Security in Code, Compliance in Law: SCA’s New Era for Tokenised Assets in the UAE

KEY TAKEAWAYS

• The UAE Securities and Commodities Authority has released draft regulations for security tokens and commodity token contracts, aiming to regulate digital assets and integrate blockchain technology into traditional financial markets.
• The draft regulations provide clear legal definitions for security tokens (representing securities like equity or bonds) and commodity token contracts (representing physical commodities like gold or oil), offering legal certainty to market participants.
• Trading and settlement of these tokens must occur on licenced exchanges or SCA-recognised Alternative Trading Systems, with over-the-counter trading limited to bonds and sukuk tokens.
• The framework enforces stringent governance and compliance requirements, including mandatory disclosures related to DLT operations, investor risks, and disaster recovery measures.
• Investors are granted protections akin to those in traditional securities markets, with clear legal recourse if issuers fail to meet their obligations.
• The draft regulations integrate distributed ledger technology into compliance mechanisms, utilising smart contracts and on-chain verification to enhance transparency and reduce fraud.
• This draft regulation fills a previous gap in the UAE’s digital asset regulatory landscape, positioning the country as a leader in blockchain-driven financial innovation while emphasising investor protection.

INTRODUCTION

After the Guidelines for the Regulation of Virtual Assets and Virtual Asset Service Providers (which we wrote about here),[1] the Securities and Commodities Authority (“SCA“) has published a draft regulation for “Security Tokens and Commodity Tokens Contracts”. The SCA’s consistent development of its virtual asset regime is evidence of its inclination to promote virtual assets businesses in a regulated environment. The draft regulations regulate the offering, issuance, promotion and registration of securities and commodity contracts on distributed ledger networks.[2]

KEY ASPECTS OF THE DRAFT REGULATION

Legal Definitions for Security and Commodity Tokens[3]

• Security Tokens: These tokens represent securities, such as equities or bonds, which are issued and recorded using distributed ledger technology (“DLT“). This would include all forms of security tokens, including equity, bonds, and sukuk tokens.
• Commodity Token Contracts: These tokens represent physical commodities such as gold, oil, metals or agricultural products, allowing for fractional ownership and digital trading.

Under the draft regulations, security tokens and commodity token contracts are treated as rights arising from an agreement between two parties that can be exercised, traded, and transferred only through the distributed ledger.[4] Certain contours of this right, such as its transfer[5] and cancellation, have been defined.[6] The draft regulations also stipulate minimum requirements for the distributed ledger, including technical standards[7] and organisational measures to ensure its integrity, as well as a requirement to record the content of the rights and the registration agreement on the distributed ledger.[8]

Blockchain and Token Issuer

The individual obligated to perform under the security token or commodity token contract is required to provide mandatory disclosures to the contract owner and undertake due diligence.[9] Additionally, the draft regulations clarify that if there is a conflict between the blockchain (contract owner) and the token issuer, the blockchain’s claim will prevail.[10]

Trading Venues and Settlement Mechanisms

The draft regulation establishes clear rules for trading and settlement, ensuring that transactions occur within regulated environments. Tokens must be traded on licenced exchanges or Alternative Trading Systems (“ATS“) recognised by the SCA.[11] Over-the-counter trading is restricted to trading and settlement of bonds and sukuk tokens.

Investor Protections and Legal Safeguards

The draft regulation includes comprehensive investor protections and enhances transparency for market participants by aligning digital securities with traditional financial markets.

• Rights and Disclosures: Token issuers are required to disclose their financial risks, token structures, and compliance status.[12]
• Token Holder Protections: Holders of these tokens are granted the same legal rights as traditional securities investors.[13]

A summary of each article of the draft regulations has been annexed to this article.

OUR ANALYSIS

Basket of the UAE Regulators

A peculiarity of the UAE’s regulatory landscape for virtual assets is the fact that there are numerous regulators, namely, the Virtual Asset Regulatory Authority (“VARA“) in Dubai, the Dubai Financial Services Authority (“DFSA“) in the Dubai International Financial Centre and the Financial Services Regulatory Authority (“FSRA“) in the Abu Dhabi Global Market. VARA, the DFSA, and FSRA are all restricted to their respective jurisdictions. The SCA acts as the federal regulator for the rest of the UAE.

There is a degree of cooperation between the SCA and VARA, as VARA derives its authority and powers from the SCA itself.[14] VASPs operating in Dubai are required to obtain a licence from VARA. Due to the coordination between the two regulators, they can then be registered with the SCA to offer their services to the rest of the UAE outside of Dubai.[15]

The Previous Position on Security and Commodity Tokens

Digital representations of securities and commodity contracts have always been excluded from the ambit of virtual asset regulation.[16] The definition of virtual assets under the SCA’s framework explicitly excludes digital representations of securities.[17] VARA also defines a virtual asset as a “digital representation of value,” excluding digital representations of securities and commodities contracts by implication. Digital securities and digital commodity derivatives contracts were thus treated like traditional securities, with ad hoc considerations given to technological and security requirements.[18]

Lacuna filled by the Draft Regulations

The draft regulations fill in the definitional gap and provide the first step to a separate framework for digital securities and commodity contracts, which considers their peculiarities. It answers the question of how these digital securities will be regulated, resolving any ambiguity in this regard. There is a strong emphasis on investor protection, a sentiment that the SCA prioritises in all financial activities that it regulates. Still, it has been adapted to reflect the specific nature of digital securities.

PATH FORWARD

The SCA’s draft regulations define security and commodity tokens and establish a compliance-driven pathway for their growth. The next step lies in industry engagement to fine-tune these rules for a balanced and progressive regulatory framework. The SCA has invited comments from industry stakeholders on the draft regulations, with the consultation period ending on 14 February 2025. All virtual asset service providers should be sharing their comments since this is the first comprehensive set of regulations governing security tokens and commodity tokens issuances at the federal level in the UAE.

APPENDIX

SUMMARY OF THE DRAFT REGULATIONS

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[1] Please read our previous article on the Guidelines on: https://techlawpolicy.com/2024/08/scanning-vasps-guidelines-for-regulation-of-virtual-assets-and-virtual-asset-service-providers/

[2] Securities & Commodities Authority- The Chairman of the Authority’s Board of Directors’ Decision No. (…./Chairman) of 2024 Concerning the Regulation as to Security Tokens and Commodity Tokens Contracts, Article 1, https://www.sca.gov.ae/assets/a003a91f/regulations-drafts-en-2025.aspx

[3] Article 2(1) of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[4] Article 4(1) of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[5] Article 6 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[6] Article 8 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[7] Article 10 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[8] Article 4(2) of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[9] Article 9 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[10] Article 6(3) of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[11] Article 11 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[12] Article 9 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[13] Article 5 of the SCA’s Draft Regulations on Security Tokens and Commodity Tokens Contracts.

[14] Article 2 of the Cabinet Decision No. 112/2022 on Delegating Certain Competencies related to the Regulation of Virtual Assets.

[15] SCA and VARA set regulatory framework for the UAE’s virtual assets sector in boost to the country’s global position in the field, Securities and Commodities Authority (September 9, 2024) https://www.sca.gov.ae/en/media-center/news/9/9/2024/sca-and-vara-set-regulatory-framework-for- the-uaes-virtual-assets-sector-in-boost-to-the-countrys-.aspx

[16]  Article (1) read with Article 3(2)(b) of the Cabinet Decision No. 111/2022 on the Regulation of Virtual Assets and Their Service Providers.

[17] Paragraph 7 of the SCA’s Guidelines on Regulation of Virtual Assets and Virtual Assets Services Providers.

[18] Paragraph 10 of the SCA’s Guidelines on Regulation of Virtual Assets and Virtual Assets Services Providers.