Digital assets in the Abu Dhabi Global Market: FSRA establishes a new regulatory framework for Fiat-Referenced Tokens

Trump’s decisive win in the US election has fuelled the crypto market with enthusiasm, pushing Bitcoin to new all-time price highs. However, the renewed market interest is accompanied by an increase in regulatory attention. 

In Europe, the FCA has released its crypto roadmap, whereas crypto asset service providers in the EU are getting ready for MiCA’s full implementation.  

In the United Arab Emirates, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) has now introduced a new regulatory framework applicable to the issuance of Fiat-Referenced Tokens (FRTs) which came into force as of 5 December. The framework creates a new separate Regulated Activity of Issuing FRTs, reducing the regulatory burden on FRT issuers, while increasing financial stability and investor protection.

In addition, the FSRA has also launched a consultation (Consultation Paper No. 11 of 2024) which proposes a series of amendments to the FSRA digital asset regulatory framework, reflecting the growing focus of regulators in the region on the digital assets sector.

Characterisation of FRTs 

The Financial Services and Markets Regulations 2015, as amended (FSMR) have been updated to introduce the new regulatory framework for the issuance of FRTs, defining an FRT as “digital assets whose transfer and storage are achieved through distributed ledger technology or equivalent transaction recording technology”. The FRT is therefore in practice, a medium of exchange stabilised by: 

• referencing a fixed amount of a single fiat currency[1]; and 
• enabling the holder to redeem the token in exchange for the amount of the fiat currency referenced by the token from its issuer upon demand.

Under FSMR, FRT issuance is to now be regarded as a separate regulated activity that requires a licence from the FSRA when conducted in or from the ADGM.

The FRT regime

Most of the new requirements are reflected in a new Chapter 19A of FSRA’s Conduct of Business Rulebook and includes:

The Conduct of Business Rulebook also specifies that an FSRA Authorised Person or a Recognised Body carrying on a Regulated Activity involving a FRT must only use “Accepted FRT”. Accepted FRT for the purposes of this framework is also considered an Accepted Virtual Asset, the seven determining factors of what constitutes an Accepted Virtual Asset (AVA) is set out at paragraph 25 of the Guidance – Regulation of Virtual Assets Activities in ADGM. These are: (1) maturity, (2) security, (3) traceability/monitoring, (4) exchange connectivity, (5) type of Distributed Ledger Technology, (6) Innovation/efficiency, and (7) practical application/functionality.

Under the new framework, the application fee and annual supervision fee for the Regulated Activity of Issuing a FRT has been set by the FSRA (3.9A of the Fees Rules (FEES)) at US$70,000 each.

Further amendments to the digital assets regulatory regime in ADGM

As noted above, the FSRA has also launched Consultation Paper No. 11 of 2024, seeking stakeholders' feedback on proposed changes to its regulatory framework for Virtual Assets (VA). Through this consultation process, the FSRA aims to bring the regulatory framework for VA firms in line with the evolving international regulatory landscape.   

Key proposed changes in the consultation include:

• replacing the current FSRA-led AVA approval model with a self-assessment and notification process;
• imposing a continuous monitoring of AVAs obligation to VA firms to ensure that such AVAs continue to be in line with the AVA assessment criteria;
• revising capital requirements applicable to VA firms;
• enhancing FRSA’s intervention powers enabling it to halt dealings in a particular VA in case, for example, of AML concerns; and
• expressly prohibiting algorithmic stablecoins, privacy tokens or digital assets employing similar technology. 

In addition, the consultation addresses the criteria for determining whether FRTs issued by issuers outside ADGM should be accepted within ADGM. In its consultation, the FSRA proposes to apply the same criteria used for the assessment of VAs. The paper also proposes to expand the scope of investments in which Venture Capital Funds may invest.

The consultation closes on 31 January 2025. 

Looking ahead 

Legal frameworks in the UAE, particularly in the virtual assets sector, are rapidly evolving to align with regional and global developments, aiming to create a predictable legal environment for fintech businesses and individuals. VA firms will be required to stay updated on their obligations as the regulatory landscape continues to develop in complexity and sophistication.

[1] Fiat currencies are currencies created and issued by sovereign governments and stored and transferred by banks and other regulated financial institutions on behalf of users.