Regulatory Developments in the UAE: SCA, Security Tokens, Commodity Tokens, and Fintech Software

The Securities and Commodities Authority (SCA) of the United Arab Emirates (UAE) has developed two significant regulatory drafts regarding software and Fintech activities in the UAE, taking a proactive step to regulate these emerging sectors.

The first document covers “Security Tokens and Commodity Tokens Contracts”, the second addresses “Robo-Advisory Services”. Available for public review until February 14th 2025, these documents provide an overview of the approach of the SCA towards these topics, as well as the potential implications for Fintech and software companies in the UAE.

“SCA realeases drafts on Security Tokens and Commodity Tokens conctracts, and Robo-Advisor Services and Robo-Advisor Algorithms.”

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Among the key regulatory concepts introduced, the following stand out as the most relevant:

1. Security Tokens:

Security tokens are digital assets that confer financial rights, such as ownership stakes, repayment obligations, or future profit entitlements. The SCA’s draft regulations define the framework for these tokens, ensuring that both issuers and investors understand their rights and obligations.

2. Commodity Tokens:

Commodity Tokens are linked to physical commodities like gold, oil, and metals. The new regulations aim to create a clear structure for how these tokens can be issued and traded, through a distributed ledger.

3. Robo-Advisory Services:

Robo-Advisory Services utilize algorithm-based platforms to provide automated investment advice and recommendations. The SCA is establishing IT requirements for these services, ensuring they operate transparently and safely.

4. Robo-Advisor Algorithms:

Robo-Advisor Algorithms are sophisticated mathematical models that analyze market data, evaluate investment decisions, and allocate assets automatically. The forthcoming regulations will ensure these algorithms meet stringent compliance and performance standards.

SCA draft about Security Tokens and Commodity Tokens Contracts

The rapid growth of the tokenized economy has prompted the SCA to establish a regulatory framework aimed at protecting stakeholders in the UAE, ensuring transparency, and nurturing innovation within the fintech and web3 sector. The draft regulations address several critical areas:

1. Territorial clarity: Currently there are several authorities regulating web3 and crypto activities in the UAE. Nevertheless, due to their territorial restrictions (e.g., VARA in Dubai; DFSA in the DIFC; or the FSRA in ADGM) certain regions where not covered, restricting web3 projects and fintech companies to operate or launch tokens in the UAE. The draft incorporates the concept of security tokens and commodity tokens within the rest of UAE.


2. Stakeholders Protection: Safeguarding investors is a primary concern in any financial market. The draft proposes measures that promote transparency, fair practices, and the integrity of tokenized assets, including disclosure requirements of potential risks.


3. Transparency: Regulating the parties’ involvement when dealing with security tokens and commodity tokens contracts is essential for maintaining market integrity. The SCA’s draft ensures that dealing with distributed ledger technologies adheres to established legal standards through a registration agreement.


4. Technology and Compliance: The draft outlines compliance requirements for issuers of security and commodity tokens contracts, including provisions on the technology behind it.

SCA draft about Robo-Advisor Services

As robo-advisory services gain popularity, the SCA recognizes the necessity for a regulatory framework to ensure these services are delivered responsibly and ethically. The draft regulations aim to address several key aspects:

1. Licensing: The new regulations will likely require robo-advisors to register with the SCA, or partner with a licensed entity, ensuring that only qualified entities can offer automated advisory services and enhancing consumer protection.


2. Client Suitability Assessments: Responsible investing principles call for ensuring that investment products and strategies are suitable for clients. The regulations are expected to mandate comprehensive assessments of clients’ risk tolerance, investment goals, and financial situations.


3. Transparency and Disclosure: Emphasizing the importance of transparency, the draft regulations will likely require robo-advisors to disclose their fees, investment strategies, and potential conflicts of interest, allowing clients to make informed decisions.


4. IT audits and stress testing: Robust audits of the platform, its capabilities, and the robo-advisor are likely to be central to the regulatory framework. The technology behind these products is likely to require heavy audits to guarantee the quality and security of the robo-advisor.

Implications for the software and Fintech Sector

The SCA’s development of regulatory drafts for “Security Tokens and Commodity Tokens Contracts” and “Robo-Advisory Services” represents a significant advancement in the UAE’s efforts to establish a robust and transparent fintech ecosystem. By formalizing the concepts of security tokens, commodity tokens, and robo-advisory services, the SCA is positioning the UAE as a leader in Fintech and web3 innovation while ensuring robust investor protection. Companies operating in this space must stay informed and adapt to these regulatory changes to leverage the opportunities they present.

Ready to Navigate UAE’s Fintech Regulations?

If your company is involved in tokenized assets, robo-advisory services, or Fintech software, understanding the SCA’s latest regulatory drafts is crucial for compliance and market readiness.

Contact our legal team today to assess how these changes impact your operations and ensure you’re fully aligned with upcoming requirements.
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