Enhancements To The DIFC's Crypto Token Regime

The Dubai Financial Services Authority (the DFSA) recently announced some notable amendments to its Crypto Token regime. These changes arise from the proposals in Consultation Paper 153 – Updates to the Crypto Token regime which was published in January 2024. Implementing these changes will help the Crypto Token regime which was initially launched in 2022 to remain current with international standards which have continued to evolve significantly.

The main changes are as follows:

Funds

• The ability to offer Units of External and Foreign Funds investing in recognised Crypto Tokens – the Fund must invest in Recognised Crypto Token/s and the investment cannot exceed 20% of the Fund GAV
• The ability for Domestic Qualified Investor Funds to invest [up to 10% of GAV] in unrecognised Crypto Tokens

Custody

• Custody of Crypto Tokens – custodians may now hold a type of unrecognised Crypto Tokens in the DIFC.
• Staking of Crypto Tokens – satisfactory due diligence must now be undertaken on the borrower and clients be informed on the risks of staking

Financial Crime

• Providing enhanced financial crime compliance guidance – this includes guidance on the 'travel rule' which introduces requirements for financial institutions to pass on certain information to the next financial institution
• Improved transaction monitoring and blockchain analysis – firms must adequately monitor the origin, any intermediate transaction, and the destination of Crypto Tokens transferred to or from its customers

Recognition of Crypto Tokens

• Introducing a defined recognition criteria for Fiat Crypto Tokens (stablecoins)
• Establishing a fee for the recognition of Crypto Tokens – the DFSA has introduced an application fee of $10,000

These enhancements are a significant step towards refining and developing the regulatory environment for Crypto Tokens in the Dubai International Financial Centre.

Since 2022, the DFSA has engaged with over 100 firms seeking licenses, gaining valuable insights into market needs and this is reflected in the introduction of new and changing regulatory requirements.

The DFSA's changes have been informed by recent market developments, recommendations from international standard-setters and the DFSA's supervisory experience.

Authored by Sarah Mary Matthias, Trainee Solicitor based in our Dubai office.

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