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,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 the inclination of the federal regulator to promote virtual assets business 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 Tokens3
- 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, both security tokens and commodity token contracts are treated as a right arising from an agreement between two parties, which can be exercised, traded and transferred only through the distributed ledger.4 Certain contours of this right have been defined, such as its transfer5 and cancellation.6 The draft regulations also stipulate minimum requirements for the distributed ledger, including technical standards7 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 owner of the contract 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 take place 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: The token issuers are required to disclose financial risks, token structures, and their 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. The VARA, DFSA and FSRA are all, however, 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, and owing 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.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 assets regulation.16 The definition of virtual assets under the SCA’s framework explicitly excludes digital representation 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 akin to 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, but it has been translated in terms of the specific nature of digital securities.
PATH FORWARD
The SCA’s draft regulations not only define security and commodity tokens but also 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.
SUMMARY OF THE DRAFT REGULATIONS
| Article | Classification | Key Provision |
|---|---|---|
| 1 | Definitions | Defines key terms including State, Law, Authority, Market, Alternative Trading System, Security Token, Commodity Token Contracts, DLT, Consensus Mechanism, and Registration Agreement. |
| 2 | General Provision | Security and commodity token contracts must comply with applicable regulations; the Authority may issue directives as needed. |
| 3 | Scope of Application | Applies to security tokens and commodity token contracts issued within or from the UAE, ensuring compliance with securities regulations. |
| 4 | Origin | a. Security & Commodity Token Contracts: i. Recorded in the distributed ledger ii. Exercised, traded, and transferred only through the ledger b. Distributed Ledger Requirements: i. Creditor’s right to dispose; not the obligor’s ii. Integrity protected by technical and organisational measures iii. Content of rights, ledger operation, and registration agreement recorded iv. Creditors can view and verify information without third-party interference c. Obligor Responsibilities: i. Prevent issuance of short or improperly created/deleted contracts ii. Ensure contracts operate per the registration agreement |
| 5 | Effect of Origin | a. Obligors perform only for creditors listed in the distributed ledger. b. Obligations are fulfilled on the maturity date, even if creditors aren’t real beneficiaries, unless obligors commit gross negligence or intentional harm. c. Token owners are protected, even if sellers can’t dispose of tokens, unless owners act in bad faith or with gross negligence. d. Obligors can object to claims if they: i. Challenge the token’s registration or origin. ii. Have the right to object personally to the current creditor. iii. Involve direct relationships with the previous creditor and intentional harm by the current creditor. |
| 6 | Transfer | a. Transfer of Contracts: Governed by Federal-Decree Law No. (31) of 2024 on Netting and the registration agreement. b. Bankruptcy Provisions: If the creditor of security or commodity token derivative contracts is bankrupt, decisions are binding if: i. Submitted in advance ii. Irrevocable under the distributed ledger rules iii. Recorded within 24 hours. c. Conflicting Claims: Good faith owner of security or commodity contracts has precedence over the token contract owner. |
| 7 | Pledge | Pledges must be visible on the distributed ledger and ensure control for the pledgee. a. Private Pledge: Subject to provisions for securities and commodity contracts. b. Pledge without Transfer: Allowed if: i. Visible on the distributed ledger. ii. Can only be disposed of by the pledgee. |
| 8 | Cancellation | Beneficiaries can request court cancellation of tokens with proof of ownership loss. |
| 9 | Information & Responsibility | a. Informing Owners: Obligors must inform owners about: i. Content of security and commodity token contracts ii. Distributed ledger operations and protection measures iii. Technology requirements for managing and exercising rights iv. Risks related to investment due to adopted technology v. Disaster recovery and security arrangements vi. Responsibility and risk distribution between obligor and service provider b. Obligor Responsibility: Obligors are responsible for damages caused by inaccurate or misleading information, unless due diligence is proven. c. Void Agreements: Any agreements that limit or exclude this responsibility are void. |
| 10 | Applicable Technical Standards | Must comply with global cybersecurity, encryption, and data protection standards; The Authority may impose additional requirements. |
| 11 | Trading & Settlement | Tokens may be traded only on licensed markets or Alternative Trading Systems; OTC trading is allowed for bonds and sukuk tokens. |
| 12 | Supervision & Inspection | The Authority can conduct inspections and access computer systems of regulated entities. |
| 13 | Request of Information and Data | The Authority may demand records, documents, and clarifications from market participants. |
| 14 | Complaints and Grievances | The Authority handles complaints and grievances related to these regulations. |
| 15 | Administrative Measures | a. Suspend offering, issuance, subscription, or registration processes. b. Cancel investors’ subscriptions and require returning the paid amounts and resulting revenues. |
| 16 | Penalties | Fines, suspensions, and penalties may be imposed for violations; additional penalties for board members and executives. |
| 17 | Publishing Names of Violators | The Authority may publicly disclose violators’ names and penalties imposed. |
| 18 | Effective Date | Regulation becomes effective 30 days after publication in the Official Gazette. |
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DISCLAIMER: This article is provided for informational and educational purposes only and does not constitute legal advice. Readers should not act upon this information without seeking professional legal counsel tailored to their specific circumstances. The analysis presented herein reflects the authors’ interpretation of legal developments as of the date of publication and may not reflect subsequent changes in law or regulation.
At TLP Advisors, we are a legal consulting firm specialising in tokenised finance, agentic financial systems, digital assets, and emerging technologies. With deep roots in the financial services, Web3, and broader technology sectors, we offer unparalleled expertise and tailored support to navigate the unique challenges and opportunities of these rapidly evolving industries. TLP Advisors has consistently been the firm of choice for web3, fintech and other financial services companies. We have built a reputation for guiding clients through complex regulatory landscapes while supporting the development of innovative and compliant financial platforms.
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