Regulation of Crypto Tokens and Digital Assets in DIFC

The rapid growth of the crypto token and digital assets industry has prompted the Dubai International Financial Centre (DIFC) and the Dubai Financial Services Authority (DFSA) [1] to institute comprehensive regulatory measures. These actions are intended to safeguard the financial system's integrity while promoting innovation and investments in this burgeoning sector.

Recognition of crypto tokens

The DIFC/DFSA Crypto Token Regime[2] establishes clear rules governing permissible activities associated with crypto tokens within the DIFC. The restrictions laid out in this regime are designed to ensure investor protection and compliance with financial market regulations. A pivotal provision stipulates that specific financial services related to crypto tokens can only be provided if these tokens are officially recognized. This also extends to options and futures linked to crypto tokens, categorized as specific derivatives. Presently, Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Toncoin (TON), and Ripple (XRP) are officially recognized as crypto tokens by the DFSA[3], whereas privacy tokens and algorithmic tokens are prohibited.[4]

Requirements for foreign branches

The DFSA Crypto Token Licence Regime[5] creates a transparent regulatory framework, enabling companies to operate in accordance with DIFC laws and standards. This framework distinguishes between two principal categories of entities: 1. DIFC Private and Public Companies and 2. foreign legal entities. Notably, the latter must have held the status of an Authorized Firm outside the DIFC before November 1, 2022. Furthermore, the head office must be licensed to conduct the relevant Financial Service and be supervised by a Regulator in a Recognized Jurisdiction. It is also imperative that capital and insurance requirements are met, with specific attention to cyber security insurance and professional indemnity insurance covering potential losses incurred by the branch and advice provided by the branch.

Fast-Tracking financial innovation

Simultaneously, the DFSA Innovation Testing License Programme[6] (DFSA ITL) grants companies the opportunity to test innovative technologies in the financial services sector before launching them in the broader market. This applies to new types of products or services or the application of innovative technologies to existing products or services. Applicants seeking this license must satisfy stringent criteria, which include a demonstrable background in the relevant business model or sector, meeting minimum capital requirements, and a comprehensive grasp of the pertinent DFSA and DIFC regulations.

However, if a crypto business involves an activity categorized as a Financial Service within the DIFC, the business must secure a Crypto Token Licence before commencing product or service testing under DFSA ITL.

Clarifying the nature of digital assets

To provide a comprehensive definition and legal framework for digital assets, the DIFC has recently also introduced its proposal for a Digital Assets Act[7]. This proposal addresses fundamental questions such as the definition of digital assets, their characteristics, and the procedures for acquisition and transfer.

According to the Digital Assets Act, a digital asset is characterized by its independent existence, inability to be duplicated, and its manifestation as a notional quantity unit, achieved through the active operation of software by a network of participants and network-instantiated data. The law also outlines conditions under which legal claims pertaining to the impairment of digital asset use are permissible, contingent on both intent and recklessness, and defines specific legal requirements for damage claims.

Enhancing investments through comprehensive asset protection

Concurrently, the new DIFC Proposed Law of Security[8] provides added protection to investors and lenders, addressing security rights associated with movable, tangible, and intangible assets, including digital assets. It delineates the circumstances under which security rights can be established, their priority in conflicts with other rights, and the methods for their enforcement. A notable feature of this law is the ability to extend security rights to the proceeds of digital assets, even if they are commingled with other assets.

Preparing for the implementation

These legal sources offer clear guidance to companies, simultaneously promoting the development of a secure and transparent crypto ecosystem in the region. Whether you're a new player or an established participant, it's crucial to evaluate if the DIFC is the most suitable jurisdiction in the United Arab Emirates for your business model and operations.

We at Pontinova can use our expertise to help you determine the appropriate options and apply for the relevant licenses.