The DFSA (Dubai Financial Services Authority), which oversees regulations at Dubai’s International Financial Center, plans to revise its regulations concerning cryptocurrency by including new provisions. These provisions will address various aspects of the crypto space such as cryptocurrency assets, secure storage of crypto (custody), decentralized finance (DeFi), stablecoins, crypto-focused investment funds, the application of crypto in the insurance sector, and measures for preventing money laundering and financing of terrorism. To this end, it has released a discussion document inviting comments from the public by March 3rd, 2024.
According to the discussion document from the DFSA, the agency pointed out anticipated changes in its policy in specific sectors. These include developments in areas such as Decentralized Finance (DeFi), combatting Money Laundering and Terrorist Financing (ML/TF), and regulations surrounding the custody of assets.
This closely resembles the latest declarations from the Financial Service Regulator Authority (FSRA) at ADGM, which highlight the importance of compliance with anti-money laundering and counter-terrorism financing measures. The FSRA also recently made it known that it plans to revise its framework for virtual assets in 2024.
According to the consultation document from the DFSA, the proposed changes focus solely on crypto tokens and do not encompass security tokens, also referred to as investment tokens.
Curiously, although the DFSA hasn’t yet granted licenses to any cryptocurrency exchanges, brokers, or similar entities, they point out that their consultation paper should catch the attention of licensed market institutions that are considering the trading, clearing, and settling of crypto tokens. Additionally, this paper is relevant to operators of Alternative Trading Systems who are interested in dealing with crypto tokens, plus any parties intending to provide services related to the custody of cryptocurrencies.
Moreover, companies interested in providing consulting services, managing investment funds, or those involved in the issuance or development of cryptocurrency tokens may also find this subject matter appealing.
Crypto tokens
The DFSA intends to reduce the cost for registering cryptocurrency tokens by half, setting the new fee at $5,000, down from the previous rate of $10,000. Additionally, the DFSA aims to adopt a more accommodating approach regarding the registration process for stablecoins or tokens tied to fiat currencies.
Regulatory authorities are planning to reduce the minimum ratio of reserve assets that stablecoins must hold from the previous 80%. Moreover, they will do away with precise mandates regarding the composition of reserve assets. The new requirement will stipulate that the reserves should consist of assets expected to retain their value, even in turbulent times. These assets should also be easily convertible to cash, sufficiently varied to spread risk, and have a low likelihood of default. Additionally, there will be an obligation for these assets to be valued on a daily basis.
In addition, the DFSA will only permit fiat crypto tokens to be tied to one specific fiat currency, and they will not authorize these tokens to be linked to a mix of different fiat currencies.
According to the DFSA, both market trends and regulatory oversight have shown that there are heightened risks involved in keeping a cryptocurrency’s value fixed to two or more traditional currencies. Nevertheless, tokens that are tethered to a combination of various currencies will continue to be classified as Crypto Tokens.
Investment Funds External and Domestic
The DFSA aims to permit both international and domestic funds to allocate investments into cryptocurrency tokens. To do so, the DFSA mandates that these funds adhere to specific criteria, which includes restricting their total investment in crypto tokens to only those that are officially recognized, ensuring that such investment does not surpass 10% of the fund’s total gross asset value. Furthermore, units of the fund are to be exclusively marketed to professional clients through private offerings.
Moreover, the fund requires a minimum investment of 50,000 US dollars, and a qualified custodian has been designated to protect and manage the Fund’s assets in cryptocurrency tokens.
The DFSA is suggesting that local funds should be allowed to allocate investments to crypto tokens that have been approved by the DFSA, and they should also be permitted to invest a small percentage in crypto tokens that have not been recognized. Since the DFSA has approved just five tokens, the maximum investment in non-recognized crypto tokens should not surpass 10% of the Fund’s Gross Asset Value (GAV); this is only applicable if the domestic fund qualifies as an Investor Fund.
Crypto Custody
In conclusion, regarding a crucial part of crypto tokens – the safekeeping – the Dubai Financial Services Authority suggests that only licensed companies that adhere to the client evaluation criteria set by the DFSA should be allowed to provide services for holding and safeguarding cryptocurrencies.
For DFSA, it’s crucial that the crypto custodian adequately secures client crypto assets and keeps them separate. The custodian must also establish rules and protocols for handling a client’s private keys, which encompasses selecting a secure storage method, ensuring the keys’ safety, and implementing safeguards to prevent hacking, theft, or fraud. This includes additional stipulations related to whether wallets are custodial or non-custodial, as well as the management of private keys.
DFSA seeks to mandate daily reconciliation of client-held crypto tokens by firms that are certified and offer custody services or have authority over the management of such crypto assets.
Financial Crime
Ultimately, the DFSA, just like ADGM before it, is stressing that anyone involved in the cryptocurrency sector must comply with the AML/CFT laws and regulations at the federal level of the UAE, in addition to adhering to the guidelines set by the Financial Action Task Force (FATF), which encompass the travel rule.
The Travel Rule, while not an officially designated term by the DFSA, is widely understood to signify the 16th Recommendation by the FATF. This recommendation mandates that financial entities involved in cryptocurrency token transactions collect and exchange details about the sender and receiver with their transaction partners, either prior to or at the time of the transaction. The FATF has emphasized the significance of enforcing these directives and has consistently urged that regions adopt the Travel Rule without delay.
Curiously, the DFSA points out that individuals with authorization must carry out careful investigations when dealing with any VASP (Virtual Asset Service Provider) involved in transfers valued at $1,000 or greater.
Insurance
In their discussion paper, the DFSA pointed out that the increasing conversation around the utilization of crypto tokens within the insurance industry—particularly in areas like policy denomination, premium collection, claims settlement, and risk underwriting in the crypto market—has led them to request input. They are looking for comments on the current developments in the underwriting of risks specific to crypto tokens, the potential regulatory concerns, and the careful handling of situations where insurers handle premiums and claims in the form of crypto tokens.
The UAE is clearly advancing its regulations and framework for cryptocurrency assets while also making sure that these measures comply with the Financial Action Task Force (FATF) standards and guidelines against money laundering and the financing of terrorism.
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