DFSA releases regulatory framework to oversee cryptocurrencies

DFSA releases regulatory framework to oversee cryptocurrencies

RELATED — Dubai passes first law regulating virtual assets

The Dubai Financial Services Authority, the regulator of the emirate’s financial hub, has released its regulatory framework oversee cryptographic tokens, or cryptocurrencies, for public viewing.

The proposed regulations are intended to protect investors and apply to companies interested in marketing, issuing, trading or creating crypto tokens in or from the Dubai International Financial Centre, the DFSA said in the statement. consultation published on Tuesday.

“The DFSA has also made proposals to address risks related to, for example, consumer protection, market integrity, custody and the financial resources of service providers,” the agency said.

Last October, the DFSA unveiled its regulatory framework overseeing investment tokens as part of a two-phase approach to its “digital asset regime” that began in early 2021.

Central banks around the world have been hesitant to approve cryptocurrencies due to their high volatility, speculative nature, lack of value, and regulatory oversight. The UAE Central Bank also does not recognize cryptocurrencies as legal tender.

The DFSA’s crypto token framework covers a range of cryptocurrencies, including Bitcoin, Ethereum, and Solana, asset-backed stablecoins, which are tied to fiat currencies, and hybrid utility tokens.

Hybrid utility tokens, such as Filecoin and Huobi Token, are usually offered to the public through initial token offerings and the funds raised are used to develop the blockchain or digital coin service.

However, under the proposed framework, the DFSA will prohibit providers of tokens and privacy devices and algorithmic tokens from operating in the DIFC.

Privacy tokens hide, anonymize, obscure or prevent the holder of a token from being traced, the DFSA said.

“All of these characteristics make it virtually impossible to accurately identify the holder or beneficial owner of a token or trace a chain of transactions,” he said.

“Based on this, we propose to ban these types of tokens and devices and introduce a ban that no public offering or promotion of privacy tokens will take place in or from the DIFC.”

Meanwhile, algorithmic tokens, such as Tether, are designed to achieve price stability by balancing the circulating supply of the digital coin through behind-the-scenes corrections, the DFSA said.

“In other words, these tokens use a method that can issue more coins when its price goes up and buy them in the market when the price goes down.

“These mechanisms are not immediately transparent to users, markets and regulators, and may not allow us to exercise effective oversight and supervision or users to understand how value is corrected,” he said. declared.

The DFSA is also proposing to exclude certain tokens — utility tokens, non-fungible tokens, and central bank digital currencies — from its definition of cryptocurrencies. These “will not fall within the scope of its regulatory framework”, he said.

With over 2,500 crypto tokens traded globally in mostly unregulated markets, the DFSA offers an “Accepted Crypto Token” approach similar to that of the Financial Services Regulatory Authority (FRSA) of Abu Dhabi Global Markets and the Central Bank of Bahrain, according to the consultation document. noted.

This means that anyone wishing to provide a financial service in relation to a crypto token or crypto token derivative will only be able to do so if the DFSA has accepted it for use in the DIFC, he added.

In 2018, ADGM’s FSRA launched a comprehensive virtual asset framework for trading virtual assets by businesses, including platforms it calls multilateral trading facilities, custodians and brokers.

The DFSA’s consultation paper is open to the public for comment until May 6.

Updated: March 10, 2022, 6:30 a.m.