UAE’s Securities and Commodities Authority proposes tokenisation 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.

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. 

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.

Created using DLT to represent financial rights or tangible assets, a security token is defined in the draft regulations as a security “based on a distributed ledger”. A security under the SCA regulations includes shares, bonds, notes, derivatives, units and structured products. The commodity token, ie, digital assets that derive their value from physical commodities (eg. gold, metals or agricultural products) is not included in the list of definitions. Instead, the regulator defines commodity token contracts which are to be intended as a “commodity contract based on a distributed ledger.”

Both security token and the commodity token contracts are characterised 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 token and commodity token contracts issued from or within the UAE. This suggests that even if a security 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 token contracts 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 derivative contract will be governed by the terms of the registration agreement, subject to the provisions of Federal-Decree Law No. (31) of 2024 on Netting. The regulations also address the impact on third parties of token holders’ decisions regarding security or commodity token derivatives if, for example, the token holder is declared bankrupt. 
   
• 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.
   
• 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. 

With the rapidly increasing demand for and development of Virtual Assets, the UAE regulators must coordinate their efforts to ensure cohesive and sustainable governance. Cabinet Resolutions 111 and 112, the UAE took steps to clarify the scope of the roles between the various regulators, but there is still further clarity that is required between them, including the process of dual registration and/or obtaining no-objections from the alternate regulator.

The consultation closes on 14 February 2025.