Zcash, Monero, USDe out as Dubai’s financial regulator updates regulations

Dubai’s financial regulator has barred privacy-focused cryptocurrencies from its main financial free zone, citing anti-money laundering and sanctions risks, in the wake of the Emirate’s digital asset rulebook overhaul and token approval responsibilities onto firms.

The Dubai Financial Services Authority said the prohibition applies in the Dubai International Financial Centre (DIFC), affecting banks, asset managers, and crypto firms operating in the Middle East, Africa, and South Asia. The updated Crypto Token Regulatory Framework took effect on Monday, the DFSA confirmed.

Privacy-oriented tokens have recently returned to prominence in markets, with the renewed trading interest pushing coins like Zcash and Monero to yearly highs. Despite that resurgence, the DFSA believes the structural features of privacy tokens make them incompatible with international financial crime controls.

Privacy tokens not compliant with DFSA and international rules 

The DFSA’s ban covers all activity involving privacy-focused crypto assets in or from the DIFC, including trading, promotion, fund management, and derivatives. The regulator said such assets pose unacceptable risks for firms in compliance with global standards on anti-money laundering and sanctions screening.

Elizabeth Wallace, associate director for policy and legal at the DFSA, told reporters the decision was unavoidable for a jurisdiction trying to garner the interest of institutions and retailers in the crypto industry.

“Privacy tokens have features to hide and anonymize the transaction history and also the holders. It’s nearly impossible for firms to comply with Financial Action Task Force requirements if they are trading or holding privacy tokens,” Wallace surmised.

According to the DFSA associate director, the issue lies in the Financial Action Task Force’s requirement that firms be able to identify all elements of a crypto transaction. That includes both the originator and the beneficiary, information that privacy coins deliberately hide. 

“Most of the requirements around anti-money laundering and financial crime wouldn’t be met if you engaged in privacy tokens,” she said.

The Arabian federal monarchy’s prohibition of privacy tokens comes on the heels of Monero reaching its all-time high price level on Monday, lifting the token just $8 shy of $600. That price is the highest point for Monero in eight years, following a previous breakout to $542 in January 2018, according to CoinGecko data. 

At the time of this reporting, the token had gained 15% in a single day and about 33% over the week, extending a trend that began late last year. While Zcash attracted most of the attention during the fourth quarter, traders had already begun rotating back into Monero in the new year.

Dubai rules extend to stablecoins, fiat-backed crypto accepted

Privacy tokens are not the only assets affected by the updated rules, as the regulator sharpened its definition of what qualifies as a compliant fiat-referenced crypto asset. The DFSA reserved the “fiat crypto tokens” column for assets pegged to currencies and backed by liquid reserves capable of meeting redemption demands during periods of market stress. 

“Things like algorithmic stablecoins, it’s a little less transparent about how they operate and being able to redeem them,” Wallace said, adding that the DFSA’s stance is much similar to the global regulatory concerns about risk in redemptions and asset backing.

When asked about Ethena, the director propounded that the token would not meet the DIFC’s definition of a stablecoin and “would be considered a crypto token.” She added that while Ethena would not be banned, it would fall outside the regulatory treatment afforded to fiat-backed stablecoins.

Beyond specific asset categories, the revised Crypto Token Regulatory Framework makes a change in how crypto assets are approved for use within the DIFC. The law had required watchdogs to publish a list of approved tokens, but the DFSA will now require licensed firms to look into whether crypto assets they plan on listing are suitable for their business and clients.

Firms must document those assessments and keep them under ongoing review, taking responsibility from the regulator directly to market participants. 

“The feedback from firms was that the market had evolved. They themselves have evolved and become more familiar with financial services regulation, and they want to have the ability to make that decision themselves,” Wallace concluded.

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