UAE security commodity tokens regulations a pivotal step for financial markets

The UAE Securities and Commodities Authority (SCA) released new draft regulations in January outlining comprehensive guidelines for the creation, issuance, and trading of security tokens and commodity tokens.

The draft regulations provide clear definitions for security and commodity tokens. Security tokens are defined as digital assets created using DLT to represent financial rights or tangible assets. This includes equity tokens, which represent ownership rights, and bond tokens, representing tradeable debts.

Commodity tokens are defined as a type of digital asset that are based on the value of physical commodities, such as gold and oil. The draft regulations note that such tokens facilitate the trading of such commodities on digital platforms while reducing the costs and risks associated with traditional trading.

Security tokens and commodity tokens represent a fusion of traditional securities and commodity contracts with cutting-edge technology, offering investors more flexible and efficient tools. The issuance of the draft regulations marks a significant step towards integrating digital assets and blockchain technology into the traditional financial markets of the region.

The new regulations highlight the UAE's commitment to embracing technological advancements in the financial sector. By recognising the transformative potential of DLT, SCA aims to redefine the issuance, trading, and investment landscape for financial markets.”

The draft regulations cover several critical areas, including their offering, issuance, promotion, and registration. SCA will have the authority to oversee compliance with the regulations and enforce penalties for violations. This includes monitoring the activities of token issuers and trading platforms, including both traditional markets and alternative trading systems such as multilateral trading facilities and organized trading facilities, to prevent fraud and market manipulation.

The regulations further specify the technological standards that must be met for the use of DLT in issuing and trading tokens, including cybersecurity, data protection, software supervision and encryption standards. These standards also include ensuring the security and integrity of the distributed ledger and the consensus mechanisms used to validate transactions. The regulations also aim to maintain market integrity by preventing market manipulation and ensuring fair trading practices. Token issuers and trading platforms will be required to implement measures to ensure investor protections, and includes measures linked to transparency and disclosure.

Investors also benefit from enhanced protection under the draft; the regulations ensure that token holders have clear and enforceable rights, similar to traditional securities, including rights to dividends, voting, and claims on assets.

Overall, the draft regulations represent a forward-looking approach to integrating digital assets into the UAE's financial markets, offering numerous benefits to investors and contributing to the development of a robust and innovative securities market.