Abu Dhabi Global Market Proposes a Regulatory Framework for Spot Crypto Asset Markets

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) published a consultation paper setting out its proposed framework to regulate spot crypto asset activities, including exchanges, custodians and other intermediaries, to be undertaken in ADGM.  The FSRA is proposing a fit-for-purpose regulatory framework that effectively addresses the full range of risks associated with crypto asset activities.  For crypto asset exchanges, it will entail proper regulation as market infrastructures addressing key risks including anti-money-laundering and counter-terrorist financing (AML/CTF), consumer protection, technology governance and safe custody. This best-in-class regime addresses concerns from regulators, institutions, corporates and investors by instituting proper oversight over crypto asset activities, and instilling the requisite integrity and confidence needed that is largely absent from the global arena. 

The dramatic growth of digital asset and crypto asset markets has been transformational for financial markets. Initially intended as a medium of exchange requiring no central counterparty, crypto assets such as Bitcoin have evolved to become alternative investments for investors seeking returns in this asset class.

In the majority of jurisdictions, crypto asset activities are largely unregulated, or regulated primarily from the AML and CTF angle.  However, crypto asset market activities involve other significant risks for participants. For instance, some crypto asset exchanges that offered the ability to trade crypto assets have experienced significant technological issues and caused investors to suffer financial losses due to stolen coins. 

There have been multiple industry calls for a more comprehensive approach to address the risks in the crypto asset markets, notably from the International Monetary Fund (IMF) and Financial Stability Board (FSB). Both the IMF and FSB have also noted, however, the potential for crypto assets and the technology underpinning them to increase the efficiency, resilience and inclusiveness of financial markets.

By establishing a comprehensive and best-in-class regulatory framework, the FSRA seeks to advocate a well-regulated regime that assures crypto asset activities are subject to proper oversight, addresses inherent risks and adheres to high standards. A fair, credible and effective regime will enable participation not only from retail and accredited investors that are active in seeking exposure, but facilitate participation from institutions and corporates that have been largely absent due to inability to address the risks involved. From a regulatory perspective, the level of transparency that this framework fosters will assist in the detection and supervision of systemic and market-based risks, contributing to the growing global understanding and supervision of systemic risks, as sought by global bodies including the FSB and IMF.