November 15, 2021

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October 25, 2021, Dubai Financial Services AuthorityDFSA“) Has developed a regulatory framework for” investment tokens “and updated its regulation for crypto-investment investments. .Consultation paper”)

Peter Smith, Director General of Strategy, Policy and Risk at DFA, said:Creating an environment for creative companies to thrive in the UAE is a key priority for both the UAE and the governments of Dubai and the DFA. Our consultation on investment tokens has enabled us to understand what companies want in the regulatory framework and to introduce market-related governance. We look forward to receiving applications from interested organizations and contributing to the sustainable development of future financial services in the DIFC.. ”[1]

What is an “investment simulation”?

An “investment token” is defined as a “security token” or “Derivative Token”.[2]. Broadly speaking, these are:

  • Warranty (e.g., share, bond or warrant) or product (optional or future) in the form of confidential digital representation of rights and obligations issued, transferred and stored by Distribution Book Technology (“DLT”) Or other similar technology; Or
  • A confidential digital declaration of rights and obligations granted, transferred and stored using DLT or other similar technologies and (i) provides rights and obligations similar to those inherently security or productive. Or (ii) has the same purpose or effect as security or output.

But, importantly, the “Investment Token” does not contain virtual assets that work. no I do not Or granting the same rights and obligations in nature as those of a lien or commodity, or have the same purpose or effect as security or derivatives. This means that key securities such as Bitcoin and Ethereum, as well as stable coins, such as Tether, remain uncontrolled by investment tokens.

Frame width

This regulatory framework applies to people who are interested in marketing, marketing, trading or capturing investment tokens at the Dubai International Financial Center.DIFC”) It also applies to DFA-authorized companies that want to provide” financial services “in connection with investment tokens. Such financial services (among other things) include handling, consulting or organizing transactions related to investment tokens or investing in interested portfolios or mutual investment funds on investment tokens.

Presentation by DFA

Instead of establishing a completely different regime for investment tokens, the DFA’s approach has led to some changes in bringing these instruments to “investment” under the current regime. According to the consultation paper.In line with the trend in the Benchmark regions: [the] The goal is to ensure that the DFA regime, which controls financial products and services, implements these tokens properly and vigorously. [the DFSA considers] To be regulated to be the same or sufficiently similar to existing investments. ”

The Consultation Paper suggested that this be done in four ways: using the ruling regime (i) as much as possible for “investment”, to address specific risks related to tokens, especially technological hazards, and (ii) the nature of basic technologies that DFSA can impersonate traditional financial products and services. To accommodate: (iii) By addressing the risks to the investor / customer relationship and market loyalty and strategic risks when new technologies are used to provide financial products or services in the DIFC or from the DIFC. And (iv) the key features of the control and the characteristics of the controlled financial products and services, to be as accurate as possible.

As noted above (i), the changes made on October 25, 2021 include the addition of new requirements to address investment tokens. For example, Chapter 14 of the DFA Rulebook Business Module Code sets additional requirements for financial services related to investment tokens.

This (among other things) prepares to teach:

  • Technology and management requirements for enterprise operating facilities (shopping malls) for investment tokens – for example, ident- (i) must ensure that any DLT application used by the facility operates on authorized access. Adequate control of authorized persons; And (ii) consider industry best practices in developing their technology design and technology management in relation to the DLT used by the facility.
  • Rules for operators of investment token facilities allow direct access – for example, the operator must ensure that the rules are clear. (ii) the obligations of the direct access member to the operator; And (iii) there are appropriate investor improvement strategies. The operator must make specific risk statements and maintain adequate systems and controls to address market security, anti-money laundering and other investor protection concerns.
  • For investment tokens protection companies (also known as “digital wallet service providers”) – for example, (i) any DLT application used to secure investment tokens must be robust, secure and compatible with any relevant investment. Tokens are traded or cleared; And (ii) the technology used and its associated processes must have adequate security measures (including cyber security) to enable secure storage and transmission of investment related tokens; And
  • Requirements for companies to provide investment tokens (such as hosting / agent investments, organizing investments, advising on financial products and asset management) to provide one or more financial services to the customer, ”well before the service is provided. This should include, among other things, (i) the risks and important characteristics associated with an investment token: (ii) whether the investment token is entered or offered for trade (and if so, details of entry). (iii) how the customer can exercise any rights granted by investment tokens (such as voting); And (iv) information related to any other investment tokens that will help the customer better understand the product and technology and make informed decisions about it.

Comment

Following the presentation of the investment tokens listed in this warning, DFA agrees with the approach taken by certain key authorities. It is similar to what was taken by the Financial Conduct Authority of the United Kingdom, for example, to imply that certain conditions, such as shares or debts (UK), provide rights and obligations similar to certain investments. Investment Token Version) Investments are taken as specified and are therefore included in the current control framework.[3].

The DFA regime is flexible, especially due to its high level, principled approach. This may be helpful in the context of the development of the virtual world. However, the exclusion of key secret currencies from this regime could limit the regime’s attractiveness, especially for cryptocurrency exchanges. However, this can be offset by the fact that the DFA regime allows investment token retailers to offer retail customers directly to retailers, provided that the customers meet certain requirements (such as qualifications and experience). This is in stark contrast to the approach proposed by the Hong Kong Financial Services and Treasury Bureau, which claims that the crypto business is restricted to professional investors.[4]

Next steps

As mentioned above, the management of investment tokens does not cover many key virtual assets. However, we understand that DFA is preparing a proposal for tokens that are not covered by the Investment Token Control Framework. These ideas are expected to cover exchange tokens, utility tokens and some stablecoins. DFSA plans to issue a second consultation paper later this year in Q4.[5]

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[1] https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens

[2] DFA Regulation Book General Module, A.2.1.1

[3] FCA Policy Statement (PS 19/22), Crypto Assets Guide (July 2019)

[4] Check out our previous alert on the proposed Hong Kong regime: https://www.gibsondunn.com/licensing-regime-for-virtual-asset-services-providers-in-hong-kong/

[5] https://www.dfsa.ae/news/dfsa-introduces-regulatory-framework-investment-tokens


Gibson Forest Lawyers are available to help you with any questions you may have about these developments. If you would like to discuss any of the above, please contact any Gibson Forest Crypto Task Force member (cryptotaskforce@gibsondunn.com) on the Global Financial Control Group or the following authors

Hardp Plahe – Dubai (+971 (0) 4 318 4611, hplahe@gibsondunn.com)
Michel M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
William R. Halat – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Chris Hicky – London (+44 (0) 20 7071 4265, chickey@gibsondunn.com)
Martin Combes – London (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)
Emily Rumble – Hong Kong (+852 2214 3839, erumble@gibsondunn.com)
Arnold Yin – Hong Kong (+852 2214 3838, apun@gibsondunn.com)
Becky Chung – Hong Kong (+852 2214 3837, bchung@gibsondunn.com)

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