Abu Dhabi Global Market’s vibrant virtual asset community has become a destination of choice for the best-in-class virtual asset companies and investors.
In September 2022 Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) free economic zone issued a Guiding Principles (“Guidance”) for the FSRA’s Approach to Virtual Asset Regulation and Supervision as a way to outline its expectations for the asset class and service providers in the sector. FSRA also aims to facilitate greater regulatory collaboration and cohesion between the FSRA and other authorities in the UAE and globally. The guiding principles are:
1. Internationally Recognized Regulatory Framework
The Guidance encompasses a suite of regulations, activity-specific rules, and supporting guidance that protects investors and maintains market integrity and future proofs against financial stability risks. The framework requires licensing entities engaged in regulated activities using virtual assets (VAs) within ADGM. Licensing these firms are assigned the same regulatory status within ADGM as any other licensed entity. Therefore product-specific conduct of business rules applies in addition to any others that are applicable to a regulated firm, such as those that are asset class agnostic.
2. High Standards for Authorization
The FSRA’s risk appetite for VA activities is such that it will only admit operators to its jurisdiction who at the outset can unequivocally meet the transparent, high standards outlined in its framework. This will maintain the best-in-class reputation of the ADGM ecosystem and instill market confidence to promote growth and investment. This discerning approach is shown by the FSRA’s power only to permit VAs that it deems ‘acceptable,’ as determined by risk factors such as security and traceability, to prevent the build-up of risk from illiquid or immature assets.
3. Money Laundering and Other Financial Crimes under FSRA
The other regulatory principles communicated by FSRA are focused on addressing the risk of money laundering and other financial crime in the virtual asset market.
According to FSRA, comprehensive Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) rules are equally applicable to VA activities, in addition to UAE-wide Federal Laws and Cabinet Resolutions on AML/CFT. The FSRA also expects full compliance with FATF Guidance and Recommendations in VA area and requires VA firms to avoid VA transactions where a counterparty’s identity is unknown.
FSRA pledged to comply with international standards in Anti-Money Laundering (AML), combating the financing of terrorism (CFT) and supporting financial sanctions. The VA industry exhibits structural features, such as user anonymity, ease of access, infrastructure segmentation and jurisdictional location
4. Risk-focused Approach
In outlining its intention to take a risk-sensitive approach, the FSRA outlines four “risk drivers”:
- Responsibilities of virtual asset custodians, even when they outsource activities to third parties.
- Firms’ technology and governance controls.
- Firms observing regulatory requirements when engaged in the exchange of virtual assets.
- Compliance with rules designed to protect investors in virtual assets – including disclosure.
5. Commitment to Enforce Regulatory Breaches
To enable the FSRA to meet its statutory objectives, ADGM legislation empowers with a range of supervisory and enforcement tools and actions to identify, address and deter regulatory breaches, regardless of sector or regulated activity.
6. International cooperation implementing the principles
In order to support the exchange of information between regulators and mitigate the variety of risks, FSRA has entered into a material number of bilateral and multilateral Memorandum of Understandings (MoUs) and supports the development of international minimum standards that can drive the sector’s growth to be sustainable, risk-sensitive and consistent across markets.
Each principle is a declaration of the FSRA’s risk appetite in the areas of regulation, authorization, financial crime, supervision, enforcement and international cooperation. Whilst they are not legally binding, they should be viewed as a complement to the comprehensive detail of our published framework, providing an accessible view of our priorities and supporting rationale in this space.
How do Guiding Principles Impact Crypto Sector?
The FSRA is the first regulator globally to regulate platforms that enable the trading of Virtual Assets as Multilateral Trading Facilities. Under the FSRA’s regime, Multilateral Trading Facilities using Virtual Assets are required to meet requirements in relation to market surveillance, settlement, transaction recording, transparency and other systems and controls.
In order to foster institutional involvement within virtual asset markets, the FSRA focuses on proper governance, oversight and transparency in relation to actors within this space.
Whilst these guiding principles provide greater clarity to investors, other regulators and industry, key expectations are set on current virtual asset service providers in ADGM and potential applicants.
The focus remains on maintaining a dynamic yet robust regulatory framework and approach that can respond to changes in the sector’s risk profile. That makes/leads to ADGM’s vibrant virtual asset community becomes a destination of choice for the best-in-class virtual asset companies and investors. FSRA also outlines the tools to mitigate the material risks that are born from these activities and the regulatory powers to identify and act upon any misconduct.
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