Abu Dhabi to Regulate Cryptocurrencies as Commodities and ICOs as ‘Specified Investments’

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has published its position regarding cryptocurrencies and initial coin offerings (ICOs) under the Financial Services and Markets Regulations (FSMR). The ADGM recognizes that attempting to develop a one size fits all regulatory apparatus for the cryptocurrency industries is inappropriate, and will approach cryptocurrencies as commodities, whilst legislating many ICOs as “specified investments”.

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The ADGM Has Sought to Clarify the Existing Regulations That Cryptocurrencies and ICOs May Be Subject To

Abu Dhabi’s financial regulator has issued a document intended to provide guidance as to the relevant legislation that cryptocurrencies and ICOs may be subject to when operating within the country. The ADGM states that the “guidance is applicable to those considering the use of… ICOs… to raise funds”, in addition to “those considering transacting in, and the general use of, virtual tokens and currencies.” The ADGM adds that “given the evolving developments in the space of virtual tokens FSRA will continue to closely monitor industry developments[, and] may issue further guidance as necessary… in order to facilitate the sound development and deployment of promising financial technology innovations.”

The guidelines state that “the use of virtual tokens… to raise funding and facilitate economic transactions has been on the rise in recent years”, and has garnered “increased attention from financial services regulators.” The ADGM states that the “risks arising from fraud, money-laundering and terrorist financing”, in addition to the volatility of many cryptocurrencies’ market value, have been the primary catalysts for the growing number of financial regulators that have sought to address the legal implications of cryptocurrencies and ICOs.

The ADGM states that “virtual tokens [that] are used as a mechanism to enable or facilitate a regulated activity… are generally permitted.” The ADGM uses remittances as an example of such, stating that “subject to fit and proper safeguards, an authorised money remittance house may receive fiat currencies from clients and use virtual currencies to securely remit an equivalent value overseas directly to a regulated foreign counterparty via the internet in real-time; the foreign counterparty can then pay out in fiat currencies to the intended end-clients.”

The ADGM asserts that virtual currencies “are not legal tender. However, virtual currencies have ‘value’ in that they can be exchanged for other things of value.” Abu Dhabi’s financial regulator describes “virtual commodities [as] hav[ing] much in common with physical commodities such as precious metals, fuels and agricultural produce”, concluding that “from a regulatory perspective, virtual currencies are treated as commodities.” As such, the ADGM states that “mining [and] spot transaction[s] in virtual currencies” will not fall under the regulatory jurisdiction of the FSRA, however, adds that companies that issue derivatives of virtual currencies will be regulated as “Specified Investments under the FSMR.”

“ICOs Can Take Many Forms”

Of ICOs, the regulator states that “investors will typically give virtual currencies to an ICO issuer in exchange for a proprietary digital medium of exchange on the [distributed ledger technology] platform. Being termed a ‘coin’ or ‘token’.” The ADGM states that some tokens represent a utility, as opposed to “an underlying financial asset.”

The ADGM asserts that tokens issued through an ICO that represent “a ‘traditional’ regulated issuance, such as share, debenture or units in a collective investment fund” will be subject to existing regulations under the FSMR, and fall under the legal classification of “securities tokens”. The guidelines state that the FSRA will determine if an ICO is subject to existing FSMR regulations on a case-by-case basis. Richard Teng, the Chief Executive Director for the FSRA of ADGM, encourages ICOs to engage with the financial regulator as soon as possible in order to accurately determine their regulatory requirements. Teng states that “ICOs have transformed the capital formation landscape and global regulatory frameworks are evolving to adapt to such innovation. Participants exploring the issuance of ICOs that offer real value to the market and wish to operate within our regulatory framework are encouraged to engage us early to gain insights into the applicable regulatory regime.”

The guidelines clarify that “where tokens do not have the features and characteristics of securities”, an ICO is likely to sit outside of the regulatory jurisdiction of the FSMR. In instances where an ICO isn’t regulated by the FSMR, the ADGM emphasizes the need for investors to conduct extensive research and exercise due diligence, as investors will not enjoy the consumer protections and legal safeguards that ICOs regulated under the FMSR will be subject to.

What do you think about Abu Dhabi’s regulatory positions with regards to ICOs and cryptocurrencies? Share your thoughts in the comments section below!

Images courtesy of Shutterstock, Abu Dhabi Global Market

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