Pioneering the Future of Digital Assets in the UAE

The United Arab Emirates Securities and Commodities Authority (SCA) has released a draft regulation concerning Security Tokens and Commodity Token Contracts, aiming to integrate Distributed Ledger Technology (DLT) into the nation's financial framework. This initiative seeks to modernize the issuance and trading of securities and commodities by leveraging digital assets.

Key Definitions:

• Security Token: A digital representation of a security utilizing DLT.

• Commodity Token Contract: A digital contract representing a commodity agreement, also based on DLT.

• Distributed Ledger Technology (DLT): A system that enables the operation and use of distributed ledgers, which are shared and synchronized across multiple nodes using a consensus mechanism.

General Provisions:

The draft regulation stipulates that the offering, issuance, promotion, and registration of security tokens and commodity token contracts within the UAE are subject to existing SCA regulations pertinent to securities and commodity contracts, in addition to the new provisions introduced in this regulation. The SCA retains the authority to issue directives as deemed appropriate to ensure effective implementation.

Scope of Application:

This regulation applies to all security tokens and commodity token contracts issued from or within the UAE, ensuring alignment with the nation's regulatory framework.

Token Origination and Ledger Requirements:

The regulation outlines specific criteria for the origination of security tokens and commodity token contracts, emphasizing that such tokens must be recorded in a distributed ledger that:

• Grants creditors, rather than obligors, the authority to manage their rights.

• Maintains integrity through adequate technical and organizational measures to prevent unauthorized modifications.

• Records the content of rights, ledger operations, and registration agreements within the distributed ledger or associated data.

• Allows creditors to access relevant information and verify the integrity and accuracy of entries without third-party interference.

Obligor Responsibilities:

Obligors are mandated to ensure that security tokens and commodity token contracts are not issued short or with a debit balance and that such tokens are neither improperly created nor deleted. They must also ensure that derivative contracts related to these tokens are regulated in accordance with their intended purpose and that the distributed ledger operates consistently with the registration agreement.

Transfer and Legal Protections:

The regulation provides guidelines for the transfer of security tokens and commodity token contracts, stating that such transfers are subject to the provisions of the registration agreement. It also offers legal protections for obligors, specifying conditions under which they are obligated to perform only against creditors listed in the distributed ledger and outlining circumstances that exempt obligors from fulfilling performance obligations.

Control, Inspection, and Penalties:

The SCA is empowered to supervise, control, and inspect obligors, offering parties, and licensees to ensure compliance with the regulation. The authority may request necessary information and documents and is authorized to impose administrative measures or penalties for violations, including suspending offerings, canceling investor subscriptions, and publishing the names of violators.

Feedback Invitation:

The SCA invites stakeholders to review the draft regulation and provide feedback by February 14, 2025. Comments can be submitted via email to Registration@sca.ae.

This draft regulation represents a significant step by the UAE in embracing technological advancements in the financial sector, aiming to enhance efficiency, transparency, and security in the issuance and trading of digital assets.