THE REGULATION: SECURITY TOKENS IN THE UAE – Karm Legal Consultants
The UAE has emerged as a strong local market for technology and in particular has embraced crypto assets and financial technology, commonly referred to as fintech. This is reflected in the adoption of various initiatives and strategies at a national and local market level. At a national level, the National 4IR Strategy and Federal Blockchain Strategy, focuses on improving government efficiency, promoting new business through technological platforms and introducing a global blockchain platform that will establish the UAE as a leader in this field.
The regions free zones have launched their own programmes. This includes the Dubai International Financial Centre’s (“DIFC”) ‘Innovation Testing License’ for fintech business to test concepts primarily based on blockchain technologies within the DIFC. Similarly, the Financial Services Regulatory Authority (“FSRA”) launched ‘RegLab Sandbox’, a licensing framework for fintech companies to test their concepts in the ADGM. Recently, the UAE Centre for the Fourth Industrial Revolution (“C4IR”) begun a joint initiative between Dubai Future Foundation (“DFF”), the World Economic Forum (“WEF”), DIFC and DFSA to launch a ‘test bed’ for fintech companies to develop and test the tokenization of digital assets.
Moreover, regulators across the mainland and free zones have already issued or announced their intention to issue regulations governing crypto assets. The Securities and Commodities Authority (“SCA”) published its ‘Guidance for Crypto Asset Regulations’ and ‘Crypto Assets Activities Regulation’ (“SCA Framework”). The FSRA of Abu Dhabi Global Market (“ADGM”) issued its ‘Guidance on Regulation of Crypto Asset Activities’ to be read in conjunction with the ‘Guidance on Regulation of Initial Coin/Token Offerings and Virtual Currencies under the Financial Services and Markets Regulations 2015’. The guidance together with the applicable ADGM Regulations and FSRA Rules governing crypto asset activities is collectively referred to as the ‘Spot Crypto Asset Framework’ (“FSRA Framework”). Finally, the Dubai Financial Services Authority (“DFSA”) of DIFC issued its consultation paper on the ‘Framework for Regulating Security Tokens’ (“DFSA Framework”). Therefore, alongside these initiatives, the UAE is developing its crypto asset regulatory system in line with pre-existing financial governance, emerging technologies and the needs of the local markets.
Tokenisation, broadly defined, is the representation of a particular asset, such as equity or bonds, through the issuance of tokens representing fractional shares of the underlying asset, which can be financial or non-financial. A token can represent a share of any tradable asset, such as equity, debt, real estate, commodities or other assets. As such, security tokens also known as asset tokens are generally categorised as ‘Securities’ and therefore subject to a higher level of regulatory scrutiny. These tokens are issued on a blockchain or distributed ledger. This novel approach breathes fresh air into financial systems creating a new space for emerging service providers and secondary exchanges.
Regulators generally approach tokens based on their economic functions and we see three broad categories emerging globally: security token; payment token; utility token or alternatively a hybrid of the three.
HOW ARE SECURITY TOKENS REGULATED IN THE UAE
The SCA Framework has intentionally chosen to keep the definition of security token broad and does not provide a prescriptive definition for security tokens. The SCA Framework widely refers to securities, which are issued, transferred or traded using crypto assets, or crypto assets that would be deemed a security by the SCA as security tokens. Furthermore, ensuring a distinction between crypto assets regulated by the SCA and those regulated by the Central Bank of the UAE was a key consideration for the SCA.
The FSRA Framework defines crypto assets and thus security tokens, as a digital representation of value, which can be digitally traded and functions as a: medium of exchange; unit of account and or a store of value but does not have legal tender status in any jurisdiction. The FSRA Framework further clarifies, a crypto asset is neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Crypto Asset, and is distinguished from fiat currency and electronic money. Therefore, crypto assets are similar to physical commodities and treated as such from a regulatory perspective. (Contd. in PDF)