August 15, 2024
Regulatory Mapping: Strategy for an RWA Tokenisation Company
Introduction
The client is a company issuing commodity-backed tokens to individuals as a form of investment (“Client”). The Client sought TLP’s assistance to explore licensing options for its global operations.
Challenge
The Client sought to provide a myriad of products, some of which could raise regulatory concerns. They faced challenges in navigating complex regulatory frameworks across various jurisdictions, ensuring proper licensing for each product offered, and mitigating risks associated with virtual assets (“VA”) custody. Another key challenge was mitigating risks associated with swapping payments made in VA.
Strategies, Tactics, and Solutions
Our team thoroughly analysed the company’s current and intended offerings. We proposed the following options to the Client:
Option 1: Operating in a fully regulated manner
- To operate in Dubai, the Client would require a licence from the Virtual Assets Regulatory Authority (“VARA”), which regulates VA activities in Dubai. Alternatively, the Client could obtain a licence from the Financial Services Regulatory Authority (“FSRA”) within the Abu Dhabi Global Market (“ADGM”) (read about the UAE regulatory ecosystem here).
- We examined the different licensable activities under both regulators that corresponded to the Client’s products and highlighted the regulations that the Client may be subject to under each regulator. Specifically, we noted restrictions the Client would have to observe under each licence to avoid being reclassified for further licensable activities.
- The Client would also need to adapt to the Central Bank’s new Payment Token Regulations (“PTR“) (read more about those here), which would affect their ability to accept payments in VA. We highlighted concerns arising from the PTR and analysed how the impact may differ if the Client operated under different regulators outside the UAE.
- As an alternative to being fully licensed in the UAE, we advised the Client to obtain licences abroad in offshore jurisdictions or onboard a regulated custodian in the UAE.
- We identified regulatory concerns (or lack thereof) regarding introducing future products in the UAE. This included assessing whether the existing licences were adequate and, where necessary, proposing tweaks to their product suite to avoid further regulatory concerns. We also proposed risk mitigation measures that the Client should follow for each intended offering.
Option 2: Operating in jurisdictions with lenient licensing regimes
We compared popular jurisdictions with less stringent regulatory requirements, listing relevant factors for consideration including the regulatory requirements, costs and timeline. This would be a viable option as many such jurisdictions have a simple, streamlined process and a crypto-friendly regime.
Option 3: Operate in an unregulated structure
This option sidesteps complex licensing and instead focuses on a multi-entity structure in different jurisdictions, each with different Ultimate Beneficial Owners (“UBOs“), transacting with each other on arms-length terms. See here for another case study looking at common Web3 multinational entity structures.
Outcomes
TLP’s expansive global strategy provided a series of options to the Client in terms of licensing depending on their priorities and capabilities. We have addressed risk mitigation measures that the Client should undertake to continue operations smoothly within the selected course of action. We have considered each of the Client’s product offerings individually to determine whether a licence would be required and, if not, what measures could be taken to maintain the status quo. Adopting these strategies would enable the Client to continue offering their products and introduce new ones without attracting regulatory scrutiny.
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TLP Advisors has consistently been the firm of choice for L1 chains, DeFi protocols, gaming companies, fintech and payment companies, foundations, funds, and investors. We have built a reputation for excellence through frequent collaborations with regulators, funds, and technology incubators. Our deep understanding of the intricate regulatory landscapes and industry dynamics allows us to provide strategic guidance and innovative solutions that empower our clients to navigate complex challenges and seize emerging opportunities.