KEY POINTS FROM THE SCA’S CRYPTO-ASSET GUIDANCE

This week the Securities and Commodities Authority (SCA) released its ‘Administrative Decision No. (11) of 2021 concerning Guidance for Crypto Asset Regulations’ (link) (or Crypto Asset Guidance/ Guidance) which throws light on, and clarifies the application of the SCA’s Board of Directors’ Decision No. 23/Chairman of 2020 concerning Crypto Assets Activities Regulation (link) (or the Crypto Assets Regulation/ Regulation), which was released late last year.

Here are the key highlights from the Guidance.

  1. Procedure and fees: The Guidance specifies that an SCA license is required to conduct crypto-asset based financial activities which are traditionally licensed by the SCA. Further, the SCA shall accept or reject a complete license application within thirty (30) business days of receipt, and may cancel a license due to a general lack of compliance with SCA regulations as defined in
  2. Relaxation for offerings to qualified investors: The Guidance states in multiple places that fewer approval and compliance requirements would apply to offerings directed at Qualified Investors. This appears to be a key consideration for the SCA in determining the regulatory compliance requirements which a fintech should meet.
  3. The Regulation does not apply to items regulated by the CBUAE: Currently this includes stored value facilities and “Payment Tokens” (i.e. tokens which are stable-coins or are otherwise backed by fiat currencies). This delineates the regulatory mandate of the CBUAE vis-à-vis the SCA. Essentially, fintechs with products related to stored value facilities and payment related cryptographic tokens will be regulated by the CBUAE; while other forms of crypto assets, including commodity tokens, and security tokens will be regulated by the SCA.
  4. Applicability: The Guidance states the financial activities which are otherwise regulated by the SCA, but are now sought to be done using/ through crypto-assets would be covered by this Regulation. It specifies that the “promotion and marketing, issuance and distribution, advice, brokerage, custody and safekeeping, fundraising, operating an (crypto-asset) exchange” would all fall within the ambit of this Regulation.
  5. Broad definition of crypto-assets: The Guidance states that the definition of crypto-assets has been intentionally kept broad. The Regulation would apply where the crypto-asset constitutes or represents a security or is traded through an exchange. Generally, a crypto-asset will be an asset issued to investors in a cryptographic form, typically with investors using cryptographic keys to evidence their ownership. The Regulations will not apply to a currency, virtual currency, unit of stored value or any other item, including any item issued within a facility, in each case approved or required to be approved by the UAE Central Bank (CBUAE) pursuant to its regulations from time to time. A key consideration for the SCA appears to be ensuring that it maintains a distinction between crypto-assets regulated by itself and crypto-assets regulated by the CBUAE.
  6. Limited disclosure requirements apply to non-security and non-listed crypto-assets: Crypto-tokens which are not security tokens and are not listed and available for trading on an ‘organized market’ need to disclose to the final users that such crypto-assets are not investments, are illiquid, and that they may lose the amount they have invested in these crypto-assets. This disclosure requirement does not apply to “loyalty schemes” and “specific-sue credits” which are likely to include in-game credits, closed loop utility tokens. For a fintech, an important question to ask would be – “Does my token ever leave its native ecosystem?”; if not, there are likely to be fewer compliance requirements.
  7. Some crypto-asset activities not regulated: Airdrops and airgrabs are not regulated if no funds are raised and no marketing of the crypto-assets occurs in the UAE. Further, mining or mining contracts, running a node, smart contract preparation and audit, and blockchain or distributed ledger provision shall remain unregulated. 
  8. Fundraising process, guidelines and additional requirements to be issued separately: The Guidance states that the SCA will prepare a licensing process and set of additional requirements for persons seeking to conduct fundraising.
  9. Requirements for crypto-asset exchanges specified: The Guidance states that in relation to commodity tokens, the regulations and decisions of the SCA applicable to commodities’ markets shall apply. Importantly, in respect to operating a crypto-asset exchange or quasi-trading platform (which are likely to be viewed as brokerages), applicants are expected to engage with the SCA for approval of its application. Peer to peer proprietary trading and discretionary arrangements to exchange fiat currencies for crypto-assets and vice versa are not intended to be governed by this Guidance. Exchanges open only to qualified investors are also likely to find some exemptions. Lastly, the SCA will require the proposed crypto-asset exchanges to demonstrate to the SCA – its operations, how it controls trading on its exchange in a manner which protects investors, how it curtails market abuse, and adheres to other regulations such as trading and listing rules as well.
  10. Principal trading to be regulated as a “brokerage”: The Guidance states that many entities may purchase and hold crypto-assets for resale. Further, it clarifies that this activity should be considered akin to a brokerage and regulated as one when conducted as a business.

 

 Authored by Ratul Roshan (Associate) and Anibal Suriel (Associate) with inputs from Akshata Namjoshi (Lead: Fintech, Blockchain and Emerging Tech)

 

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