DFSA’s new regulations on Investment Tokens
In a few decades, technologies have had the most significant impact on the life of people. It's not because of social media, drones & robotics, the Internet of Things, machine learning. Still, the changes are happening due to the underlying technology of digital currencies such as cryptocurrency, Bitcoin. Nowadays, we rely entirely on the mediators such as the government, banks, credit card companies, etc., for the growth and establishment of trust in our economy.
Therefore, a protocol of digital cash was developed, which used an underlying cryptocurrency called bitcoin. This cryptocurrency enabled people to do transactions without mediators. Ethereum, Litecoin, Bitcoin Cash, Dogecoin, tokens are some of the virtual currencies.
In UAE, Dubai Financial Services Authority's new regulations were introduced, which govern investment tokens in and from the Dubai International Financial Centre (DIFC). This article is about the new regimes on investment tokens by DFSA.
Investment tokens in UAE
Tokens are defined as "a cryptographically secured digital representation of value, rights or obligations, which may be issued, transferred and stored electronically, using Distributed Ledger Technology (DLT) or other similar technology." Crypto tokens (investment tokens) are a kind of virtual currency token that requires another platform.
In October 2021, Dubai Financial Services Authority (DFSA) announced a new regime that standardizes the regulation of Security Tokens in DIFC. In March 2021, the first phase of the consultation paper was issued, which DFSA has digital assets regime. Initial coin offering (ICO) is how investment tokens are created and sold by crowdfunding exercise.
The Dubai Financial Services Authority considers the tokens to be a part of financial instrument and scrutinizes concerning:
- The protection of investors
- Pre-requisite disclosure and demeanor by the service provider
- Reliability of market.
A stable coin, also a cryptocurrency, will probably be enclosed in DFSA's second consultation paper.
Types of investment tokens:
The regulated tokens introduced by DFSA are Investment Tokens. There are majorly two types of investment tokens, they are:
Security Tokens – Security tokens represent assets based on the block chain model. Alternative investments have been represented by the security token, which includes mathematical models such as stocks, real estate market, gold, art, etc.
Derivative Tokens – These tokens are known as derivatives because they derive their value from other tokens. It represents market derivatives by tokenizing everything, such as futures or options.
These two forms of investment tokens are tokens that bestow on the rights and responsibilities indistinguishable from those that were deliberated by security or derivative. In the DIFC, this token investment plan will apply to all the firms that want to issue investment tokens.
Key features on investment tokens:
- Investment tokens provide direct admittance to trading venues. Originating from the current transitional model of trading, the retail client is the most critical deviation.
- It clears the way for the entrance of trading of Investment Tokens on DFSA regulated exchange.
- Those who hold Investment Tokens in the digital wallet provider category put a place for additional requirements.
- It offers additional requirements for investment tokens in asset organization activities and financial service providers who advise, deal, and arrange.
- Disclosure of documents used for offering and marketing investment for brochures.
As per the new regulation of UAE on investment tokens, all the authorized firms must conduct a technology audit for better enablement of investment tokens that includes holding or controlling the investment. It relies on Distributed ledger technology (DLT) or any other similar technology for enabling financial services concerning Investment Tokens.
Concerning the compliance of an authorized firm, a third-party expert should carry out the technology audit with the assistance of technical resources and requirements imposed by the government on it. A written report of the audit must be submitted to Dubai Financial Services Authority (DFSA) by the auditor. The authorized firm has an encumbrance to satisfy the Dubai Financial Services Authority regarding the professional overseeing the relevant audit.
Investment Token would apply to:
- Parties interested in trading, holding, or issuing investment tokens from DIFC would be covered under this regulatory framework. Firms that are authorized and wish to undertake the services of investment tokens would also be included in this framework.
- For doing the activities related to Investment Tokens and to procure the approval and authorization, it is required that the parties willing to trade in Investment Tokens should mandatorily submit a detailed analysis to the DFSA.
- It also guides in clearing out about the token that which type of token it is; whether it is an Investment Token or any other kind of token to the person or company who wishes to carry out any activity regarding this.
- Furthermore, anyone who needs approvals and licenses for financial activities regarding crypto-assets will be issued by Dubai World Trade Centre Authority. This framework was allowed by DFSA. Cryptocurrencies like bitcoin, utility tokens, investment tokens, and stable coins are expected to cover under this.
Rules and regulations for digital wallets:
Digital wallets are those kinds of wallets where tokens are stored that can be retrieved by using an amalgamation of both public and private cryptographic keys. The digital wallet service providers must ensure that:
- The Distributed ledger technology should be flexible and consistent.
- The digital wallet should identify that which investment token belongs to whom
- There must be a proper procedure that should be specified to clients. It should maintain appropriate records and data of clients in respect to transactions of investment tokens.
As the investment tokens are a part of the first phase of the digital assets regime, it is relevant to investment advisors, asset managers, ATS operators, fund managers, and custody providers. In the future, the investment token I will enhance the opportunity for innovative fintech by licensing tokenized crowdfunding platforms and Digital wallet providers. The second phase of cryptocurrencies will be coming soon in the form of Utility Tokens Stable coins.
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