Publication
M&A in the banking sector: Key themes for 2025
Many commentators speculate that 2025 will see a rebound in the overall volume, if not value, of bank deals.
SCA publishes draft regulations for Security Tokens and Commodity Tokens
Middle East | Publication | January 2025
The Emirates Securities and Commodities Authority (the SCA) has published draft regulations on security and commodity tokens (the Draft Regulations).
The Draft Regulations provide some degree of clarity on the regulation of security and commodity tokens in “onshore” UAE. The SCA had indicated that it may move to regulate security and commodity tokens when it delegated certain regulatory powers in Dubai to the Virtual Asset Regulatory Authority (VARA) in Cabinet Decision No 111 of 2022 (CD111). By way of reminder, Article 3(2) of CD111 provided that security and commodity tokens fall within the regulatory ambit of the SCA, notwithstanding the absence of applicable SCA regulations at that time. Therefore, the Draft Regulation marks a significant step forward in the UAE’s adoption and integration of distributed ledger technology (DLT) into its financial markets outside the financial free zones.
The Draft Regulations contain provisions for the offering, issuance, promotion and registration of security and commodity tokens within the UAE. Once implemented, the regulations would not apply in the Dubai International Financial Centre or the Abu Dhabi Global Market.
This purpose of this article is to highlight some of the key provisions proposed by the Draft Regulations.
Taxonomy
The Draft Regulations propose definitions of security tokens and commodity tokens that are consistent with definitions adopted in other jurisdictions.
Security tokens are defined as digital assets created using DLT to represent financial rights or tangible assets. The definition captures equity tokens, representing ownership rights, and bond tokens, representing tradeable debts.
Commodity tokens are defined as a type of digital asset that are based on the value of physical commodities, such as gold and oil. The Draft Regulations note that such tokens facilitate the trading of such commodities on digital platforms while reducing the costs and risks associated with traditional trading.
Licencing
The Draft Regulations provide that the offering, issuance, promotion and registration of security tokens and commodity tokens falls under the regulatory ambit of the SCA.
It is unclear whether there will be a new licence category for activities involving security tokens and commodity tokens. However, the Draft Regulations do provide that such tokens may only be traded and settled on either a “market” licenced by the SCA or on an alternative trading system (an MTF or an OTF) licenced by the SCA.
Information requirements
A significant focus of the Draft Regulations is ensuring that token owners are given sufficient information to make an informed decision on investing in the tokens.
Under the Draft Regulations, issuers of security tokens and commodity tokens must make specific disclosures in relation to the tokens. These include details about the nature of the tokens, the measures taken for protecting the related distributed ledger’s operation, the essential risks related to investing in the tokens, and details of available recovery measures for disaster recovery purposes. This essentially replicates the model adopted for Payment Token Issuers to produce a White Paper in respect of each Payment Token under the UAE Central Bank’s Payment Token Services Regulations.
The Draft Regulations propose to hold issuers accountable for any damages incurred by token owners as a result of inaccurate or misleading information provided to them.
Technical standards requirements
The Draft Regulations set out technical requirements to address the specific technology risks associated with security and commodity tokens. Specifically, the technology related to such tokens is required to meet international best standards in relation to cybersecurity, data protection, software, testing and supervision. The Draft Regulations are silent on what the international best standards are.
Conclusion
It is clear that investor protection is high on the SCA’s agenda given its focus on the quality and accuracy of disclosures made to clients, and the proposed adoption of international best standards when it comes to the technology underlying the tokens. However, the Draft Regulations are silent on whether there will be a new licence category and how that may operate, including whether there is scope for dual licencing for entities already licenced by the VARA.
The deadline to provide feedback on the Draft Regulations is 14 February 2025.
This article has been written by Middle East Partner and Head of Financial Services Regulatory Matthew Shanahan, Associates Hasanali Pirbhai and Jack Abrehart, and International Trainee Matthew Leech.
Should you have any queries or questions, please get in touch with one the key contacts listed below.
Recent publications
Subscribe and stay up to date with the latest legal news, information and events . . .