DFSA boosts cryptoasset regime with a number of key amendments

19/06/2024

The Dubai Financial Services Authority (“DFSA”), the financial services regulator for the Dubai International Financial Centre (“DIFC”), has announced further developments to its agile cryptoasset regime following its January 2024 Consultation Paper (the “CP”). The amendments relate to a number of changes to the DFSA rules on funds, custody, financial crime and the recognition of cryptoasset tokens. There are also a number of changes implemented in the new rules which differ to the proposed rules originally set out in the CP, and which we have highlighted below.

The key changes include:

  1. Changing recognition criteria for fiat cryptoasset tokens (commonly referred to as stablecoins) to remove specific requirements on the proportion of assets held in reserves. Instead, the regime requires (amongst other things) that reserves: (i) are held in assets likely to maintain their value, (ii) are highly liquid, (iii) are appropriately diversified and (iv) carry minimal risk. Further, daily valuation is now necessary.
  2. Requiring fund managers not to manage an external fund that invests in cryptoasset tokens unless (amongst other factors) the investment in cryptoasset tokens is limited to “recognised crypto tokens” and does not exceed 20% of the gross asset value (“GAV”) of the external fund. A similar threshold is applied to investments made in foreign funds. This differs to the threshold of 10% originally set out in the CP. 
  3. Allowing (domestic only) Qualified Investor Funds (“QIF”) to invest in unrecognised cryptoasset tokens, provided the exposure does not exceed 30% of the fund’s GAV and relevant information is provided to investors in the QIF upon request. There is also a requirement for firms to perform daily valuations. This differs to the threshold of 10% originally set out in the CP.
  4. Aligning further with international recommendations regarding custody, requiring firms to: 
    • Have in place adequate policies and procedures to enable them to identify and rectify any unauthorised or incorrectly executed transfer of cryptoasset tokens. 
    • Have in place adequate compensation arrangements to cover potential losses where such transfers cannot be reversed. 
    • Provide the DFSA with a mix of information relating to unauthorised or incorrect transfers of client cryptoasset tokens.
  5. A number of changes to lending and staking, notably that:
    • Only authorised firms with custody permissions are permitted to arrange lending for staking purposes. This is provided that the cryptoasset token is not a prohibited token, that the firm is reasonably satisfied that the client is a professional client or market counterparty, and that the lending is solely for the purpose of staking.
    • Firms must provide clients with a statement of the risks of staking, obtain consent from clients to transfer cryptoasset tokens to borrowers for staking purposes, and perform due diligence on borrowers of staked cryptoassets.  
  6. Addressing financial crime risk through compliance guidelines, including: 
    • Bringing in the “Travel Rule”. The Travel Rule, as per FATF Recommendation 16, requires financial institutions engaged in cryptoasset token transfers to obtain originator information and beneficiary information and share it with counterparties before or during the transaction. Firms will have to develop policies and procedures to comply with this. 
    • Ensuring adequate policies and procedures are in place to mitigate money laundering risks and therefore enhance transaction monitoring and blockchain analysis. Notably, suspicious transactions should be identified and reported. 
    • Ensuring firms conduct due diligence on each virtual asset service provider where cryptoasset token transfers are US $1,000 or more, and identify the money laundering risks associated with a transfer, applying appropriate risk-based measures. 
    • Requiring additional requirements (that would apply to an authorised person) for non-fungible token and utility token transfers carried out by a designated non-financial business or profession.
  7. Reducing the fee for recognising cryptoasset tokens from US $10,000 per token to US $5,000 after acknowledging the burden of such a high fee.

 

Comment

The DFSA has diligently worked with over 100 firms seeking licensing to better understand the market and regulatory needs to inform the expansion of the regime, as evidenced by the divergence of some of the final changes from those originally proposed in the CP. These changes will advance the regulatory environment for cryptoassets in the DIFC, however the regulator has emphasised that the changes do not indicate a lenient approach towards cryptoassets.

Chief Executive of the DFSA, Ian Johnston, stated that the objective for the regime “is to foster innovation in a responsible and transparent manner while ensuring we meet our regulatory objectives. At the DFSA, we have taken a balanced approach in developing this regime and remain committed to evolving it in line with global best practices and standards,” which is reflected in how far the regime has come since coming into force in 2022.

CMS has leading experts within the virtual asset space in the Middle East and should any contacts or clients require further guidance, we encourage them to get in touch with the contacts listed.

Co-authored by Anna Burdzy, Trainee Solicitor at CMS