DIFC’s regulator is working on a framework to manage digital assets

A framework for the management of digital assets, such as cryptocurrencies, is being drawn up by the Dubai Financial Services Authority (DFSA), the regulator of the emirates’ financial free zone (DIFC).

The move was revealed in the body’s business plan for the year 2021-2022 which was released recently.

“We will look to regulate a wide range of digital assets, including security tokens, utility tokens, the various types of exchange (or payment) tokens, such as cryptocurrencies and the firms that provide relevant services in these markets. We will regulate these markets in a proportionate and thoughtful manner, drawing on best practices across the globe.”

The DFSA will publish two consultation papers seeking views on its proposed rules, one in the first quarter and the other in the second quarter, Mr. Smith added.

Regulating digital assets

Over the past few years, regulators around the region have been getting to terms with how to regulate cryptocurrencies and other digital assets.

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) released its first guidelines on the matter in 2018 and in-principal approval in 2019 for a range of crypto asset exchanges, including BitOasis, Digital Assets Exchange, Matrix Exchange and MidChains. The Central Bank of Bahrain also launched rules governing the provision of crypto asset services in the kingdom in 2019.

The DFSA’s business plan also said it would promote Dubai’s capital markets by “enabling capital-raising by small and medium enterprises (SMEs) through equity and debt listings in the DIFC.” The DFSA created rules paving the way for small and medium-sized companies to list shares in April last year, ahead of the announcement of a new Nasdaq Dubai Growth Market targeting SMEs in October. The exchange is set to begin operations in the first half of this year.

The DFSA will soon roll out rules governing the approval process for the compliance advisers smaller companies need to appoint to achieve listings, as well as for the filing of prospectuses. The regulator also intends to step up oversight in a number of areas, including firms “carrying out financial services activities in or from the DIFC in substance but who lack the specific regulatory authorization to do so”.

“Maintaining the reputation of the DIFC as a respected financial center remains our core priority and those seeking to operate outside the letter and spirit of our regulations undermine this,” chief executive Bryan Stirewalt said in the business plan. “Greater scrutiny will be placed on business models and activities taking place in substance within the DIFC, regardless of legal structure.”

Last year, the DFSA took action against Al Masah Capital, a Cayman Islands-based private equity firm and its Dubai-based affiliate Al Masah Capital Management. The regulator ruled that the latter was managing funds from within the DIFC on behalf of its parent when it was not authorized to do so. It imposed fines with a combined value of more than $5 million on both entities and on three of its key executives. The Cayman Islands-based parent was placed into voluntary liquidation in August last year.