In early September 2018, the Securities and Commodities Authority (SCA) of the United Arab Emirates (UAE) announced that it had approved a plan to regulate ICOs and recognize issued tokens as securities. Most recently, Dr. Hans Koning and Dr. David Meszaros— who are both familiar with the UAE cryptocurrency legislation— provided their input on the matter.
The UAE Declares Issued Tokens ‘Securities’
The UAE has taken the first step in providing a regulatory framework for cryptocurrencies. Most importantly, they have announced their recognition of digital tokens as financial products, meaning real assets. Due to this, they will be subject to the regulatory framework established by the SCA, though that framework is still being written.
Despite its incomplete status, Dr. Koning and Dr. Meszaros were able to provide some interesting details.
The SCA is currently writing guidelines which will be used to regulate cryptocurrencies, or in their terms, digital securities. Thus far, the regulations appear to place a large degree of responsibility on the token issuer, as is likely no surprise for most.
Further, the SCA has seemingly replaced the term ‘whitepaper’ with ‘prospectus’. The latter word is well-known in the financial industry, as it refers to a financial disclosure document which describes financial security to potential investors. A prospectus provides more data to investors, allowing for an informed decision. There are some legal requirements that come along with the prospectus: it must be 100% accurate— if it isn’t, then the company can be held liable. If the company acts differently than stated in the prospectus, investors can sue for damages.
There are also requirements to ensure identity checks and to prevent the funding of illegitimate organizations. These include KYC and AML guidelines. It is likely that the SCA will require mandatory KYC checks for all token investors.
Will the Forthcoming Legislation make the UAE a Security Token Leader?
The reason for such a regulatory framework is likely due to economic incentives. Sultan bin Saeed Al Mansouri, Chairman of the SCA, is also the UAE’s Minister of Economy. The UAE economy is heavily reliant on oil, as it accounts for over 70% of the UAE’s state budget.
Given such a situation, they’ve shown interest in expanding their economy. In the past decade, the UAE has experienced a significant growth of tech-related companies, and it’s likely that their action in the blockchain space aims to bring added business and an expanding economy to the UAE.
The effects could be just that, claim both Drs. They say that the clear regulatory framework could bring companies who wish to compliantly raise capital via token offerings to the UAE, along with their talented employees.
The benefits can also reach investors. While hesitation from their home country’s regulators could stall their investing, the SCA’s action could motivate and incentivize other regulatory bodies to take action as well.
If the SCA does stir international action, the playing field could be leveled, which is ultimately beneficial for all. Different jurisdictions could get on the same page, and perhaps some sort of international regulatory standard could be established. A clearer regulatory framework also contributes to greater competition, which can potentially benefit investors the most.
While regulatory bodies both in the US and in Europe continue to further clarify certain aspects of security tokens, one thing is clear. The UAE just made a serious statement.
How the world reacts, we’ll have to wait and see.
What do you think of the SCA’s classification of tokens as financial products? Will other regulatory bodies follow the SCA by also providing a regulatory framework for the industry to follow? We’d like to know what you think in the comments below.
Image courtesy of Wikipedia.