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CRYPTO ASSETS NEWSLETTER - OCTOBER 2019

INTRODUCTION

On October 15, 2019 the Securities and Commodities Authority of the UAE published the draft regulations concerning crypto assets, for public consultation and comment, with the aim to gather feedback from the industry players (“Draft Regulations”). The Regulations are drafted to govern all aspects of the Crypto Assets industry within the UAE, ranging from token issuance requirements, to trading and safekeeping practices, with emphasis on protecting investor interests through stringent compliance with financial crime prevention measures, crypto-asset sake-keeping standards, information security controls, technology governance norms and the regulation of conduct of business requirements for all market intermediaries. In this month’s newsletter, we cover only the concepts introduced by the Draft Regulations, which are niche and have been excluded, disregarded or possibly missed by many other Regulators around the world. Please also note that: this Newsletter does not replicate/reproduce the comments and opinions shared by Team KARM with SCA during the consultation period and is merely intended to be a source of information for our readers.

 

THE DRAFT REGULATIONS

 

Definition of Crypto Assets
One of the defining features of the Draft Regulations is its definition of ‘Crypto Assets’- which functions as a medium of exchange, store of value, unit of account, representation of ownership, economic rights or rights access of utility of any kind, which is capable of being electronically transferred. In light hereof, this appears to be an umbrella term for all such types of assets. Internationally, the umbrella definition has been ‘virtual’ or ‘digital’ assets, merely acknowledging the digital or virtual nature of the varied types of assets.
 
Types of Crypto Assets
The major sub-sectors under Crypto Assets include – ‘Commodity Tokens’ and ‘Security Tokens’. Commodity Tokens are defined as: any tokens which do not qualify as security tokens; whereas the Security Tokens are defined as: the tokens which can be deemed to be a security to the extent issued, transferred or traded in the form of a Crypto Asset or a Crypto Asset which is otherwise deemed to be a security pursuant to the existing regulations. ‘Securities’ are defined to mean: the financial instruments which may represent an interest in financing or investment transaction, including the likes of shares, stocks, bonds, sukuks.
 
Recognized Crypto Currencies
A very interesting concept of Recognized Crypto Assets has been introduced by the SCA in the Draft Regulations. As per the relevant sections, the Regulator shall maintain and may from time to time update the register of ‘Recognized Crypto Currencies’. The Draft Regulations leave a room for the Regulator’s discretion to determine the nature and classification of Recognized Crypto Assets. Recognized Crypto Assets are exempt from many requirements otherwise applicable to Commodity and Security Tokens In some way, the concept may turn out to be similar to the concept of ‘Accepted Crypto Assets’, as was introduced in the OCAB framework of ADGM and which is defined to mean the crypto assets which have been accepted and approved by the Regulator. Whilst ADGM has not released a public list of accepted crypto assets, it’ll be interesting to see the list of ‘Crypto Assets’ as ‘Recognized’ by the SCA.
 
Crypto Fundraising Platforms
One of the most intriguing contributions of the Draft Regulations is the introduction of the concept of ‘Crypto Fundraising Platforms’. As per the Draft Regulations, a Crypto Fundraising Platform is “an electronic platform accessible online through which a facility is available for persons to commit funds (including fiat currency and other Crypto Assets) to subscribe for Crypto Assets, including where such facility provides account details of a third-party institution (irrespective of its jurisdiction) to receive such funds and where such funds are raised in the form of donations.” This definition appears to cover all platforms which would permit ‘committing’ of funds for ‘subscription’ of crypto assets (including that of security tokens). It is intriguing to see that not only subscription, but the possibility of regulating the platforms which facilitate contributions which do not yield any returns or profit entitlement to the owners of Crypto Assets committing funds, are also covered by the definition. The applicant for a license must be a corporate person in one of the forms prescribed in the existing custody regulations or may be: offering persons of Crypto Assets, where the scope of the proposed Crypto Fundraising Platform is limited to being in respect of the relevant Crypto Assets; or a person authorized to operate a Crypto Asset Exchange.
 
Crypto Asset Exchange
This is possibly one of the most unique definitions of the Crypto Asset Exchanges introduced by a Regulator. The Draft Regulations define Crypto Assets Exchange as: “a platform or facility for the trading, conversion and/or exchange of Crypto Assets in return for other Crypto Assets, fiat currency, Securities and/or Commodities, which applies non-discretionary trading and/or order matching rules, or which brings potential buyers and sellers together (regardless of whether any resulting transaction is executed on the platform), or which is deemed to be a Crypto Asset Exchange and is not otherwise excluded from being a Crypto Asset Exchange under the Draft Regulations and is approved or licensed as a Crypto Fundraising Platform.” This gives rise to a possibility to include conversion to securities or commodities through a single exchange. Internationally, there has been very limited development on a single regulated exchange for trading of all types of assets, securities and commodities. The dynamics of such an exchange would be intriguing to see, when such one comes into play.
 
‘Loyalty Schemes’ & ‘Specific Use Credits Commodity Tokens Issued’
As per the Draft Regulations a Loyalty Scheme is deemed to be a programme for the issuance of Commodity Tokens as a reward for purchases of consumer products and/or services which may only be exchanged or redeemed, in return for consumer goods and/or services or any associated arrangements thereto; and in no case, as a return for Crypto Assets or money. This is welcomed news for gaming enthusiasts as the SCA has recognized Specific Use Credits Commodity Tokens as the tokens which are issued or offered exclusively to users of an online game, information technology platform, or application by the developers which may be only redeemed to access and/or enhance rights or services in a specific game, or application or the umbrella ecosystem thereto. In no case, however, may these tokens be redeemed to fiat currency, tangible property, or other Crypto Assets. Needless to say, these are welcome inclusions in terms of definitions, since they can often be confused with cryptocurrencies.
 
Offering of Crypto Assets and Security Tokens
In accordance with the Draft Regulations, the Crypto Assets may be listed on an exchange which permits the offering to be made only to Qualified Investors (as defined in the Draft Regulations), unless otherwise approved by the Regulator. Similarly, for Security Tokens: while most Regulators around the globe have taken a retrofitted approach to regulate the offering by way of existing securities regulations, the SCA has gone into detail in providing the offering mechanism. Further, the Security Tokens may only be offered by public joint stock company, unless otherwise permitted; and only to an entity incorporated in the mainland or in a financial free zone, within UAE. It is further stipulated that if the offer is being made to Qualified Investor, only a filing in accordance with the Draft Regulations is to be undertaken. Further, we note that a discretion to approve alternate forms of entities to undertake security token issuance is considered, however the exact requirements are yet to be seen.
 
 
CONCLUSION
The UAE’s SCA’s Draft Regulations come at a time when there is a dire need of regulatory clarity in the crypto space. From the outset, the Draft Regulations touch upon multiple concepts in the crypto asset space which deserve regulation. It will, however, be interesting to see the interplay of existing regulations with the introduction of the SCA’s regulations, which may change the dynamics of the UAE crypto market altogether. In either case, a favorable regulation is always welcomed.
 
 
Authored by Akshata Namjoshi (Senior Associate) with inputs from Soumya George (Principal Associate).

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