On 25 June 2018, the Abu Dhabi Global Market (ADGM) launched a regulatory framework, known as the "Spot Crypto Asset Framework", to enable applicants to apply to operate a crypto asset business in or from the ADGM (the Framework). The Framework follows on from the ADGM's successful completion of a public consultation process earlier this year, and is comprised of ADGM Regulations and Financial Services Regulatory Authority (FSRA) Rules governing Crypto Asset Activities, a Guidance Note and Application Form.
Under the Framework, a "Crypto Asset" is treated as a commodity. It is defined as "a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction. A Crypto Asset is (a) neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Crypto Asset; and (b) distinguished from Fiat Currency and E-money." Applicants that meet the requirements of the Framework will be granted a Financial Services Permission (FSP) to carry out the activity of "Operating a Crypto Asset Business" (OCAB).
The OCAB FSP will carry with it a slew of compliance-related obligations, including anti-money laundering, consumer protection, security and technology governance requirements, in order to comprehensively address the key risks that trading in virtual currencies carries with it. Moreover, the Framework also establishes the concept of "Accepted Crypto Assets" – with activities of OCAB holders being limited to dealing in these only (in order to safeguard against higher risk crypto activities with assets that may be illiquid or immature). The ADGM has stated that it does not intend to make a list of such Accepted Crypto Assets publicly available, but may furnish this information to applicants and OCAB holders upon request. The (non-exclusive) factors that the ADGM will examine when assessing whether or not a Crypto Asset will qualify as an Accepted Crypto Asset include:
- Security – whether the Crypto Asset is capable of being responsive to and improving upon any of its inherent risks or vulnerabilities.
- Traceability/monitoring – whether transactions of the Crypto Asset can be adequately monitored along with counterparties to each trade.
- Exchange connectivity – whether other suitably regulated exchanges support the Crypto Asset.
- Market demand/volatility – the strength of market demand and controls to manage volatility.
- Type of distributed ledger – whether there are any issues with the security/usability of the distributed ledger technology used for the Crypto Asset.
- Innovation/efficiency – whether the Crypto Asset satisfies an unmet need in the market or assists in solving a problem.
- Practical application/functionality – whether the Crypto Asset has quantifiable functionality.
Successful applicants under the OCAB regime will be able to engage in certain general activities in relation to Accepted Crypto Assets. These include:
- Buying, selling or exercising any right in an Accepted Crypto Asset.
- Managing Accepted Crypto Assets belonging to another person.
- Making arrangements with a view to another person buying, selling or providing custody of an Accepted Crypto Asset.
- Marketing of Accepted Crypto Assets.
- Advising on the merits of buying or selling an Accepted Crypto Asset.
There are also additional specific activities that will give rise to heightened regulatory and compliance obligations; namely, operating a Crypto Asset Exchange or operating as a Crypto Asset Custodian.
Interested applicants can apply for an FSP to carry on the Regulated Activity of Operating a Crypto Asset Business via the ADGM directly. Applicants must pay an initial authorisation fee of either US$20,000 or US$125,000 (with the latter amount applicable where the applicant is seeking to operate as a Crypto Asset Exchange). Annual supervision fees are either US$15,000 or US$60,000 (again, with the latter amount applicable where the applicant is seeking to operate as a Crypto Asset Exchange).
Although many still regard crypto assets as having the potential to be inherently high risk, it is apparent that the ADGM authorities invested a significant amount of time in devising a framework that is responsive to these potential risks and predicated on best practice approaches of mitigating them. The introduction of the Framework is sure to generate a significant amount of interest and growth in the crypto assets space in the region.
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