DFSA, which consists of Bitcoin, Ethereum, and Litecoin; Where
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 recognizes that Crypto Token (in which case the DFSA will publish a notice of such recognition on its website).
What should you do?
- If you are a DFSA-approved business and are already doing business related to crypto tokens, you have six months (from November 1, 2022) to obtain the appropriate approvals to continue doing so. During this period, the DFSA has confirmed that you can continue to carry on this activity, but cannot expand these activities.
- If you are based at DIFC but are not a DFSA approved business and were engaged in financial services activities in relation to crypto tokens (prior to November 1, 2022), you will need to obtain the appropriate authorization from the DFSA before continuing to engage in this activity.
Failure to do so will be a violation of laws and DFSA rules.