The global digital landscape continues to rapidly transform and bring forth innovative financial instruments and technologies, including within the shifting regulatory frameworks that have shaped the digital asset ecosystem in the United Kingdom, United States, and United Arab Emirates.
Below we cover some recent trends and key developments in tokenization, cryptocurrency markets, and blockchain technologies and discuss global regulatory approaches intended to ensure security and compliance in relation to this dynamic asset class.
Current Regime
The existing rules and regulations of the current UK regulatory framework apply to cryptoassets, and the Financial Conduct Authority (FCA) classifies them as either:
Unregulated tokens currently fall outside the regulatory perimeter, meaning the buying and selling of cryptocurrencies does not require FCA authorization. However, anti-money laundering (AML) requirements still apply to unregulated tokens, and the UK financial promotions regime has also recently been extended to cover unregulated cryptoassets.
Proposed Regime
The previous UK government had expressed its goal of making the UK a global cryptoasset technology hub and had set out plans last year to create a new regulatory regime for cryptoassets to be implemented in two phases. However, it remains to be seen whether there will be changes to such plans under the new Labour government.
The first phase of the current plans involves the creation of FCA-regulated activities for the issuance and custody of fiat-backed stablecoins issued in the UK as well as the regulation of payment services related to these coins when using a UK payment chain. Under the current plans, stablecoins are to be brought within the regulatory perimeter as it was considered that risks and opportunities relating to stablecoins are most urgent in light of their broad use and concerns over their ability to provide stable value and redeemability.
The UK Financial Services and Markets Act 2023 gives the government the power to establish an FCA authorization and supervision regime for stablecoin that draws on existing electronic money and payments regulation to mitigate conduct, prudential and market integrity risks for issuers of stablecoins and payment service providers using stablecoins.
In the second phase of the current plans for a new regulatory regime for cryptoassets, other cryptoassets not currently within the UK regulatory perimeter would also be brought within scope of the existing regulatory framework. A broad range of cryptoasset activities would be regulated under the new proposed regime, including issuance activities (which relate to admitting a cryptoasset to a trading venue and making a public offer of a cryptoasset), exchange activities, lending, borrowing and leverage activities, custody activities, and investment and risk management activities. The FCA would have the power to make tailored rules for firms carrying on cryptoasset activities that will be consulted on at a later stage.
Broadly, proposed US digital asset legislation is defined by whether the particular digital asset being transacted is a security.
While it has not yet been signed into law, the Financial Innovation and Technology for the 21st Century Act (FIT21) could provide a blueprint for US digital asset regulation well into the future. By providing a bifurcated regulatory regime to oversee digital assets for the Commodity Futures Trading Commission and US Securities and Exchange Commission (SEC), as well as further guidance for stablecoin issuers, the United States may become a viable jurisdiction in which digital asset companies could do business without fear of enforcement action for their offerings.
FIT21 has passed in the House, but the Senate has not yet taken action on this legislation and is not expected to do so during this congressional term. Despite the low likelihood of FIT21 becoming law in 2024, this legislation could serve as the framework for future legislative efforts.
Enforcement
The SEC has garnered a reputation for regulation by enforcement in the digital asset space. Until recently, the SEC has focused its enforcement resources on digital asset issuers. In 2023, the SEC filed suit against the major digital asset exchanges in the United States claiming that they are acting as unregistered securities brokers, clearing agencies, and exchanges.
The UAE’s progressive approach to regulating digital assets reflects its broader ambitions to become a global innovation and technology hub. There are regimes at the federal level, the emirate level in Dubai, as well as within the two financial free zones, the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC).
The general approach of regulators in the UAE has been to adapt the existing financial services regulatory frameworks to financial activities involving digital assets. Over the last few years the UAE and individual emirates have supercharged their regulatory efforts with respect to digital assets to attract a global set of businesses and investors that are focused on this asset class, with Abu Dhabi and Dubai driving most of the changes.
In furtherance of the Financial Infrastructure Transformation (FIT) Programme, which was launched in February of 2023, there have been a number of updates at the federal level with respect to digital assets:
Dubai Onshore – Virtual Assets Regulatory Authority
The Virtual Assets Regulatory Authority’s (VARA’s) approach to regulation is activity-based, not asset-specific. VARA does not restrict any virtual asset but instead focuses on the activities that the Virtual Asset Service Providers (VASPs) wish to conduct. In February 2023, VARA issued its Virtual Assets and Related Activities Regulations applicable to all VASPs. We expect updated guidance with respect to licensing processes to be issued later this year. We further understand that VARA intends to focus on tokenization.
Unlike VARA, the virtual asset regime in the DIFC focuses on the virtual asset rather than the service being provided in connection therewith. The Dubai Financial Services Authority (DFSA) recently added Toncoin and Ripple to its list of Recognised Crypto Tokens, joining Bitcoin, Ether, and Litecoin.
The DIFC issued a consultation paper in January 2024 proposing revisions to the Crypto Token regulations. A new Digital Assets Law issued in March, the first law to set out the legal characteristics of digital assets as a matter of property law, provides for how digital assets may be controlled, transferred, and dealt with by interested parties.
The law provides that, in the absence of evidence showing otherwise, a person (or a group of persons acting together) who has control of a digital asset is presumed to have the superior legal title to it.
The ADGM introduced the world’s first DLT Foundations Framework, creating a legal structure for blockchain foundations and decentralized autonomous organizations. The ADGM’s Financial Services Regulatory Authority (FSRA) has been innovating in the regulation of digital asset exchanges through its regulation of multilateral trading facilities and has issued a number of licenses in this regard over the last 12 months.
The FSRA issued Consultation Paper No. 7 of 2024, Proposed Regulatory Framework for the Issuance of Fiat-Referenced Token, in August. The paper outlines the FSRA’s proposal for a specific regulatory framework that would enable the issuance of fiat-referenced tokens (FRTs) from the ADGM. The paper notes that these are a category of stablecoins that are backed by high-quality liquid assets that are denominated in the same currency as the FRT and that can be rapidly liquidated with minimal adverse price effect.
Ras Al Khaimah
Last year, the RAK Digital Assets Oasis (DAO) was launched, the world’s first free zone dedicated to digital and virtual asset companies wishing to operate with respect to blockchain, gaming, NFTs, decentralized applications (dApps), artificial intelligence, Web3-related activities, and Web3 supporting activities. The DAO has issued the Ras Al Khaimah Digital Assets Oasis Companies Regulations 2023, which governs the formation and governance requirements of DAO companies more generally, but has not yet issued laws or regulations specific to digital assets.
Saudi Arabia
Saudi Arabia is poised to play a pivotal role in the crypto revolution. The Saudi Arabian Monetary Authority (SAMA) is at the forefront of monitoring cryptocurrency transactions, with a focus on a regulatory environment that balances promoting innovation and protecting investors and consumers.
The issuance of a Fatwa by a prominent Saudi cleric and the deeming of Bitcoin and other cryptocurrencies as Sharia-compliant have been pivotal factors in changing Saudi Arabia’s stance on crypto. SAMA continues to consider and test the potential for a CBDC. SAMA has joined the mBridge project as a participant in the Minimum Viable Product platform.