The Abu Dhabi Global Market (ADGM) has launched a comprehensive framework to regulate spot cryptoasset activities (the Framework), as set out in a guidance note released in June 2018 following public consultation.
This Framework includes coverage of those activities undertaken by cryptocurrency exchanges, custodians, and other intermediaries located in the ADGM.
The objective of the ADGM is to address the potential risks associated with cryptoasset activities – including risks relating to money laundering and compliance with measures against financial crime and counter-terrorism financing, as well as principles of consumer protection, technology governance, and exchange operations.
New regulated activity
The ADGM has issued its Framework under the auspices of the Financial Services and Markets Regulations of 2015 (FSMR), regulated by the Financial Services Regulatory Authority (FSRA).
The Framework is effective through amendments made to the FSMR and four modules of the FSRA Rules.
It essentially creates a type of activity named "Operating a Crypto Asset Business" or "OCAB", for short – in order to include it as an activity to be covered as a 'Regulated Activity' in the existing governance regime already in place in the ADGM.
The FSRA has opted to create a new regulated activity rather than squeeze cryptoasset activities into existing Regulated Activities (this is the same approach taken to crowdfunding by the Dubai Financial Services Authority).
This is made evident by the declaration in the guidance of June 2018 that the principal rules for OCAB are as set out in chapter 17 of the FSRA Conduct of Business Rulebook (the Rulebook), which already applies to Authorised Persons generally ('Authorised Persons' being those persons authorised to undertake 'Regulated Activities' in the ADGM).
The guidance further specifies that an OCAB holder, as a holder of a Financial Services Permission (FSP) valid in the ADGM, is considered to be an Authorised Person for the purposes of the FSMR and the Rulebook, and has the same regulatory status within the ADGM as any other Authorised Person.
The Framework applies to any applicant for an OCAB FSP, any Authorised Person participating in OCAB, and any recognised investment exchange permitting it to participate in OCAB.
The FSRA Rules and Regulations subject to amendment
- FSRA Conduct of Business Rules
- FSRA Fees Rules 2015
- FSRA Market Infrastructure Rulebook
- FRSA Glossary
Definition of a cryptoasset
The definition of what constitutes a cryptoasset will be of key interest to applicants. Definition of a cryptoasset
The FSRA has set out its definition as a digital representation of value that can be digitally traded and functions as:
- a medium of exchange; and/or
- a unit of account; and/or
- a store of value, but does not have legal tender status in any jurisdiction.
Furthermore, a cryptoasset is:
- neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the cryptoasset; and
- distinguished from fiat currency and e-money.
This is based on the well-accepted definition of virtual currency of the Financial Action Task Force.
A key facet of the Framework will be the implementation of a "Daily Value Trading Levy" on exchanges trading in cryptoassets, on a sliding-scale basis.
It is important to make the distinction that the Framework is not intended to apply to initial coin offerings (ICOs) or other capital raising purposes, which are covered by a separate guidance note.
The activities which comprise OCAB include buying, selling or exercising any right in cryptoassets (whether as principal or agent), managing cryptoassets belonging to another person, advising on the merits of buying or selling of cryptoassets, marketing cryptoassets, or operating a cryptoasset exchange.
However, there are certain exclusions from being considered an activity that may be covered by OCAB – for example, the development of software for creating or mining cryptoassets, or, importantly, any other activity or arrangement that is deemed by the ADGM FSRA to not constitute an OCAB, where necessary and appropriate in order for the ADGM FSRA to pursue its objectives.
This catch-all provision effectively means that practically, potential applicants with activities in the cryptoasset space should enquire with the ADGM FSRA whether their activities would be captured under the Framework, before commencing such activities in the ADGM.
Past efforts to bolster innovation
The introduction of the Framework came after the completion of a public consultation on the introduction of a cryptoasset framework by the FSRA in May 2018.
It follows a series of developments in the regulatory landscape around the cryptoasset industry in the United Arab Emirates (UAE), where regulators have taken the lead in the Middle East region with regards to implementing new initiatives to formalise regulation for the cryptoasset sector.
Authorities in the UAE have been vigilant in responding to ongoing media coverage of cryptoasset-related developments, such as ICOs.
We previously covered the release of a public warning statement in February 2018 regarding ICOs by the federal financial services and securities regulator, the Securities and Commodities Authority.
How does it compare with other regulators?
Regulators around the world have taken divergent, and in some cases, highly polarised approaches to the regulation of cryptoasset spot trading.
As a general principle, the majority of national or government regulators have not licensed spot cryptoasset activities, with more of a focus on anti-money laundering and counter-terrorism financing risks.
In some jurisdictions, such as China, trading in cryptoassets is illegal, as are the exchanges that host those activities.
In others, such as Switzerland, Singapore, Hong Kong and the UK, regulators have adopted a more balanced approach – permitting entities to undertake cryptoasset activities, and reviewing existing legislation as well as considering new legal frameworks for the industry.
Christine Lagarde, head of the International Monetary Fund (IMF) has commented on the new technologies in an article released by the IMF in June 2018, lending a prominent spotlight to developments in cryptoassets.
Interestingly, the Financial Stability Board of the G20 nations declared in July 2018 that it was preparing a framework to monitor the stability of cryptoasset markets – clearly, the ADGM's efforts were timely.
What happens now?
The intention of the Framework, although not explicitly stated as such by the ADGM, can be interpreted as an attempt to bring cryptoasset activities under the umbrella of the existing regulatory regime in ADGM, rather than an attempt to create or administer a cryptoasset-specific system.
This is evidenced by the treatment of OCAB holders as Authorised Persons, and the fact that they have the same regulatory status within ADGM as any other Authorised Person.
Very few, if any, special considerations apply on the basis that such an Authorised Person is involved in the cryptoasset business.
Importantly, the principal rules for an OCAB holder are very much the same as those which apply to Authorised Persons generally.
The Framework now exists, but it is very hard to predict where regulation in this space will go – however, it seems certain that although public and media interest in cryptoassets may have cooled since the heights of late 2017, regulatory scrutiny will only increase.
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