ADGM Consultation Paper on Virtual Assets Draws Legal Insights

The Abu Dhabi Global Market (ADGM) recently issued Consultation Paper No. 10 of 2024, inviting market participants to provide feedback on proposed amendments to its Financial Services Regulatory Authority (FSRA) guidelines, including updates to virtual asset regulations. Rasma Legal shared detailed insights into the paper with Unlock Blockchain, highlighting key amendments and offering recommendations for future considerations.

The proposed amendments include the removal of the FSRA’s requirement to issue warning notices for granting Financial Services Permissions, as well as prohibiting Payment Service Providers from handling cash transactions, both directly and indirectly. Rasma Legal considers this measure as a positive step towards ensuring adherence to the FATF’s recommendations on Customer Due Diligence and transaction monitoring. Enhanced notification obligations for Controlled Functions have also been proposed, and Rasma Legal recommends the introduction of governance reporting requirements similar to the UK FCA’s SM&CR, given the FSMR’s alignment with the UK’s FSMA. to align with international standards.

Virtual Assets-Specific Amendments

Own-Initiative Requirement Power: Aligning with global practices, such as the UK FCA, the FSRA has reframed Section 5A(2) to strengthen cross-border collaboration under the IOSCO Multilateral MoU.

Amendments to the Guidance on the Regulation of Virtual Asset Activities in ADGM (Attachment 2 of the Consultation Paper). The proposed amendments maintain the existing categorization of Digital Assets, as outlined below:

Digital Securities: possess the characteristics of a Security under the FSMR (e.g., Shares, Debentures, Units in Collective Investments Funds), and are, therefore, deemed securities.
Virtual Assets: are non-fiat virtual currencies or crypto exchange tokens. These tokens are treated as commodities and not classified as Specified Investments under the FSMR.
Derivatives and Funds: are regulated as Specified Investments under the FSMR.
Utility Tokens: are tokens redeemed for access to specific products or services, and are treated as commodities, and are not deemed Specified Investments under the FSMR.
Fiat Tokens: are stablecoins pegged to the value of the underlying fiat currencies. These tokens are treated as a form of digital representation of Fiat Currency.

Rasma Legal underscored that these amendments reflect minor adjustments rather than an overhaul, emphasizing FSRA's alignment with global regulatory frameworks and a commitment to fostering international collaboration.

Enhancing AML/CFT and Virtual Asset Regulation

Mazen Rasamny, Managing Partner at Rasma Legal, highlighted the importance of these reforms, stating that they reinforce the FSRA’s focus on AML/CFT compliance, governance, market integrity, and risk management. He particularly noted the importance of addressing regulatory gaps for Payment Service Providers to ensure effective monitoring of cash transactions and compliance with FATF standards.

“The recent proposed reforms "clearly reflects the FSRA’s focus on ensuring its regulatory framework remains agile, aligning with international best practices and global standards" Rasamny said. "The ADGM has established itself as a pioneering model in the Middle East, being the first jurisdiction in the region to introduce a regulatory framework for spot virtual asset activities," Rasamny added.

Looking ahead, Mazen anticipates that the FSRA will introduce significant changes to its virtual assets regime that will influence the operational landscape for service providers. Rasamny also highlighted that the amendments are refinements rather than overhauls, reinforcing ADGM’s reputation as a leader in virtual asset regulation.

Encouraging Participation

The feedback from Rasma Legal highlights the comprehensive nature of the proposed updates and their alignment with global regulatory standards. ADGM’s efforts to refine its framework demonstrate its commitment to maintaining a robust and adaptive regulatory environment that promotes innovation while ensuring market integrity.

Market participants are encouraged to review the consultation paper and submit their feedback to ADGM by the specified deadline. This is a critical opportunity to shape the future of virtual asset regulations in the UAE.