Currency is defined as something, more often than not paper and coins, that act as a medium of exchange for goods and services. This practice of trade has been a constant for humankind throughout its various ages, occurring in multiple forms, yet resulting in the same outcome. While earlier transactions revolved around the exchange of physical forms of currency in the form of legal tenders, at present, with the advancements made in technology, the currency has taken an alternative system that's known as cryptocurrency.
Cryptocurrency facilitates financial transactions in the same manner currency does, with the exception that it is intangible and acts as a digital asset. The standard currency relies on central banking systems and controlling authorities as a form of regulation, whereas cryptocurrency utilises a form of decentralised control. This decentralised methodology of control is made possible by the use of distributed ledger technology or distributed ledger technology (DLT). The technology is such that digital data is spread across multiple devices in an interconnected network and subsequently synchronised using a consensus of these devices within the network. The lack of a regulatory body overseeing these networks is considered as a significant security threat, but this hasn't stopped multiple variations of cryptocurrency being conceived including Bitcoin, Altcoins, Token, etc. With cryptocurrency gaining major traction and becoming mainstream, countries have looked into the same, and while some have expressed reservations in adopting the system, some have taken it up as an authorised medium of exchange. The United Arab Emirates (UAE) is one such country that has taken an active interest in integrating cryptocurrency into its economy through the Abu Dhabi Global Market (ADGM), an international financial centre and financial free zone in Abu Dhabi.
Abu Dhabi Global Market
The Abu Dhabi Global Market was established as a financial free zone in the Emirate of Abu Dhabi by Federal Decree No. (15) of 2013 and is governed by Abu Dhabi Law No. (4) of 2013. It is located at Al Maryah Island and is comprised of three independent authorities:
- The Global Market's Registration Bureau (known as the Registration Authority or RA)
- The Financial Services Regulations Bureau (known as the Financial Services Regulations Authority or FSRA)
- The Global Market's Courts (known as the ADGM Courts)
The responsibility of registration, incorporation and licensing of legal entities within the ADGM rests with the Registration Authority. It also works with government authorities and services and is in charge of issuing notices, circulars, permits in relation to ADGM. Any changes to the information provided by the entity have to be officially informed to the Registration Authority within a set time period. Any failure by the entity to do so will result in fines. Apart from this, the RA is tasked with enforcement of ADGM companies regulations, dissolution and restoration of ADGM establishments and registration of property located in Al Maryah Island.
The Financial Services Regulations Authority conducts and facilitates all financial services in ADGM. Financial entities registered with ADGM must adhere to the obligations set out by the FSRA, that are in addition to the standard obligations of ADGM. The FSRA seeks to uphold the integrity of ADGM's financial system and acts to deter any such conduct or activity that disturbs the stability of the financial services industry. ADGM also has set up measures to towards prevention of financial crimes by adhering to Countering Financing of Terrorism (CFT) Anti-Money Laundering (AML) guidelines, with FSRA being the competent authority governing the same. The ADGM Courts consists of the Court of Appeal and the Court of First Instance, and function as per the rules and regulations enacted by the ADGM Board of Directors and its subsequent amendments.
Guidelines related to Cryptocurrency
In May 2019, the Financial Services Regulatory Authority issued a set of guidelines with respect to Cryptocurrency. The guidelines enacted were:
- Digital Security Offerings and Crypto Assets Regulations under the FSMR (dated 13th May 2019)
- Regulation of Crypto Asset Activities in ADGM (dated 14th May 2019)
According to these guidelines, a Crypto Asset was recognised to be a value of digital representation that could digitally be traded and be utilised as a medium of exchange, but not having any legal tender status in any jurisdiction. The main objectives are to address the risks that arise when trading of crypto assets occur. At present, in the event of a theft or a loss of crypto assets, users do not have a safety net that will enable them to recover their assets. The mere adherence to AML and CFT guidelines is not sufficient enough to quell the broader risks of crypto assets. The issues addressed by the guidelines pertain to the areas of:
- Consumer Protection
- Safe Custody
- Technology Governance
- Market Abuse
Under the regulatory framework, any person (custodian, market operator or intermediary) dealing in crypto assets needed to be approved by the FSRA as a Financial Services Permission (FSP) holder in the business of operating crypto assets, otherwise known as OCAB. Apart from the above-mentioned guidelines, authorised persons must comply with the following additional guidelines:
- The FSRA Conduct of Business Rulebook (COBS)
- The FSRA General Rulebook (GEN)
- Anti-Money Laundering and Sanctions Rules and Guidance under the FSRA (AML)
- The FSRA Rules of Market Conduct (RMC)
As per chapter 17 of COBS, there are seven key factors which the FSRA considers while determining whether a Crypto Asset becomes an Accepted Crypto Asset. They are:
The volatility, sufficiency and the proportion of Crypto Asset in the free float are assessed. The FSRA does not prescribe a source for the calculation of market capitalisation of Crypto Asset. It instead uses recognised sources, as and when it may be available.
The Crypto Asset is determined if it is able to adapt and improve the risks and vulnerabilities it has and tested on their ability to allow secure private keys the appropriate safeguarding.
The ability of crypto assets to identify counterparties in transactions are assessed along with the ability of OCAB holders to demonstrate the origin and destination such crypto assets.
The presence of other exchange centres which support crypto assets, their jurisdictions and regulations are investigated.
Types of DLT:
The security of the DLT that is used for the purpose of Crypto Assets is assessed to understand if it is stress tested.
The ability of the Crypto Asset to solve fundamental problems or create value for the participants or meet a need of the market is determined.
Practical Application/ Functionality:
The functionality of the Crypto Asset in terms of real-world quality is looked into and plays an important role in determining if it becomes an Accepted Crypto Asset.
Anti-Money Laundering and Countering Financing of Terrorism Guidelines
One of the primary concerns with the usage of Crypto Assets is money laundering (ML) and terrorism financing (TF). The ADGM introduced the Anti-Money Laundering and Countering Financing of Terrorism Guidelines in 2015 with the jurisdiction being exclusive to the Global Market area, and it is independent of any federal anti-money laundering legislation. The guidelines introduced to apply for all those persons who operate from or in the ADGM.
Under the UAE criminal law, as per Article 3 of Federal Decree Law No. (20) of 2018, a person may be held criminally liable for money laundering if it is conducted intentionally in the name of the person or from their account. The following also constitute offences in relation to money laundering:
- Failure to report suspicions related to money laundering
- Assisting in the commission of money laundering
An inter-governmental organisation called the Financial Action Task Force (FATF) helps develop and promote international standards to fight money laundering and terrorist financing. The FATF has identified certain critical risks associated with crypto assets, such as:
Anonymous operation of Crypto Assets
Since crypto assets are traded on the Internet with no face-to-face interactions, anonymous funding and transactions take place. This can result in the failure to identify the source of destination of the funds.
Increased potential for ML and TF risks:
The ease of access to Crypto Asset systems (even from a mobile phone) massively increases the global and can enable cross-border transactions, which can be challenging to monitor.
Crypto Asset systems are built on platforms that require complex infrastructures with multiple entities across different jurisdictions being involved. This can cause difficulty for law enforcement agencies to access them. The rapid increase of decentralised technologies which are used by Crypto Asset businesses further aggravates the issue.
Jurisdictions not having adequate ML/TF tools:
Since different components of the Crypto Asset system may be spread out across multiple jurisdictions, it is entirely possible that such jurisdictions may not have adequate framework and control over money laundering and terrorism financing.
On the basis of the risks put forth by the Financial Action Task Force, the FSRA has introduced fundamental principles an OCAB holder should consider, which are:
OCAB holders must understand the risks associated with the activities involved and should carry out periodic risk-based assessments, which identify, assess, manage and mitigate the risks related to money laundering.
Business Risk Assessment:
In accordance with the AML rules, entities must take appropriate steps to identify and analyse ML risks the business may be exposed to, with importance given to the use of new technologies that can be used. The FATF further recommends that financial institutions must conduct such risk assessment prior to the launch of any new practice, technology or product.
Customer Risk Assessment and Customer Due Diligence:
Procedures in relation to Customer Risk Assessment and Customer Due Diligence must be implemented by all OCAB holders and must rate the Clients according to their risk profile. The due diligence must be carried out in accordance with the AML rules as per FSRA. In the event that the ongoing due diligence happens non-face-to-face, the OCAB holders are expected by the FSRA to identify the client as a natural person. OCAB holders must ensure that the process of due diligence is not a simplified one and may use any technology available to them in order to mitigate any such risk associated with verifying the client.
Governance, Systems and Controls:
OCAB holders are required to implement the necessary technological governance systems and controls to ensure appropriate ML and TF compliance. Third-party solutions and technologies can be brought on in order to fulfil the regulatory obligations put forth. Effective transaction monitoring systems must be implemented in order to determine the origin and destination of Crypto Assets. A Money Laundering Reporting Officer (MLRO) must be appointed by the OCAB Holder, and this officer will be responsible for implementing and overseeing how the OCAB Holder complies with the AML rules.
Suspicious Activity Reporting Obligations:
OCAB holders must establish online connectivity with UAE's Financial Intelligence Unit for submitting such suspicious activity reports and must ensure that transaction monitoring systems are in place to identify any possible breach of domestic or international sanctions.
The FSRA expects record-keeping practices in accordance with the AML/CFT compliance guidelines, to be followed by OCAB holders. Such data must be kept in an easily accessible format and provided to the FSRA whenever required.
It is imperative that for the successful integration of crypto assets, the guidelines that are put forth by the Financial Services Regulations Authority are followed. These guidelines are quite comprehensive in nature and ensure that a safety net is available for those dealing in crypto assets and digital asset exchange. The ADGM has been a pioneer in international financial centres, with its unique outlook and it has certainly paved the way for further inroads in the field of cryptocurrency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.