Points to note
- The ADGM and the FSRA have launched a crypto asset regulatory framework on June 25th.
- The regulatory framework aims to diversify Abu Dhabi's financial industry, increase the attractiveness of crypto assets and safeguard stakeholders.
- The regulation provides a framework for conducting crypto asset business.
The ADGM's regulatory framework issued by the FSRA recognises two types of digital assets; security tokens and crypto assets. While security tokens are digital assets with similar characteristics to securities, crypto assets are a form of digital currency that utilise cryptography and blockchain technology in order to provide secure payment networks and transactions. Bitcoin, Ethereum and Litecoin are all examples of existing digital currencies.
Under the Article 258(1) of the Financial Services and Markets (Amendment 2) Regulations 2018, a crypto asset 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 a legal tender status in any jurisdiction. A Crypto Asset is:
- 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
- distinguished from fiat currency and e-money."
Unlike tender of fiat money, crypto assets are not issued by any central authority, and are theoretically immune to government interference or manipulation. In addition, crypto assets are not subject to depreciation by inflation, and the underlying value of the currency is derived from supply and demand forces instead of outside intervention. This means that a cryptocurrency can increase in value as demand for it increases.
The Activities Covered by the Regulatory Framework
To implement the regulatory framework, "Operating a Crypto Asset Business" has now been included to the list of FSRA regulated activities. Operating a crypto asset business involves undertaking one or more of the following activities in or from the ADGM:
- buying, selling or exercising any right in accepted crypto assets as a principal or agent;
- managing accepted crypto assets belonging to another person;
- making arrangements with a view to another person buying, selling or providing custody of accepted crypto assets;
- marketing of accepted crypto assets;
- advising on the merits of buying or selling accepted crypto assets or any rights conferred by such buying or selling; and
- operating a crypto asset exchange or as a crypto asset custodian.
In order to operate a crypto asset business, authorisation must be sought from the FSRA.
The application form is available on ADGM's website and is to be submitted directly to FSRA once completed and signed. All applicants are required to complete sections 1 to 5, which include generic information such as the applicant's contact details, the crypto asset activities in contemplation, and information about the applicant's group and board members. In order to complete the application, all applicants must also sign and date the declaration under section 8.
Those applicants who want to operate a crypto asset exchange must also complete section 6, while applicants applying to operate as crypto asset custodians are required to also complete section 7.
An initial authorisation fee of US$20,000 must be paid, with a recurring annual supervision fee of US$25,000. Where the applicant intends to operate a crypto asset exchange instead, the initial authorisation fee is US$125,000, with an annual supervision fee of US$60,000.
While in various jurisdictions the licensing of spot crypto asset activities remains unavailable, and in other jurisdictions spot trading of crypto assets is altogether banned, there is a growing consensus that global implementation and standardisation of crypto assets regulation is required. This shift has likely been spurred by the growing interest from exchanges, custodians and intermediaries as digital currencies increasingly become recognised as an asset class of their own and a medium of exchange for the payment of goods and services.
Therefore, ADGM's early adoption of a crypto asset regulatory framework demonstrates its willingness and commitment to diversify its financial industry and offering as the market evolves. It is also an indication of the growth of crypto asset markets and their attractiveness to industry stakeholders.