DFSA Crypto Rules: 3 points to walk you through the regulatory minefield.

The DFSA has recognised the growth in interest in innovative financial products and has introduced a comprehensive regime aiming to strike a balance between encouraging innovation and protecting consumers. The new regime came into force on 1 November and here we set out the key points for interested parties to be mindful of when considering offering financial services using Crypto Tokens.

There are a number of considerations for firms interested in pursuing either a variation of scope to an existing DFSA Licence or new entrants wishing to apply for a Licence. It is vital to highlight that unless authorised by the DFSA to do so, anyone offering financial services utilising Crypto Tokens runs the risk of enforcement action*.

1. The DFSA has decided on a non-standard application process to manage the expected flow of cases. It will consist of three increasingly intensive stages of interaction to filter out unprepared or unworkable applications. There will be a stringent examination of the business model to ensure an understanding of the new regime, appropriate human resources, capital, governance, compliance, and enhanced an AML/CTF framework.

2. There are a number of operating prohibitions and enhanced requirements:

o Some straightforward ones, such as Crowdfunders and Money Service Providers cannot apply;
o Some are more complex like Branches, including those operating as Representative Offices, cannot apply for a Licence except under certain conservative circumstances;
o Technology firms may fall within the remit of the regime depending on their activity;
o Even with a licence, the DFSA has set out that foreign funds cannot be marketed;
o Domestic Funds will be permissible, but there are stringent criteria to be met;
o For many, there will be unfamiliar rules around Marketing, Custody, Client Classification and the Retail Client’s appropriateness test, technology governance, and audit requirements.

3. The DFSA will only allow firms to carry on financial services in relation to Recognised Crypto Tokens. It has now published a list of those Tokens – currently, only Bitcoin (BTC), Litecoin (LTC), and Ethereum (ETH) appear on the list. Carrying on financial services with Unrecognised, Privacy, or Algorithmic Tokens is prohibited. Non-Fungible Tokens and Utility Tokens fall outside the regime as Excluded Tokens, but certain requirements come into play for issuers and those firms wishing to offer services to an NFT or UT. These firms will need to register new entities as DNFBPs and adhere to the DFSA’s AML/CFT regime.

With the introduction of the regime, already Authorised Firms will need to assess whether they want to vary their Licence or, if they are a Branch, whether they even can. Any new firm wanting to carry out the Crypto Token business will need to apply for a new Licence.

At Clarity Solutions, we recognise that understanding this new regime is not straightforward and we are here to assist you with it. If you think your business meets the criteria to operate within the new regime or you require a variation of your existing Licence or a new Licence application, we can provide you with an ongoing service to ensure you stay within the bounds of the Rules.

If you would like to discuss anything relating to the new regime, please contact us at [email protected] and we can help you decide on your next steps.

*The DFSA previously reached out to the DIFC community to ascertain the level of any activity which could have been considered to breach the regulatory perimeter before the Rules were made. There are transitional arrangements available for a limited 6-month period.