New crypto assets regulatory regime launched in the ADGM

The new guidance follows the FSRA’s Consultation Paper No. 2 of 2018 on the "Introduction of a Crypto Asset Regulatory Framework in the ADGM" issued on 30 April 2018, which initially proposed the introduction of new types of regulated activities relating to digital currencies (including operating a crypto asset exchange and operating as a crypto asset custodian), through amendments to the FSRA’s Conduct of Business (COBS), Fees (FEES), and Market Infrastructure (MIR) rules and Glossary.

As a reminder, the ADGM is a geographically delineated financial free zone with its own common-law based civil and commercial legal framework, and financial services regulatory regime (separate and distinct from the rest of the UAE, including the UAE’s other financial free zone, the Dubai International Financial Centre (DIFC)). Under the powers vested in it under its principle financial services legislation, the ADGM Financial Services and Markets Regulations 2015, as amended (the FSMRs), the ADGM has issued guidance relevant to crypto assets, cryptocurrencies, tokens and ICOs, promoting itself as an alternative jurisdiction for players in this fast emerging sub-sector of the FinTech ecosystem. The FSRA had also previously issued a Guidance Note on the "Regulation of Initial Coin/Token Offerings and Crypto Assets" on 09 October 2017.

In its new regulatory framework, the FSRA appears to be aligning itself with certain other regulators developing their approaches to the crypto-industry globally, such as the Swiss Financial Market Supervisory Authority (FINMA) which published guidelines on 16 February 2018 taking a more nuanced approach to ICOs by stating that: (1) generally, the circumstances around an instrument must be considered on a case-by-case basis; and (2) that digital tokens can be categorised into three types - (a) Payment Tokens, (b) Utility Tokens, and (c) Asset Tokens, each having their own unique regulatory treatment. Similarly, through the new ADGM regulatory regime, the FSRA has gone for the approach of dividing digital assets / instruments into (a) Security Tokens, (b) Crypto Assets, (c) Utility Tokens or Non-Security Tokens, and (d) Derivatives and Collective Investment Funds of the aforementioned instruments, in identifying that there should be no "one-size-fits-all" approach.

The new ADGM regulatory regime also introduces the new regulated activity of "Operating a Crypto Asset Business" (or OCAB) under the FSMRs, which covers (amongst other things), the arranging, buying, selling, providing custody, marketing, and advising on the merits of buying or selling, "Accepted Crypto Assets". By introducing and setting a threshold criteria for "Crypto Assets" to be considered as "Accepted" (through a number of different factors now outlined in the FSRA’s updated COBS rules, such as maturity/market capitalisation, market demand/volatility, type of distributed ledger, security, etc.), the FSRA has built-in a "factors-based" model in order to try and prevent higher-risk activities involving or relating to illiquid or "immature" Crypto Assets. The new regime also creates a framework for operating (a) a "Crypto Assets Exchange" or (b) as a "Crypto Asset Custodian".

For further specific guidance on the new rules, please contact Muneer Khan, Raza Rizvi and Samir Safar-Aly, or your usual contact.