UAE’s Securities and Commodities Authority launches consultation on token framework

The United Arab Emirates’ Securities and Commodities Authority (the SCA) has launched a public consultation on draft regulations for security and commodity tokens. The proposed framework sets out the requirements and rules governing security and commodity tokens within the 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.  

SCA’s security and commodity tokens rules are just the latest crypto focused regulations issued by the financial regulators across the Emirates. Last month the Financial Services Regulatory Authority’s in the ADGM issued a new regulatory framework for Fiat-Referenced Tokens, and the Virtual Assets Regulatory Authority's issued new crypto marketing regulations within Dubai. Together, they aim to solidify UAE's position as a leading global hub for virtual assets. 

This purpose of this article is to highlight some of the key provisions proposed by the draft regulations.

Scope of the SCA consultation

The SCA observes that security and commodity tokens are among the most important applications of Distributed Ledger Technology (DLT), representing a qualitative shift in the issuance and trading of securities and commodity contracts.

Under the draft regulations, a Security Token is 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 or 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

Both Security and Commodity Tokens are characterized in the consultation as “a right under an agreement between two parties” that is recorded in the distributed ledger and “may be exercised, traded and transferred to others only through the distributed ledger”.

The obligations under the draft regulations will apply to security and commodity tokens issued from or within the UAE. This suggests that even if a token is intended for markets outside the UAE, it must adhere to these requirements provided the issuer is based in the UAE. The draft regulations do not address those security tokens and commodity tokens issued outside the UAE but target customers within the UAE.

The proposed regulatory framework

The draft regulations impose stringent technical, transparency and security requirements on issuers of security tokens and commodity token contracts. These include:

• Distributed ledger: The definition of distributed ledger chosen by the regulator resembles that of EU’s MiCA. The distributed ledger must meet the requirements set out in the regulations, including giving token holders the power to dispose of their rights, and requiring the issuer to ensure its integrity by implementing adequate technical and organisational measures, protecting it from unauthorised modification. 
   
• Transfer: The transfer of a security token or commodity token will be governed by the terms of the registration agreement, subject to the provisions of Federal-Decree Law No. (31) of 2024 on Netting. 
   
• Token cancellation: The cancellation of the token instrument can be requested by the beneficiary once this proves on his principal authority to dispose and its loss. The cancellation gives the beneficiary the right to either exercise his right out of the distributed ledger or request a new issuance. 
   
• Transparency requirements: The regulations mandate a series of informational obligations on token issuers vis-à-vis token holders, which include providing information on the content of the contract, working method of the distributed ledger and security measures implemented, any software requirements investors should use to manage or exercise their rights and investment risks connected to the technology.  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.
   
• Trading & Settlement: The regulations specify that in scope tokens may only be traded and settled through securities and commodities market, or Multilateral Trading Facility or Organised Trading Facility licensed by the SCA. However, the SCA further specifies that bonds and sukuk tokens may be conducted over-the counter.
   
• SCA’s powers: The framework empowers the SCA to ensure compliance with the regulation by, for example, requesting information, inspecting computer systems or equipment storing data of the obligor, offering parties, and licensee. In case of non-compliance, the SCA may also impose administrative measures and penalties.

Looking ahead

The UAE’s regulatory framework in respect of virtual assets is nascent, complex and ever-changing. 

With multiple financial regulators within the region issuing their own respective regulatory framework in respect of virtual assets, there is a concern around regulatory fragmentation and indeed whether dual licensing may be required. It is not yet clear whether there will be a new licence category for activities involving security tokens and commodity tokens. 

The public consultation closes on 14 February 2025.