The FRSA is the independent financial services regulator for the Abu Dhabi Global Market (ADGM) financial free zone.
The ADGM Digital Asset Guidance follows the FSRA’s launch of a regulatory framework relevant to certain crypto asset activities on 25 June 2018. This introduced a new regulated activity of 'Operating a Crypto Asset Business', and updated guidance published on 14 May 2019 covering, amongst other things, stablecoins, crypto-asset custody activities, technology governance and anti-money laundering/sanctions.
The ADGM Digital Asset Guidance outlines the ADGM’s regulatory treatment of 'Digital Securities'. The FSRA considers whether an offering of a Digital Security' falls within the 'conventional' securities regulatory framework on a case-by-case basis.
If such 'Digital Security' exhibits the features and characteristics, both economic and legal, of a conventional security, such as a share or debenture, the FSRA will deem the 'Digital Security' to fall within the existing regulatory framework for securities and accordingly, treat it as a security under the ADGM Financial Services and Markets Regulations 2015, as amended (FSMRs).
The requirements set out in the FSMRs regarding offers of securities to the public and the listing rules applicable to issuers seeking admission to the Official List, apply in full to 'Digital Securities'.
Entities engaging in Initial Coin Offerings (ICOs) will need to publish an FSRA approved prospectus, containing the same level of information required under a convention Initial Public Offering (IPO) and are subject to the same timeframes as issuers of traditional securities. Equally, however, exemptions contained in the FSMRs also apply to 'Digital Securities', and the requirements for a prospectus are not required for 'Exempt Offers'.
The ADGM Digital Asset Guidance further sets out the FSRA’s views on how trading venues and settlement institutions interact with 'Digital Securities'. Applicants for a 'Digital Securities' related business license must demonstrate to the FSRA that they meet both the conventional requirements prescribed for them under the FSRA’s Market Infrastructure Rules, as well as the new requirements for 'Digital Securities'.
Guidance is also given for crypto asset businesses and other FSRA licensees who wish to engage in 'Digital Securities' related business, including governance and risk disclosure requirements.
The ADGM Digital Asset Guidance also touches on several other regulatory considerations relevant to 'Digital Securities' such as technology governance and controls, market abuse, anti-money laundering and combating the financing of terrorism related issues specific to 'Digital Securities'.
Stablecoins
As mentioned above, in May 2019, the FSRA developed and supplemented its guidance on the regulation of crypto asset activities by setting out its position on stablecoins. According to the supplemental FSRA guidance, where stablecoins are fully backed by fiat currencies, they are treated as a form of digital representation of money.
Accordingly, where they are used as a payment instrument for the transmission of money, they fall into the existing regulated activity of providing money services under the FSMRs.
The FSRA announcement on its position in relation to stablecoins can be found here.
Private financing platforms
The FSRA had previously introduced a regulatory framework for private financing platforms (PFPs) in September 2018.
The FSRA’s rules on PFPs provide for alternative financing and debt raising, equity funding, private placement and invoice financing platforms. Recognising the risks associated with PFPs, such as loss of capital, lack of liquidity, lack of information to enable clients to conduct proper due diligence, platform failure and potential conflicts of interest, the FSRA established authorisation criteria for proposed PFP operators, which require the applicant to demonstrate that, amongst others, it has adequate and appropriate resources, is capable of being effectively supervised and has appropriate compliance arrangements.
As ‘Retail Clients’ in general are not able to appreciate the high risks associated with transactions facilitated through a PFP, the FSRA has stated in its guidance that it intends to restrict the accessibility of PFPs to 'Professional Clients'.
In reviewing whether a PFP applicant meets the required thresholds, the FSRA considers factors including business models, track record, the directors’ skills and experience and adequacy of systems and controls.
Moreover, the PFP guidance and regulatory framework set out a number of ongoing requirements that PFP operators must comply with, for example, publishing risk warnings, undertaking proportionate due diligence on PFP prospects and limitations on marketing.
Overall, the approach taken by the FSRA is similar to that taken by the Dubai Financial Services Authority (DFSA) in Dubai. International Financial Centre (DIFC) – the only other financial free zone in the UAE – with regards to crowdfunding platforms.
For further guidance on the digital assets regulatory regime in the ADGM, please refer to our previous articles here and here.
For further information on developments in this area in the ADGM, as well as the DIFC and the wider UAE, please contact Muneer Khan.
