Abu Dhabi regulator issues guidance on initial coin offerings and virtual currencies

Raza Rizvi and Neil Westwood consider the new guidance from the ADGM’s Financial Services Regulatory Authority on the use of virtual tokens and currencies.

The regulator of financial services in the Abu Dhabi Global Market, the Financial Services Regulatory Authority (FSRA), has issued guidance on the treatment of virtual currencies and initial coin offerings (ICOs) under the FSRA’s regulatory framework.

The guidance considers the issuance of virtual tokens (including virtual currencies) for the purpose of raising funds, as well as the conduct of transactions using virtual tokens and currencies.

The following points in the guidance may be of particular interest:

  • The FSRA expressly acknowledges that virtual tokens used to enable or facilitate a Regulated Activity under the existing regulatory framework are “generally permitted”, provided “fit and proper safeguards” are in place.
  • The FSRA may treat certain virtual tokens as Securities for the purposes of the Financial Services and Markets Regulations 2015 (FSMR). Issuers of such tokens are encouraged to approach the FSRA at an early stage and are reminded of their obligation to, amongst other things, publish a prospectus. Issuers may benefit from the statutory exemption from the requirement to publish a prospectus if the tokens are issued on a private placement basis.
  • Investors in virtual tokens which do not constitute Securities, and investors in many virtual currencies, are reminded that they will not benefit from regulatory safeguards which protect against risks of fraud and loss of capital. These assets are treated as commodities, which are not Specified Investments under the FSMR.
  • Market intermediaries and operators dealing in derivatives of virtual currencies, such as futures and options, are deemed to be conducting a Regulated Activity. Derivatives of virtual currencies are regulated as Commodity Derivatives, a form of Specified Investment under the FSMR.

The guidance is a progressive move from a dynamic financial services regulator; however, a key next step will involve open, industry engagement with the expected output of voluntary best-practice standards to hold give some investor comfort around unregulated ICOs. Despite being seen by many conservative financial institutions as being on the questionable fringe of the FinTech world, Abu Dhabi’s regulator’s output seems to suggest there’s potential to bring ICOs more into the mainstream of financing options.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.