The Abu Dhabi Global Markets (the ADGM) has recently issued that 'Guidance on Regulation of Crypto Asset Activities in the ADGM' (the Regulation). This Regulation has come as a supplementary to the Initial Coin and Token Offerings Guidelines issued on 9 October 2017 (the ICO Guidelines). While the latter provided a basic framework on the different types of virtual instruments in the market space and clearly defined their boundaries, the Regulation has set out clear guidelines for crypto exchanges, custodians, and intermediaries. The Regulations have been issued as per section 15(2) of the Financial Services and Markets Regulations, 2015 (the FSMR) and apply to the following persons: -
- parties applying for FSP or Financial Services Permission to operate a crypto asset business under the purview of the ADGM;
- any authorized party operating a crypto asset business under the purview of the ADGM; or
- an investment exchange operating a crypto asset business in the ADGM.
The United Arab Emirates(UAE) has been testing the waters on the life of cryptocurrency for long and therefore, is silent on the subject of its regulations till yet. However, the issuance of the Regulations shows that the ADGM wishes to invite companies and individual investors from around the globe.
The FSRA regulates the category into which different types of digital assets or instruments shall fall. The regulation divides digital assets into three different groups and provides for the legal nature of each type. The types of digital assets supplied for are non-security tokens, security tokens and, crypto assets.
- Non-security tokens explained by using the example of a utility token;
- Security tokens defined as digital assets with characteristics of security – for instance, tokenized offerings of security; and
- Crypto assets explained as cryptocurrencies (such as Bitcoin, Ether, etc.).
The creation of Digital assets is from funds/derivatives provided for digital assets such as collective investment funds investing in digital assets.
The new FSRA regulatory approach includes only security tokens and crypto assets within its ambit of regulation. Utility tokens are treated as commodities and do not fall within the specified investments classification under the FSMR.
The Financial Services Regulatory Authority (the FSRA) (regarding Spot Crypto Asset Framework) defined Crypto Assets as: -
a digital portrayal of value that is digitally purchased and sold; and portrays the function of (a) a medium of exchange; and/or (b) a unit of account; and/or (c) a store of value; as long as it does not have a legal tender status in any jurisdiction. Therefore, by definition, a Crypto Asset is -
- not issued or guaranteed by the authorities of any jurisdiction, and fulfills the abovementioned functions only by agreement within the community of users of the said asset, and
- is distinguished and separated from fiat Currency and e-money.
Further, the below table has laid down the regulatory approach to various categories of digital or virtual instruments: -
Category of Digital Assets /Instruments
"Security Tokens" (e.g. virtual tokens that
have the elements and attributes of a Security under the FSMR, Offers, Debentures, Units in a Collective Investment).
Regarded to be Securities compliant with Paragraph 58(2)(b) of FSMR. Every single budgetary administration exercises in connection to Security Tokens, for example, working essential/optional markets, managing/exchanging/overseeing interests in or exhorting on Security Tokens, will be liable to the pertinent administrative prerequisites under the FSMR.
Market delegates and market administrators managing or overseeing interests in Security Tokens should be authorized/endorsed by FSRA as FSP holders, Recognized Investment Exchanges or Recognized Clearing Houses, as appropriate.
"Crypto Assets" (e.g. non-fiat virtual monetary forms).
Regarded as items and, in this manner, not considered Specified Speculations under the FSMR.
In accordance with the Spot Crypto Asset Framework, be that as it may, advertise middle people (e.g. specialist merchants, caretakers, resource supervisors) and Crypto Asset Exchanges managing in or overseeing Crypto Assets will be authorized/affirmed by FSRA as OCAB Holders. As it were exercises in Accepted Crypto Assets will be allowed.
"Utility Tokens" or "Non-Security Token" (e.g. - virtual tokens that do not show the highlights and qualities of a directed venture/ instrument under the FSMR. )
Regarded as products and, hence, not esteemed Specified Ventures under the FSMR.
Except if such Utility Tokens are gotten under the meaning of Crypto Resources, spot exchanging and exchanges in Utility Tokens don't constitute Regulated Activities, exercises imagined under an Acknowledgment Order (e.g., those of a Recognized Investment Exchange or on the other hand Recognized Clearing House), or exercises visualized under the Market Rules (MKT).
Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens and Utility Tokens
Directed as Specified Investments under the FSMR. Market go-betweens and advertise administrators managing in such Subordinates and Collective Investment Funds should be authorized /affirmed by FSRA as FSP holders, Recognized Investment Trades or Recognized Clearing Houses, as pertinent.
As per the guidelines (section 30) of the FSMR, the granting of FSP will be to any applicant who qualifies for authorization in line with the Spot Crypto Asset Framework. The Regulations have also laid down the specific applicability of the term OCAB (Operating a Crypto Asset Business) for interpretation and excluded the following activities for the avoidance of any ambiguity in this regard: -
- the development or administration of Crypto Assets;
- the development, dissemination or utilization of specific software for mining a Crypto Asset;
- the transfer of Crypto Assets;
- a loyalty point scheme that is denominated concerning Crypto Assets; or
- any other activity that the FSRA deems not to constitute operating a Crypto Asset Business to meet the regulator's objective.
As per the COBS Rule 17.2.2. The consideration of the following factors for the determination of whether a Crypto Asset is an Accepted Crypto Asset for the FSRA:
- A maturity or market capitalization threshold; COBS 17.2.2(a)
- Other factors – not to be considered definitive or binding, which include:
- Exchange connectivity;
- Market demand/volatility;
- Type of distributed ledger;
- Practical application/ functionality;
Due to the inherent characteristics of the risk involved in operating a Crypto Asset Business, according to COBS Rule 17.3. There are a certain number of capital requirements, these include that the capital must be held in fiat form, for those operating a Crypto Asset Exchange, they are required to hold capital resources equivalent to 12 months' operational expenses; and all others are required to hold capital resources equivalent to 6 months' operational expenses.
Internationally there has been a noticeable rise in concerns due to Crypto Asset activities, explicitly concerning Money Laundering and Financing of Terrorism. International institutions have issued a variety of Digital Asset warnings advising of the significant risks and possibility of illegal uses of Digital Assets. In pursuance of the abovementioned warning, the FSRA comprehensively applies its Anti Money Laundering and Countering Financing of Terrorism framework; it obligates full compliance with, among other things:
- UAE AML/CFT Federal Laws, including the UAE Cabinet Resolution No. (38) of 2014;
- The FSRA AML and Sanctions Rules and Guidance; and
- The adoption of international best practices
The FSRA has provided critical considerations for AML/CFT Compliance that an OCAB Holder should consider:
- Risk-Based Approach – here the holder must understand the risks associated with their activities and must do what they can to mitigate as such;
- Business Risk Assessment – this includes the identification and assessment of the money laundering risks to which their business is exposed; intrinsic to that assessment is becoming familiar with the characteristics and terminology of the Crypto Asset Industry;
- Know Your Customer, Customer Due Diligence, and Customer Risk Assessment – the FSRA places an expectation on all OCAB holders to ensure that their Client onboarding processes are fully compliant with the regulations. There is a requirement to implement clear KYC and CDD policies and procedures;
- Governance, systems, and Controls – an appropriate governance structure must be applied, especially concerning Information Technology governance. The FSRA states that Holders must seek out technical solutions that are fit for purpose – in furthering this requirement due to diligence and risk assessment must be completed to ensure competency and capability;
- Reporting obligations – OCAB holders are necessitated to establish transaction monitoring systems to detect possible ML and TF activities;\
- Keeping records –OCAB holders are required to have policies and procedures in place to ensure proper record keeping practices. In understanding the transaction records of many Crypto Asset transactions, it is evident that there is a link between these transactions and the blockchain technology, this requires the holders to implement specific arrangements to ensure access to all relevant information as is necessary.
Regarding Crypto Asset Risk Disclosures COBS Rule 17.6 sets out a list of risks that require disclosure to Clients. The Rules states that Holders are to undertake an analysis of the risks, following this, they must make all necessary disclosures to their clients.
The Spot Crypto Asset Framework contains additional requirements which apply to Crypto Asset Custodians – these include not only the abovementioned requirements for Holders but also COBS 17.8. The FSRA categorizes custodial arrangements as follows:
- Type 1 – the holder is wholly responsible for custody of the Clients Crypto Assets and provides this service "in-house" through its own Crypto Asset wallet solution;
- Type 2 – the holder is wholly responsible for the custody of the Clients Crypto Assets but outsources this service to a third-party Crypto Asset Custodian; and
- Type 3 – the holder wholly allows Clients to "self-custodise" their Crypto Assets.
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.