Dubai regulator DFSA’s Crypto Token regime comes into effect

The UAE’s Securities and Commodities Authority (SCA) has published “The Authority’s Chairman of the Board of Directors Decision No. (21/R.M) of 2020 Concerning the Regulation of Crypto Assets” (Decision)

“The intention of the Crypto Token regime is to foster innovation in a measured, responsible and transparent manner while still meeting the DFSA’s regulatory objectives,” a statement said. “The DFSA has taken a balanced approach in the development of this regime and will consider, as the sector develops, further changes and amendments to the regime in alignment with best practices and standards adopted by International Standard-setters.”

The public and the business community were consulted by the SCA in 2019 on the draught text’s phrasing. The Decision, which was released on November 1, 2020, will take effect thirty days after it is published in the Official Gazette of the United Arab Emirates. Arabic speakers can currently watch The Decision online. In due course, we anticipate the SCA will release an unofficial English translation of the Decision.

This article offers a high-level overview of some of the key takeaways and points to note about the SCA’s Decision.

What is the Decision?

The Decision is a document that is prepared in a language that is very friendly to any layman. For anyone wishing to provide cryptocurrency assets in the UAE, the SCA’s Decision outlines the licensing requirements that must be met. This comprises financial services based on or utilizing crypto assets, such as ICOs, exchanges, markets, crowd-funding platforms, custodial services, etc.

What kinds of crypto assets are covered by the SCA’s Decision?

A record within an electronic network or distribution network that serves as a medium of exchange, storage, unit of account representing ownership, or usufruct that can be transferred electronically from one person to another through the operation of a computer program or an algorithm governing its use is what the SCA’s Decision defined broadly as a crypto asset. It outlines the legal framework that also applies to security and commodities tokens.

Who can offer Crypto Assets?

Companies offering cryptocurrency assets (or any related services) must be incorporated onshore in the United Arab Emirates or in one of its financial free zones (i.e. the Dubai International Financial Centre or the Abu Dhabi Global Market). Licensees may ‘passport’ the listing of crypto assets on one or more cryptocurrency exchanges.

The SCA requires licenses from providers before they can offer crypto assets within the UAE. During that procedure, candidates must show that they strictly adhere to the UAE’s anti-money laundering and counter-terrorism funding legislation, as well as its standards for cyber security compliance and data protection.

Onshore cloud computing and data residency rules

Utilizing international standards, service providers must locate computer systems (or cloud computing facilities) onshore within the UAE.

Usually, this means that service providers (or their subcontractors) must be able to show compliance with the UAE Federal Government’s cyber security standards, including ISO9001 and ISO27001, at the very least.

The SCA’s Decision mandates that service providers who encrypt, store, process, or transfer crypto assets or personal data using offshore servers or public cloud facilities employ onshore cloud computing services to provide parallel backup and disaster recovery facilities.

Employees and Subcontractors

Subcontractors and employees employed by providers of digital assets, custodians, escrow services, and other contractors must adhere to stringent rules and must have the necessary training and experience to carry out their duties.

Licensees are permitted to employ subcontractors, but they are responsible for all associated risks and responsibilities in the event that those subcontractors violate the Decision. For this reason, the SCA’s Decision mandates that licensees and their subcontractors create a thorough service-level agreement outlining the allocation of duties between the two parties with regard to data protection and cyber security.

The SCA made it clear that it has complete authority to check on online transactions and audit licensees. The SCA has broad authority to punish violators, suspend violators’ privileges, or

To whom may crypto assets be offered?

1. Qualified Investors and
2. Other people who do not match the requirements of a Qualified Investors were developed as two types of people

to whom crypto assets may be offered.

Prior to making cryptocurrency assets available to Qualified Investors, Licensees are required to submit paperwork to the SCA.

In all other circumstances, licensees are required to seek prior SCA clearance before making cryptocurrency assets available to non-Qualified Investors. Licensees must file documents with the SCA in advance of offering crypto assets to Qualified Investors. In all other cases, licensees must request prior approval from the SCA before offering crypto assets to non-Qualified Investors.

A Qualified Investor is broadly defined as:

• Institutional investors (i.e. banks, financial institutions, or companies) who hold more than AED 75m in assets, or have a net turnover of AED 150m, or state governments, foreign governments, and international bodies.
• Individuals who hold AED 4m in funds or an annual income of no less than AED 1m, and with whom a licensee can verify that they possess sufficient knowledge and understanding about the risks of investing in crypto assets.

Due diligence

The SCA made it clear that all customers must be categorized and evaluated as if they were a “high risk” in order to conduct anti-money laundering and “know your customer” checks on potential investors. This roughly translates into performing “enhanced due diligence” on a customer’s source of funds, ultimate beneficial ownership structure, risks associated with political exposure, the potential for customers to be used as conduits for money laundering activities, and any geographic risks posed by the customer, their directors, shareholders, associated suppliers, and intermediaries.

How can I access the SCA’s Decision online?

You can download the SCA’s Decision (in Arabic) from its website by clicking here. It is important to note that the Central Bank of the UAE’s Circular (6/2020), “Regulatory Framework for Stored Values and Electronic Payment Systems,” should be read in conjunction with the Decision.

How can Xpert Advisory help you obtain a crypto license in the UAE?

Xpert Advisory is an award-winning corporate advisory and consultancy firm comprising professionals who work to ensure you and your business are structured and operating in a compliant manner within the UAE by providing One Stop Solution for companies of all sizes.

Contact us today at aus@xpertadvisory.com