The DFSA introduced its comprehensive framework for regulating financial services using Crypto Tokens on 1 November 2022. This was the second phase of the DFSA’s work in this area following the introduction of the Investment Token regime in October 2021.

The DFSA set out to regulate Crypto Token businesses with the intention of fostering innovation in a measured, responsible and transparent manner while still meeting the DFSA’s regulatory objectives. Under the regime, firms in the Dubai International Financial Centre (DIFC) can apply for and obtain a licence to provide financial services with Crypto Tokens in or from the DIFC.

The Regime

The DFSA’s regulatory regime is largely technology-neutral, allowing firms to provide a wide range of financial services with Crypto Tokens. We believe that the main principles of our regulatory framework in this area are familiar to the market, with specific requirements in those areas where the use of the distributed ledger technology (or similar) introduces additional risks that need to be addressed with more focused requirements.

Our framework is designed to accommodate firms who want to operate a Crypto Token market, provide custodial services, manage clients’ assets, establish or manage funds, or provide other financial services. The rules cover a wide range of risks relating to financial crime, technology, governance, custody, disclosure, market abuse and fraud.

The Crypto Token regime has received significant interest since its inception:

• 100+ firms have inquired regarding operating a Crypto Token business (these are firms new to the DIFC and Authorised Firms looking to vary their licence);
• 5 Crypto Token variations were issued (a mix of funds and trading business);
• 1 licence to offer Investment Tokens was issued (to tokenise units of a fund);
• 3 Crypto Tokens have been recognised, covering 75% of the total Crypto market capitalisation; and
• 2 applications for Crypto Token recognition are being reviewed.

In carrying out this engagement and responding to inquiries, we have learned a considerable amount about the market, the products and services firms want to offer, and where our regime may benefit from further clarity and, in parts, further requirements or flexibility. Our next set of proposals will focus on:

• Custody;
• Financial Crime;
• Staking for Proof of Stake (PoS) consensus mechanisms; and
• Fund Management.

For more information on the Crypto Token regime, please go to the DFSA website or contact the DFSA.