The DIFC Digital Assets Regime (Digital Asset Regime) is a structure created by the Dubai Financial Services Authority (DFSA). The purpose of this structure is to regulate and control access to fintech applications based on blockchain technology.
DFSA has created the Digital Assets Regime for DIFC, which includes two parts. The first part defines security tokens, while the second covers utility and exchange tokens. Both features provide guidelines for the usage of digital assets in Dubai.
How does DIFC identify Digital Assets?
The DFSA identifies tokens used in DIFC. The DFSA qualifies as “tokens” digital assets created with Distributed Ledger Technology (DLT) or similar technology that offer value, rights, and obligations.
The DFSA generally requires all crypto assets to be created, stored, and transferred using the DLT implementation. A distributed ledger is a data structure that makes it possible to record transactions and share them among a network of computers.
A DLT application is a system that allows transactions and details to be recorded and does not have a management function. The DFSA has approved this type of system for use with its regulations.
What special requirements does the DFSA control?
The DFSA has set specific requirements for token assets that companies can use, produce and promote in the DIFC region. These requirements have been created to protect investors. The DFSA rejects and, if necessary, bans assets that fail to comply with these requirements.
- Regulations: Care is taken to ensure that the token asset complies with regulations in other parts of the world. The trading status is checked in different regions. It is expected to support all protocols in terms of governance.
- Liquidity: The liquidity of the token asset is examined. It looks at the trading depth in the market, the total token supply, and its value. All factors affecting demand and supply are considered by conducting more detailed research.
- Stability: The ability of the token asset to offer a stable price is checked. Reserves created following regulations, total supply, volume, responsibilities, and liabilities are reviewed.
- Transparency: Transparency is one of the most critical control criteria. The technology needs to be precise. Stakeholders and protocols should support transparency. Transactions must be traceable during the operation of the token mechanism.
- Competence: The adequacy and suitability of the technology are taken into consideration. Protocols are examined for the type of blockchain and the privacy of user information. Access permissions are reviewed, and the availability of smart contracts is checked.
- Risks: Cyber security risks are reviewed after examining AML and CTF risks. The technologies used to store token assets are expected to meet the standards. The risks associated with settlements and activities are concerned.
Additionally, to comply with DFSA requirements, companies must establish a subsidiary within the DIFC. Establishing a representative office is not sufficient to meet these requirements.
How does DFSA define security token existence?
Similar to traditional securities, security token assets represent the ownership and investment of an asset. Security token holders gain access to various privileges, such as voting rights. The DFSA considers security tokens as investments.
The DFSA requires specific requirements before considering a token an asset: It is regarded as security if money is invested in the token asset and there is an expectation of making a profit. Also, it is viewed as security if there is a joint venture or a profit from the companies’ operations.
What is a security token?
A security token is a digital asset that represents the value of real-world assets such as real estate or company equity. Security tokens are created by fulfilling several criteria, including the funding source. After the necessary information is transferred to the blockchain, the formation process is completed.
Security tokens are one of the fastest growing digital assets, with many developers and institutions striving to make them a reality. However, a security token asset cannot be considered usable unless it is approved by the regulator in the region in which it was produced.
What is a hybrid utility token?
The hybrid utility can be used as a token exchange. It is linked to products offered on a particular blockchain. They can offer opportunities such as discounts and early access to the supply of products. Hybrid utility token holders have all the rights specified.
Crypto exchanges often create the hybrid utility token. The purpose is to offer users a discount in trading and specific fees. All funds collected through the hybrid utility token are used to develop the product.
What is a utility token?
The utility token is usually part of a closed ecosystem. It is used as a payment method for services and products within the ecosystem. Assets called gaming tokens are the best examples of utility tokens. The DFSA regulation does not cover them.
The usage targets set for the utility token may differ. Users need them to perform certain operations on the network. The most important feature that distinguishes them from other cryptocurrencies is that they cannot be obtained by mining.
What is a non-fungible token?
Non-fungible token (NFT) is used at different points such as collections and website domains. These serve as unique identification. NFT can be used to show ownership of a particular asset. Monetary equivalents are not standard.
There is no clearly defined standard reference point for NFT. These assets can be traded but cannot be exchanged afterward. According to DFSA, they may or may not be security tokens, depending on how they are developed and their underlying purpose.
What is the asset-referenced token?
Asset-referenced token aims to reduce price volatility in cryptocurrencies. A stable currency is usually referenced when determining its values. For this reason, cryptocurrencies with fixed values are considered asset-referenced tokens.
Sometimes spot prices for commodities are referenced as a particular asset-referenced token. These are called tokenized commodities. Others are linked to the asset pool and are called “units of a fund.”
What token types are prohibited under DIFC?
DFSA has prohibited privacy token and algorithmic token assets under DIFC regulations. As a result, companies operating in the DIFC region are forbidden by regulation from the offering, promoting, and selling such token assets.
What is a privacy token?
A privacy token is an asset that keeps users anonymous. They hide transactions on the blockchain to protect users’ activities. When a transaction is made, the parties know all the information, but the third parties cannot access this information.
All crypto regulators tightly control privacy token assets. In many places, these assets cannot be used for trading by people. The use of privacy tokens is prohibited in almost every KYC-compliant region.
What is an algorithmic token?
The algorithmic token is a digital asset that references two types of token assets. On the one hand, there is the coin, which has a fixed value, and on the other, another asset that supports the corresponding coin asset. Its task is to manage the algorithm or smart contract relationship.
An obvious real asset does not back the algorithmic token. Therefore, it carries significant risks. The algorithm connects two specific coin assets to determine the price. It has no practical validity, even if it has a real asset-backed value.
Is the security token an investment?
How does DFSA qualify investment for a given security token? A self-assessment is performed for token asset applications submitted to the DFSA itself. There is a hybrid approach to evaluation.
DFSA prefers to set different regulations for all token assets, including security tokens. The regulations applied for exchange tokens, utility tokens, payment tokens, and all other token assets differ.
Is it possible to trade with the security token?
The DFSA has regulations for exchanges, alternative trading systems, and exchanges to keep trade flow under control. It makes various authorizations in line with the securities regulation.
- Authorized Market Institution (AMI): AMI is a clearing house licensed by the DFSA. There are two different AMI institutions in the DIFC region, NASDAQ Dubai (DIFX) and Dubai Mercantile Exchange (DME).
- Multilateral Trading Facility (MTF): MTF is a system that brings together multiple third parties to buy and sell shares (subject to mandatory rules) in investments. A contract must bind investments.
- Organized Trading Facility (OTF): An OTF is a system aggregating multiple third parties to buy and sell shares (subject to its rules) in investments. A contract must bind investments.
In the DIFC region, security token assets are traded through such organizations. In addition, the DFSA sets additional requirements that apply to such organizations, such as KYC compliance and technology compatibility.
What are security token trading platforms?
DFSA determines the platforms where security tokens can be traded in line with the regulations. Generally speaking, there are three crucial trading and exchange platforms. Even if the established regulations differ, security tokens can be traded.
- Centralized platforms: Centralized platforms take control of customers’ token assets. Transactions such as matching, processing, and transferring orders are recorded outside the blockchain. In addition, participants are offered limited access.
- DEX platforms: DEX platforms are by no means decentralized. Self-executing smart contracts exist. Investors control their token holdings, and trading and barter transactions occur on the blockchain.
- Hybrid platforms: Hybrid platforms are created by a combination of DLT applications and centralized applications. Fully automated clearing and settlement models are not available on hybrid platforms.
DFSA requires all platforms to meet the current set requirements. There are requirements for security token assets such as independent technology control, direct access to facilities, investment criteria, operating rules, and digital wallets.
Specific licenses created by the DFSA are available to crypto-related companies. Even if companies hold these licenses, they must separately apply for token assets. Additionally, agents (representative offices) are not allowed to trade crypto-related.