Perspective Prospectus: UAE Finds Solution For ICO Liability

Early September 2018, the Securities and Commodities Authority (SCA) of the United Arab Emirates by its Chairman Sultan bin Saeed AL MANSOURI, announced it had approved a plan to regulate ICOs and recognize the issued tokens as securities. Although UAE has the most diversified economy in the GCC, it's economy remains extremely reliant on oil. Petroleum and natural gas continue to play a central role: in 2011, oil exports accounted for 77% of the UAE's state budget. Indeed, the Emirates strive for the diversification of the economy, and FinTech and 'token economy' may become one of the branches they will be closely working on in the nearest future.

Drs Hans KONING and Dr David MESZAROS, the co-founders of Vicarium project, studied the legal framework regarding crypto in UAE, and provided their opinions.

Earlier this year, the SCA came up with a warning to investors that tokens sales come with risks, and that tokens prices can be highly volatile. The message then was that investors needed to “exert caution towards token based fundraising and related crowdfunding schemes”, which is hardly an endorsement. It is therefore safe to say this new ruling heralds a change in UAE’s position.

This new stance is part of a number of initiatives to update and upgrade regulations so financial activities and services in the securities sector will match the best international standards and practices. The adopted plan includes a whole set of mechanisms and is part of an integrated project to regulate digital securities. However, the new proposal is not yet in place, and more importantly has not yet given much clarity. It is perhaps better to see as the UAE’s projected plan. That gives us a fair bit of insight into the “brave new world” they envision.

The market matures. More responsibility to appear

Firstly, the plan implies that digital tokens are real assets, financial products. Once that was established, the SCA starts writing up guidelines, flowing into a set of mechanisms to regulate digital securities. It seems to give a large degree of responsibility at the underlying company that issues the tokens, or launches the ICO. And quite rightly so; the onus of responsibility needs to lie there.

Another focal point addresses the minimum content of the whitepaper. The SCA actually calls it the prospectus, and says ‘whitepaper’ in brackets. Prospectus is a very specific meaning in the financial industry, as a financial disclosure document that describes a financial security to potential investors. Based on reading a prospectus an investor can make a well balanced and informed decision. A prospectus has to be 100% accurate and reliable; if it’s not, the company can be held liable. If it acts differently than stipulated in the prospectus, then an investor can sue for damages. Such stance is a strong sign of the digital token and the ICO becoming mature.

Furthermore, there are well known rules added, that somehow might seem obligatory, but give credence to digital assets as established. This refers to KYC, AML guidelines and the prevention of funding terrorist organisations. Making KYC mandatory for all token investors is in that sense a logical step. The SCA also posits it should continue to keep raising awareness of investors regarding digital securities and commodities.

The regulator claims to adopt the best international practices and consults with the industry and the markets. This way the SCA says it wants to actively monitor the further development of ICOs and crowdfunding, and see how it settles and becomes more established. The digital token industry will go through much more developments and challenges. The SCA makes it clear it wants to keep the finger to the pulse. It is commendable that the regulator opens up to industry insiders and stakeholders, and turns to them for advice and experiences. One can hope they will choose a wide and diverse set of insiders for the best result.

The reasons behind the UAE moves and what will follow

The fact that SCA Chairman Sultan bin Saeed AL MANSOURI is also the Minister of Economy of the UAE does fuel the idea there might be a strong underlying financial and economic motive. Having an economic perspective in order to guide regulations does not have to be bad. But, as transparency is a founding principle in the blockchain, and crucial in the financial industry, it would be good if the SCA were to shed a bit more light on that.

A financial regulator like the SCA has two core responsibilities: ensuring a stable and fair market, and protecting the investor and their interests. In any decision a regulator takes, those two principles are weighed, discussed, argued and reviewed on potential impact. That can also explain why regulators all over the world sometimes are seen as “one step behind” reality. This decision can be seen as a “catch up” by the SCA.

The past decade we have witnessed a massive growth of tech-related companies in the Gulf area: EY claim that Islamic FinTech to attract 150 mln new customers for the next three years. The UAE is at the forefront with Smart City and Smart Living Tech, EnerTech, and FinTech developments. The country’s effort to obtain/retain a special position in this specific arena and keep appeal to the international business community has been an important policy driver for the UAE. Digital tokens are now accepted as real, and that is a major development; crypto is invited to come sit at the adults table.

As an outcome, the market in UAE will get a boost, and will come in different forms. Firstly we will see an influx of companies and talent to the UAE, who want to run their fundraising and token issuance under a clear framework. That is also good for investors, who now know where they stand, but obviously still might face issues and uncertainty in their home countries. The real boost will lie in leveling playing fields in other jurisdictions, taking away the competitive advantage the UAE now seems to obtain. That leveling, adding competition, is always great to improve the playing field; useful regulations, better security, professionalized companies, solid product/services offerings, etc — all leading to the creation of a mature and established market. The UAE is upping the game, and that is the most significant consequence in this decision.

Some countries will follow suit, some will be more restrictive, some simply will never make up their mind. Perhaps even FOMO might drive countries to make a rapid and positive decision. Meanwhile, the UAE pours a lot of money and resources at becoming and maintaining to be a significant player in the FinTech industry. By making this choice, the UAE shows that they believe crypto to be more than a hype, but a significant addition to it — not substitute for the financial market, as Middle Eastern countries had great success in the developments during last years. UAE wants to sit at that table and has positioned itself at the head of it.

As it often happens, there is also another side of the coin

How the framework will ultimately look like is still not clear. What rules will be part of the framework, and how strict, or more important, how many degrees of freedom are there? A simple example of such uncertainty: whether there will be a distinction between security and utility tokens? The exact mandate of the SCA is also not crystal clear yet. What falls, and what does not fall under the purview of the SCA in this discussion? What is absolutely clear is that companies do not receive a blank check when it comes to planning an ICO and issuing tokens or that simply “anything goes”. In this ruling, the UAE is clearly not blind to developments in the technical and financial arena, consumer demands, company expectations, nor for the fact that tokens and ICOs are a relatively new phenomenon. That requires to walk on a tightrope at times. Rather than not making a choice, the SCA has chosen to jump in at the deep end. With the decision of adopting crypto as securities, the UAE has upped the ante.

Drs Hans Koning is the co-founder and CEO (Business & Governance) and Dr David Meszaros is the co-founder and COO (Legal) of Vicarium, 21st Century Corporate Services Boutique Style. Both authors have been involved in the Blockchain and crypto community for a few years, and both have an ample academic background. Prior to blockchain they span a 30 year business career.