The regime covers not only AML/CFT risks in respect of trading, clearing, holding or transferring crypto tokens, but also addressing risks relating to consumer protection, market integrity, custody and financial resources for service providers.

The DFSA has extended the scope of many current financial services activities, for example, advising, dealing, arranging, trading and custody, to allow firms in the DIFC to be able to provide products and services in relation to crypto tokens.

Firms, whether currently authorised by the DFSA or not, that want to provide financial services in relation to crypto tokens in or from the DIFC will have to obtain a license from the DFSA by first submitting a pre-application via the DFSA website. 

According to the press release, the guidance reflects VARA’s objective to provide a "progressive framework" that can enable borderless economic opportunity, without compromising market security, across the global Virtual Assets industry.

The regulations specifically address "marketing and communications activities, ahead of operationalising the MVP licensees so that any mass-market information dissemination, and consumer solicitation are designed to safeguard community interests."

The regulatory guidelines "cover all forms of outreach, communications and advertising, including publication of information, awareness building, customer engagement, and/or investor solicitation".

Guidelines:

• Regulatory Guidelines on Marketing Advertising and Promotions related to Virtual Assets
• Penalties for Non-Compliance

The dual-language English and Arabic statement cites the following concerns in relation to ICOs:

• certain ICOs are not regulated and therefore may be subject to fraud risks;
• tracking and recovering funds in case of an ICO collapse may prove difficult in practice as ICOs may be issued abroad and subject to foreign regulations;
• ICO trading on secondary markets are subject to opaque and volatile pricing and insufficient liquidity;
• retail investors may not be able to comprehend the risks, costs and expected returns from investments in ICOs; and
• ICO information disclosure to investors may be unaudited or incomplete and may present an investment case in a misleading manner by emphasising benefits over risks.

The SCA's statement echoes concerns raised by 27 regulators around the world that have suggested that ICOs are highly speculative, not standardised in their legal and regulatory status, and that investors (and in particular, retail investors) are putting their entire capital at risk.

"ICOs involve the issuance of digital tokens created using distributed ledger technology and sold to investors by action or through subscription in return for cryptocurrency. The terms and features of ICOs differ in each case, as does the nature of the rights or interest (if any) that is acquired by the investor. ICOs are highly speculative and characterised by high volatility in the prices of tokens," the statement said.

The SCA warns that, "at present, [SCA] does not regulate or mandate or recognise any ICO. No legal protection is currently offered and investors are entering into these investments at their own risk".

The SCA's warning follows recent announcements from other financial regulators in the United Arab Emirates, including the Dubai Financial Services Authority (DFSA, the financial services regulator of the Dubai International Financial Centre free zone (DIFC)) and the Financial Services Regulatory Authority (FSRA, the financial services regulator of the Abu Dhabi Global Market free zone):

The DFSA announced in September 2017 that ICOs and the systems and technology that support them are complex, with their own unique risks which may increase when offerings are made on a cross-border basis. The DFSA's announcement concludes by stating that ICOs are high-risk investments, that it does not currently regulate these types of product offerings or provide licensing to firms in the DIFC to undertake ICO fundraises.

The FSRA published guidance on the regulation of ICOs and virtual currencies under the Abu Dhabi Global Market's Financial Services and Markets Regulation (FSMR). Under the FSRA's guidance, virtual tokens that have the features and characteristics of a "security" (as defined in the FSMR) will be deemed to be, and regulated as, securities under the FSMR. All financial services in relation to a security-based ICO, such as dealing, trading, advising on, or managing investments in tokens will be subject to the regulatory requirements of the FSMR. Conversely, other virtual tokens and currencies (such as bitcoin) which do not exhibit the features and characteristics of a security will be deemed to be commodities and therefore not regulated as specified investments under the FSMR, and spot transactions in those commodities will not constitute regulated activities.

This statement by the SCA also follows a recent warning by the International Organisation of Securities Commissions (IOSCO).

The SCA and numerous global financial regulators are members of IOSCO and the similarities between recent warnings suggest that the members of IOSCO are seeking to standardise or harmonise their approach towards regulation of ICOs. IOSCO is the leading international policy forum for securities regulators, including the US Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA) and the European Securities and Markets Authority, and sets global standards for securities regulation.

In an interesting twist with a Dubai nexus, in January 2018, the SEC obtained a court order to freeze the assets of AriseBank during its ongoing ICO, in which AriseBank claimed to have raised more than US$600 million.

The SEC stated that the two founders of AriseBank, based in Texas and Dubai, had illegally raised funds from retail investors without registering with regulators.

As a result, the SEC froze various cryptocurrency assets received by AriseBank and appointed a receiver to return them to investors.

This was the first appointment of a receiver and the most substantial action taken by any financial regulator in connection with an ICO to date, and the SEC's actions followed numerous warnings issued in relation to token offerings which could be deemed to be securities under the Howey test in the United States.