Qatar introduces new digital assets framework

Structure of the DA regime

The DA Regime consists of three key components, the: 

• QFC Digital Asset Regulations;
• Investment Token Rules 2024; and 
• Token Service Provider Guidelines. 

What is a Digital Asset? 

Under the DA Regime, a “Digital Asset” is a “digital representation of a property right, real or personal, including contractual property rights” and exists as a “Token”. 

The DA Regime also sets out the scope of:

• “Permitted Tokens”: Tokens which QFC-licensed providers may generate; and 
• “Investment Tokens”: those Permitted Tokens which represent rights to specified products (such as shares, debt instruments, units in a collective investment scheme, options, futures, contracts for differences, contracts of insurance, deposits), derivatives, or rights derived from specified products – additional licensing obligations exist for services provided in relation to Investment Tokens, as we explain below. 

What is a Token Service?

A Token Service refers to one of five services which may be performed in relation to a Permitted Token by firms which receive the appropriate Token Service Provider permission(s). The Token Services are:

• Validation: ensuring the authenticity and integrity of Tokens.
• Token Generation: creating new Tokens as on-chain representations of off-chain underlying rights.
• Token Custody Services: safeguarding Tokens on behalf of clients.
• Operating a Token Exchange: facilitating the buying and selling of Tokens.
• Token Transfer Services: managing the transfer of Tokens between parties.

QFC Digital Asset Regulation

The Regulations define the scope of Permitted Tokens and the QFC Authority’s power to prohibit the tokenisation of certain underlying rights. They then set out the regulatory framework under which legal title to an off-chain right may be tokenised so as to create an on-chain representation of title (i.e. the Token), and establish that the lawful transfer of the Token will constitute the transfer of legal title to the off-chain right.

Token Service Provider license and authorisation

To provide the Token Services listed above, a firm must obtain the appropriate license (the License).

Where the Token Services are performed in relation to Investment Tokens, an applicant must obtain both a commercial license from the QFC Authority and the appropriate regulatory authorisation from the QFC Regulatory Authority (QFCRA). In contrast, where a Token Service is provided only in relation to other Token types, or the service is a mere technology provision, only a commercial license from the QFC Authority is required.

Eligibility criteria for Token Service Provider License

To obtain a Token Service Provider License under the Regulations, prospective applicants must meet several eligibility criteria. These criteria are designed to ensure that the applicant’s product is suitable for the QFC market, and that the applicant can operate within the DA Regime. The eligibility criteria are set out to include:

Token Service Provider Guidelines

These Guidelines are designed to promote a robust framework for cybersecurity, data protection, and regulatory compliance, ensuring a safe and secure system is in place. They apply to all Token Service Providers providing Token Services within or from the QFC.

Additionally, the QFC Authority Rules apply in their entirety to those firms which don’t need a QFCRA authorisation, and some parts also apply to QFCRA firms. The Rules now include a Token Service Providers’ Code.

Impact on existing legislation 

To ensure the efficiency of the DA Regime, the QFC has also amended the following existing regulations:

• QFC Companies Regulations;
• Special Companies Regulations;
• QFCA Rules; and
• Non-Regulated Activities Rules.

Investment Token Rules 2024

These Rules address the treatment of Investment Tokens. Any firm wishing to perform a Token Service related to Investment Tokens must be authorised and supervised by the QFCRA, in addition to holding a commercial license from the QFC Authority. 

Additionally, the Investment Tokens (Miscellaneous Amendments) Rules 2024 introduce further rules and guidelines. Key requirements include:

• Requiring non-financial institution Token Service Providers to comply with the QFCRA AML/CFT Rules (financial institution Token Service Providers must already comply with these rules).
• The creation of new license categories for "Tokenised Schemes" and "Token Investing Schemes" with specific requirements, including disclosure obligations and risk management.
• Mandating robust systems and controls for firms providing custody services for Investment Tokens.
• Ensuring advertisements about regulated activities involving Investment Tokens are clear about the risks involved.

Resources

• Digital Asset Regulations 2024
• Investment Token Rules 2024
• Investment Token (Miscellaneous Amendments) Rules 2024
• Companies Regulations 2005
• Special Company Regulations
• Contract Regulations 2005
• QFCA Rules
• Non-Regulated Activities Rules
• User Guide
• Token Service Provider Guidelines
• Companies Rules

Acknowledgments to John Hobbs, trainee with A&O Shearman’s Financial Services Regulatory team in London, for his contribution to this post.