Regulatory Update – June 2023

Registration Authority (RA) of Abu Dhabi Global Market (ADGM)

RA introduced a Distributed Ledger Technology Framework

The ADGM’s RA, issued a consultation paper for its proposed legislative framework for DLT Foundations. The proposed rules cater to the needs of Decentralized Autonomous Organizations (DAO) and DLT projects and has some features of the ADGM’s Foundations Regulations that will appeal to developers of DLT projects. Major updates include:

• Granting DLT foundations a separate distinct legal personality in the ADGM;
• Recognizing token holders’ legal status and their voting rights;
• Authorizing DLT Foundations to conduct any activity set by the founders;
• Requiring DLT foundations to maintain a minimum asset value of $25,000;
• Mandating DLT Foundation to comply with transparency requirements and to file their annual returns and audited accounts.

The proposed rules place an emphasis on transparency which is favorable for decentralization and most DLT projects. Additionally, the rules include requirements concerning decentralization and governance such as setting out the rights of token holders.

Financial Services Regulatory Services (FSRA) of Abu Dhabi Global Market (ADGM)

FSRA toughens client classification and protection rules

The ADGM’s FSRA closed its consultation for the amendment to client classification, client assets and conduct requirements. The FSRA’s paper proposed to:

• Reclassify single family office (SFO) as assessed rather than deemed professional clients;
• SFOs must undergo an assessment of their expertise before being offered professional clients-only types of services;
• Raise the minimum net assets threshold for assessed professional client to $1,000,000 from the previous $500,000;
• Eliminate the service-based class of professional clients;
• Oblige clients of licensees who meet the definition of assessed professional clients to update the licensee of any changes that affect their client classification; and
• Redefine the regulated activity of providing custody to exclude certain alternative asset classes such as real-estate and art.

The consultation paper also included new client protection measures that are related to investment business governing such as marketing materials, investment advice, suitability assessment of clients and disclosing fees and charges of transaction.

Dubai Financial Services Authority (DFSA) of Dubai International Financial Center (DIFC)

DFSA updates its Money Services rules and restricts Crypto Services promotion

The DFSA issued circular 150 covering its proposed amendments to the Money Services (MSB) rules. The proposed rules also touch certain aspects of the DFSA’s previously released Crypto Token Regime. Highlights of the consultation include:

• Permit MSB to offer cash withdrawal service from store of value accounts in the UAE;
• Increase the frequency of reconciliations of client accounts from once per 25 days to daily;
• Regulate “wrapped tokens” within the DFSA Crypto Token Regime and permit services to be offered involving such tokens;
• Limit licensees from referring their clients to non DIFC business that offer virtual asset products; and
• The limitation extends to any jurisdictions that do not have equivalent requirements to the DFSA Crypto Token Regime.

DFSA invites feedback from the public on its crowdfunding regime

DFSA issued a call for evidence, inviting feedback on the effectiveness of the crowdfunding regulations, involving challenges with operating under the regime. The DFSA raises important questions and highlights challenges faced by loan-based, equity and property crowdfunding platform operators:

• The adequacy of the limits currently in place on retail clients;
• The ability of platform operators to offer rewards or incentives;
• The promotion of specific lending or investments offers outside the platform;
• Exploring the need and utility of a secondary market for shares and loan participants;
• Exploring the possibility of allowing tokenization of offers on crowdfunding platform;
• Reviewing the requirement to maintain a Sharia Supervisory Board for Islamic offers;
• Investigate the use case of allowing commercial property offers on platforms.

The feedback should be submitted via the template provided by the DFSA no later than 27th July 2023.

Securities and Commodities Authority (SCA)

SCA issues its virtual assets regime

The United Arab Emirates’ federal-level financial services regulator relevant to securities, commodities and now Virtual Assets Service Providers, issued Decisions (26/RM “Virtual Assets Platform Operators”) & (27/RM “Amending the SCA Rulebook”) laying the groundwork for regulating virtual asset providers. Highlights of the regime:

• Restricting the definition of virtual assets to digital representation of value that can be traded, transferred or used as an investment;
• Exclude tokenized financial instruments from SCA’s definition of virtual assets;
• Introduce accepted virtual asset criteria;
• Extending the scope of existing regulated activities of brokerage, portfolio management and custody to
  include virtual assets;
• Setting out virtual asset specific prudential requirements ranging from AED2mn for brokerage activity to
  AED 5mn to exchange service.

Additionally, the regulations focus on six key areas covering operational efficiency, technology governance, monitoring and controls, disclosure, anti-money laundering and short selling and trading controls.

Saudi Central Bank (SAMA),

SAMA takes steps to regulate Buy Now Pay Later (BNPL) sector

On 5 March 2023, the Saudi Central Bank (SAMA) published its draft rules for regulating BNPL companies. The rules aim to increase the financial inclusion in the Kingdom and foster growth in the financial sector without compromising the financial consumer protection principles and their rights. Major updates include:

• The addition of BNPL as a sub license under Financing Companies;
• Setting the minimum capital requirement for BNPL companies at SAR5,000,000;
• Setting out exposure limit of SAR5,000 per client;
• Limiting the facility term to 6 months; and
• Imposing a strict gearing limits on licensees.

Treasury Committee of the House of Commons (UK)

The UK’s house of commons lays its strategy for the crypto assets sector

The UK’s parliament represented by its treasury committee published its report “Regulating Crypto” on 17th May 2023. The report discusses the opportunities present in the crypto industry and the challenges it brings, in addition to the UK government’s ambition for the sector. Moreover, the report contains a list of recommendation:

1. The committee recognizes the potential of some crypto assets and underlying technologies to bring benefits to financial markets especially in the payments sector;
2. that the Government takes a balanced approach to supporting crypto assets;
3. Avoid expending public resources on supporting crypto asset activities without a clear, beneficial use case, as appears to have been the case with the Royal Mint NFT and;
4. recommend that the Government regulates retail trading and investment activity in unbacked crypto assets as gambling rather than as a financial service.

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