Registering and licensing DeFi and DApps in the DIFC
What is Defi?
Decentralised Finance, or DeFi, is emerging fintech built on Decentralised Ledger Technology, or DLT. Commonly referred to as finance on the blockchain, DeFi applications are mostly built on Ethereum networks and designed to operate as peer-to-peer solutions.
Designed to eliminate the “middlemen in the process”, DeFi aims to remove third parties such as centralized financial institutions including banks, custodians and finance companies, from the finance value chain.
The opposite of centralization
The current financial system is built on rails that have existed for centuries. While the mode of operation and technology have changed, these changes have been incremental to the existing fundamentals of central control.
In today’s scenario, the central control rests with institutions that play a key role in vetting transactions between otherwise untrusted participants. For example, consider a credit card transaction. You pay the merchant at his POS terminal, which is the initiation of the transaction. The transaction is then passed on by the Payment Service Processor, or PSP, to the acquiring bank, say HSBC, which forwards the details to a credit card network like Visa or Mastercard.
The network clears the transaction and requests the corresponding payment from your bank, say ADCB. The bank reviews your account, clears the charge if funds are present, through the network, to the acquiring bank and finally back to the merchant. That is the “approved” message that you receive on the merchant’s POS.
DeFi technology eliminates the need for the acquiring bank, PSP, card network and even your own bank by routing transactions through underlying blockchain technology. The main components in this case are the protocols (Bitcoin, Ethereum etc.), payment tokens (also called cryptocurrency), digital wallets and connectivity. Financial transactions are verified on distributed ledgers using mechanisms such as Proof of Stake and Proof of Work.
Some examples of popular Defi projects include:
1. Colony Lab – on the Avalanche Blockchain – this is a community-driven Avalanche accelerator that provides early-stage funding to projects that are based on the Avalanche platform.
2. Aave – on the Ethereum Blockchain – this finance platform uses DLT where a wide range of cryptocurrencies can be lent and borrowed. Powered by smart contracts and a crypto pool, participants can earn interest and borrow capital, all in the crypto space.
3. Fantom – open-source smart contracts platform that utilizes the it’s own Lachesis consensus mechanism.
What are DApps?
Decentralised Applications run on Decentralised Ledger Technology (DLT), commonly referred to as Blockchain or P2P networks.
Ethereum is the most popular protocol used by DApps, given it’s flexibility in working with smart contracts. One of the most popular and well-known DApps is BitTorrent, a P2P file sharing service, where multiple users upload and download files, all through peer-to-peer connections as opposed to connecting to a centralized group of servers.
Advantages of DApp projects include safeguarding of user privacy, anonymity and flexibility of governance without reliance on a centralized authority.
Some examples of popular DApp projects include:
1. Uniswap – A decentralised and automated market maker, Uniswap enables the exchange of cryptocurrencies using algorithms and executed using smart contracts.
2. MakerDAO – a cryptocurrency lending platform with it’s native currency (Dai). Users can borrow and lend crypto using smart contracts. Dai in itself is a stablecoin, pegged to the US Dollar.
3. CryptoPunks – A collection of 10,000 NFTs on the Ethereum blockchain.
How to register a DeFi or DApp project in the DIFC
The Middle East has seen a flurry of tech-related activity in the recent years. Tech companies are characterized by rapid ideation followed by implementation at an equally rapid pace. Another commonality is that most tech companies start small, and then ramp up quickly upon securing funding. However, managing costs at the onset is critical, especially in the first year, so as to ensure that the tech startup does not fold before it manages to attract its first round of seed/angel investments.
A fledgling tech ecosystem needs good support from all quarters, and here is where the Dubai International Financial Centre has come to play an important part. Recognising the difficulties faced by early-stage technology companies, the DIFC made a lot of changes to create and accommodate a startup ecosystem in its award-winning onshore financial centre.
What is the DIFC?
The Dubai International Financial Centre, or DIFC, is a leading financial hub in the region for business, fintech, and lifestyle. Setup in 2004, the DIFC has grown to be one of the top 10 onshore financial centres in the world. It brought in a paradigm change in the region, by adopting a Common Law framework, with an independent regulator (DFSA) and an independent English language Common Law judiciary – DIFC Courts.
Since then, the DIFC District has matured into more than just a place to work – it is now a lifestyle destination, with retail outlets, cafes and restaurants, art galleries, residential apartments, public green areas and hotels dotting the landscape.
DIFC Innovation License
The DIFC started by attracting financial technology, or Fintech players into its DIFC Fintech Hive, which is an accelerator that has completed multiple cohorts, with over 400 fintech companies. It quickly extended the benefits of a startup license to all kinds of tech startups – fintech, edutech, regtech, and all technology-based startups that wish to cater to the region.
The DIFC Innovation license offers heavily discounted initial and ongoing fees, world-class co-working spaces at low costs, and an ecosystem of fellow technology firms, seed and angel investors, and access to the leading venture capital firms in the region.
Benefits offered to Innovation licenses in the DIFC
- Well-subsidised license fee of US$ 1,500 per year, for upto 4 years*
- Zero incorporation and registration fees
- Waiver of the minimum share capital requirement of US$ 50,000
- Minimum co-working desk space at US$ 500 per month, payable monthly or annually
- Upto 4 visas approved on the minimum co-working desk space
- Reduced visa costs of upto 50%
Why setup a technology startup in the DIFC?
The DIFC is a leading financial hub in the region for business, fintech, and lifestyle. While the primary focus of the DIFC has been to authorise financial service companies, the advent of fintech led to an increased interest in both non-regulated and regulated technology startups. The DIFC Innovation License offers licenses to both, with regulated fintechs having to secure additional DFSA authorisations. Here are a few advantages of setting up a technology company in the DIFC.
Codified English Common Law
The DIFC offers a modified version of the English Common Law, which gives foreign investors an additional sense of security and stability. In partnership with the common law framework, the Dubai Financial Services Authority (DFSA) functions as the DIFC’s regulatory body and plays a crucial role in providing as well as enforcing the international regulatory standards that make the financial hub a popular destination for international businesses. While a DIFC non-financial tech startup company is not regulated by the DFSA, the robust regulatory structure of the Authority gives comfort to investors.
The DIFC is well regarded in the international community, being voted among the top eight onshore financial centers worldwide. It’s emphasis on regulation, and visibility in the investor community also helps to attract further investments down the road.
The DIFC Courts initiative was the first of its kind in the region, and the laws establishing the DIFC Courts were designed to ensure the highest international standards.
The DIFC Wills & Probate Registry allows eligible individuals the ability to register their wills under Common Law, and hence providing the ability for legacy planning within the center.
Tech startup companies in the DIFC can apply for visas for their staff and their families.
The Government Services Office in the DIFC is dedicated to providing a wide range of administrative services, and one of these is the issue and renewal of employment visas. For tech startups, the DIFC offers upto 4 visas on the minimum co-working space that they have earmarked at the Fintech Hive.
The DIFC has implemented a path-breaking Employee Workplace Savings Plan, called DEWS, to restructure the previously defined employee benefit plan into a funded and professionally-managed, defined contribution plan. The DEWS initiative also offers a voluntary savings plan, allowing employees working in the DIFC to secure their financial future in an easy-to-manage fashion. DEWS has found significant traction within the centre, and together with the DIFC Employment Law, provides employees and employers with a world-class Human Resources framework.
The DIFC is set to undergo significant expansion and plans to use the additional space to construct more office and creative spaces, residences, retail spaces, and entertainment. That’s 13 million square feet of space dedicated to the pursuit of fintech and innovation and designed to accommodate the needs of professionals from around the world.
Such an environment helps attract good talent from the world over. Over 25,000 professionals already live and work in the DIFC. Technology companies in the DIFC are able to source better talent and access a pool of premium service providers within the center, thus making it a self-containing ecosystem.
DIFC VC Fund Manager ecosystem
The DIFC recently implemented a Venture Capital Fund Manager regime, that made it easier for startup and existing VC fund managers to set up in and operate from the centre. It is anticipated that the new regime will atrract over 100 VC fund managers in the coming two years, thus creating an ecosystem where technology companies and VC Funds co-exist, and access to funding is made much easier for techonology firms that set up in the DIFC.
Such an environment helps attract good talent from the world over. Over 30,000 professionals already live and work in the DIFC. Technology companies in the DIFC are able to source better talent and access a pool of premium service providers within the center, thus making it a self-containing ecosystem.
What is the process for registering a DeFi/DApp project in the DIFC?
You can register a DeFi or a DApp project as an Innovation License. In case the DeFi project involves what may be considered a regulated activity (for example, P2P lending), additional authorisations will be required from the Dubai Financial Service Authority, or DFSA.
The process comprises the following steps
1. Submission of application, including a detailed business plan and KYC.
2. Pre-screening and issuance of approvals.
3. Completion of the registration of the legal structure at the Registrar of Companies.
4. Issuance of license.
5. Establishment card issuance for visa processing.
The whole process takes 10-12 working days, following which visas and permits can be applied under the new company.
How much does it cost to register an Innovation License in the DIFC?
The costs involved are as follows:
- 1. Registration fee - US$ 100 (one-time)
- 2. License fee - US$ 1,500 (annual)
- 3. Data Protection fee - US$ 250 (year 1, US$ 200 subsequently)
- 4. Co-working space - US$ 500 (per month)
How can 10 Leaves assist you?
We provide turnkey services for DIFC Innovation licenses. In fact, we are one of the two approved service providers to assist with the formation of such licenses in the centre.
Our digital processes help you complete the formalities in a systematic and timely manner, with zero in-person interaction requirements.
We also assist with bank account opening, in most major local banks in the UAE.
DeFi and DApps require a good understanding of the underlying blockchain technology. We have developed strong capabilities in the area, including advice on regulatory authorisations of DeFi projects in the region and Europe.
Startups require a lot of legal assistance, but sometimes find lawyer costs to be prohibitive. Many then resort to short-cut methods of downloading template agreements from the internet, ones that can lead to many problems in the future.
Through 10 Leaves Legability, we offer customized legal solutions for startups, from the shareholder or investor agreements to share-vesting plans and employment agreements. We also assist in designing holding structures to protect Intellectual Property, which is key to technology companies.
All this, at startup-friendly prices!
Our market-entry solutions help you explore expansion into Saudi Arabia, Europe and India. We assist you in these jurisdictions as well.
Coming to technology, our in-house tech solution - tenL technologies, helps you partner with recognized and professional vendors so as to build your platforms and integrate them with financial service partners such as banks and other fintechs.