Dubai Financial Authority Revamps Crypto Token Rules for Funds

Key takeaways:

• In an effort to improve and expand the legal framework governing tokens inside its special economic zone, the DFSA has announced changes to its crypto token rules.
• The amendment affected the capacity to provide units of outside and international funds that invest in approved crypto tokens.

In an effort to improve and expand the legal framework governing tokens inside its special economic zone, the Dubai Financial Services Authority (DFSA) has announced changes to its crypto token rules.

One of the nation’s special economic zones, the Dubai International Financial Centre (DIFC), is home to firms established under the jurisdiction of the DFSA, an independent regulator in the United Arab Emirates (UAE).

The DFSA said on June 3 that it updated its crypto token policy to consider modifications resulting from its publication of Consultation Paper 153 in January 2024. The modifications addressed several important topics, such as the mechanism for recognizing crypto assets and funds invested in them.

Regarding funding, the amendment affected the capacity to provide units of outside and international funds that invest in approved crypto tokens. The DFSA previously forbade fund activities using crypto tokens.

In a recent consultation paper, the regulator said that asset managers and fund managers thought the framework was too onerous. According to the DFSA:

“They expressed the view that the current regulatory approach was too stringent, especially the limitations on External Funds and Foreign Funds investing in Crypto Tokens and, for some, the restriction on investing in Recognised Crypto Tokens only.”

The modifications also impacted domestic qualified investor funds’ capacity to make investments in tokens that are not yet recognised. Only five crypto tokens have been recognised by the DFSA since the regime’s implementation: Bitcoin, Ether, Litecoin, XRP, and Toncoin.

The regulator took into consideration the feasibility of permitting domestic funds to make restricted investments in unrecognized crypto, provided that the exposure did not surpass 10% of the fund’s gross asset value (GAV), even if it still considers that the recognition procedure is crucial.

The application fee for token recognition was $10,000 per token prior to the modifications. Many people thought this charge was too high, according to the DFSA, especially if their company wanted to be recognised for more than one token. Some also said the procedure was a “unnecessary burden.”

The regulator lowered the costs to $5,000 in response to the complaints and added new recognition standards for stablecoins, which are crypto tokens linked to fiat currency. The DFSA stressed in its consultation document that these modifications do not signify a more permissive approach. They stated:

“We emphasize that our proposal does not mean we are relaxing our approach, rather it is meant to provide the DFSA with the flexibility to recognize Fiat Crypto Tokens issued in other jurisdictions with comparable regulation,”

Ian Johnston, the chief executive of the DFSA, stated in a news release that the regulator hopes to promote innovation in a responsible and open way with the crypto token regime. 

The release claims that the modifications result from market trends, suggestions made by international standard-setters, and the regulator’s supervisory experience.