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Includes the buying and selling (Proprietary Trading) of crypto-commodities developed on distributed ledger technology applications. This activity does not include acting as an exchange, providing brokerage services, financial services, banking services, payment processing or storage services.
Includes firms engaged in providing an online platform for the buying & selling of third parties’ unique digital assets (NFTs) and facilitates commercial interactions between buyer and seller in return of a commission or remuneration. The online platform cannot be used to trade or promote crypto-commodities, cryptocurrencies or NFTs covering any regulated products or securities.
Includes firms that provide database management solutions and ancillary services based on distributed ledger technologies, such as blockchain, such firms are not permitted to trade in, or setup an exchange for currencies or crypto currencies or commodities.
Includes firms engaged in the development and hosting of digital virtual environments, which enable simulated interactions between individuals, such firms are not permitted to issue tokens which are traded on exchanges or trade in crypto commodities.
Can operate a crypto asset business, involving one or a combination of crypto asset activities including:
The ADGM is one of two international financial centres in the UAE. Established in 2015, it quickly rose through the rankings and is now counted as one of the top 25 financial centres in the world. ADGM’s innovative SPV regime, its initiatives in the fintech space and its issuance of the region’s first cryto-asset regulatory framework, have all contributed to its success.
DAE can be any business that is built around crypto transactions. These include Virtual Asset Service Providers (VASP) such as crypto exchanges, ATMs that allow crypto transactions and conversion, gaming sites, business incubators and any other such entity that deals in digital assets. They are also called Virtual Asset Entities or Crypto Asset Entities.
Any Digital Asset Entity that uses the services of a bank or any other financial institution is a DAC. They are classified thus mainly to account for increased AML monitoring and compliance checks.
Enhanced anti-money laundering/counter terrorism financing and compliance obligations apply to DAEs that engage in financial services. These DAEs are referred to as Virtual Asset Service Providers and include exchanges/platforms that allow for fiat-virtual or virtual-virtual asset conversions (Alternative Trading Systems or Multilateral Trading facilities), transfers of virtual assets, custody of virtual assets such as digital custodians, and issuers/distributors and advisors on virtual assets, such as asset managers and investment advisors.
Most regulators define VASPs in a way to capture the above activities carried out “for and behalf of another person”, so for instance, mining crypto at home or on an individual basis may not come under regulation, but mining pools could be classified as VASPs.
The ADGM’s Virtual Assets Framework is designed to cover all activities concerning virtual assets. This includes non-fiat virtual currencies such as Bitcoin and Ether, Digital Securities that include tokenised offerings of securities (Security Tokens), Fiat tokens or Stablecoins and associated derivatives. Utility Tokens are also mentioned in the framework but may not come under the purview of regulation, if they do not exhibit features and characteristics of a regulated investment.
The ADGM Virtual Assets Framework is of interest to Virtual Asset Service Providers, especially issuers of Virtual Assets, Digital Exchanges that wish to admit Virtual Assets to trading, or performing clearing and settlement services, operators of exchanges such as Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF) that wish to trade Virtual Assets, providers of Digital Wallets who provide custody and storage services for such virtual assets, technology providers and in general, any licensed firm that wishes to advise, arrange or manage virtual assets.
As per the ADGM’s definition, "Virtual Asset" means a digital representation of value that can be digitally traded and functions as
A Virtual Asset is -
In addition, a Digital Security is defined as a token that confers rights and obligations that are:
In effect, a Digital Security is a token that behaves as a security (equity, debenture, convertible, future, option etc.) and is hence considered by the FSRA as a Security and a Specified Investment.
The FSRA has a list of instruments that they consider a security. In general, a transaction is considered a security if a) There is an investment of money, b) There is an expectation of profit, c) The investment of money is in a common enterprise and d) Any profit comes from the efforts of a promoter or third party. This is also commonly known as the Howey Test.
Utility Tokens, i.e. tokens that can be redeemed for access to a specified product or service are treated as commodities and hence not deemed Specified Investments. Trading and transactions in Utility Tokens are not regulated, unless they are caught as Accepted Virtual Assets.
The FSRA would require third-party verification to demonstrate that the Virtual Asset meets security requirements to be deemed an accepted Virtual Asset.
The considerations would include:
Market capitalization and sufficiency of client demand, proportion in free float and the control mechanisms to manage volatility.
Security – the ability of the Virtual Asset to respond and adapt to vulnerabilities Origin and destination of the virtual asset, ability to identify counterparties in transactions and monitoring of on-chain transactions.
Number of exchanges where the Virtual Asset is listed and the depth of regulation of such exchanges.
Depth of innovation of the Virtual Asset and practicaility of application.
The VASP activities that are covered by the ADGM Virtual Assets Framework include:
The ADGM has an existing framework for the authorization and regulation of Exchanges, Alternative Trading Systems and Clearing houses. Under the regulation for conventional securities, exchanges are licensed as Authorised Market Institutions (AMI), and MTFs and OTFs are licensed as Alternative Trading Systems. Accordingly, the FSRA permits such institutions to perform the same activities for Virtual Assets as well. However, privacy tokens and anonymous trading will not be allowed.
There are additional requirements applicable to such facilities, mainly comprising KYC and technology-related compliances.
The FSRA would be interested in reviewing the criteria for market participants who access and update records on the platform, network security and ongoing compliances. They would also review the IT design of the DLT implementation adopted by the VASP that trades virtual assets, and whether it is able to address how the rights and obligations relating to the tokens are properly discharged.
Technology governance mechanisms would also be reviewed, including IT architecture, storage and transmission of data, procedures to address soft and hard forks, cyber-security measures, decision-making protocols and interfaces with providers of digital wallets.
A comprehensive IT audit, conducted by an independent third-party IT expert would be required to be submitted to the FSRA annually.
A Multilateral Trading Facility is a platform that is more loosely regulated than an exchange. It is used to match large orders mainly from institutional clients, and hence work as broker-dealers rather than exchange houses. They are also referred to as Multilateral Trading Facilities in Europe.
MTF operators allow for trading of a wide variety of equity and non-equity securities, including shares, warrants, options, derivatives, futures, CFDs, fund units and crypto assets. Contracts between buyers and sellers are formed according to a set of transparent rules that do not discriminate between members or their clients (non-discretionary basis).
Organised Trading Facilities on the other hand, are facilities where contracts for the exchange of non-equities such as bonds, structured finance products, emission allowances or derivatives are formed, on a discretionary basis. An MTF is usually operated by a regulated investment firm or an operator, whereas an OTF can only be operated by a regulated investment firm.
Virtual Asset Service Providers that wish to provide a platform for the listing and trading of Virtual Assets, will need to seek authorisations from the ADGM to operate an MTF. There are already 6 VASPs in the ADGM, with some more at In-Principle Approval stage.
The prospectus requirements that apply for public offers of Securities, i.e. Initial Public Offerings, will continue to apply to IPO’s of Security Tokens. In these cases, the white papers released by the issuers can be considered as Prospectuses, provided they contain the information as mandated by the FSRA for issuances of securities. Also, there will be additional information and disclosures required for Security Token issuances.
The FSRA has provisions for exempt offers in the case of conventional securities, and an offer of Security Tokens denominated in an amount of at least US$ 100,000 or equivalent will be considered an exempt offer. However, any further fractional interest in such security tokens (for less than US$ 100,000) will not be exempt.
Funds can also be tokenised. The FSRA allows Security Tokens that represent rights and obligations similar to Units in a Fund, in which case they will be regulated in the same manner as Units of Funds. Additional prospectus disclosures will be required, similar to those required in the case of initial offers of other Security Tokens. Such tokens can be offered both to the public and via private placement, and the same rules and eligibility criteria will apply to the Fund Managers.
Funds will also be allowed to invest in other crypto-tokens, subject to appropriate disclosures in the Fund Prospectus.
Virtual Asset Service Providers interested in carrying out financial services from the ADGM are required to submit applications to the Financial Services Regulatory Authority, or FSRA.
The type of business that the VASP wishes to engage in defines the category of License that is required. For example, a firm undertaking low risk activities such as advising or arranging will require a Category 4 License, while a discretionary portfolio manager will require a Category 3C License. A STP broker, dealing on a matched principal basis will require a Category 3A License, whereas a market maker or provider of credit provider will require a Category 2 License. Full-fledged banks, that accept deposits, will come under a Category 1 License.
A common misinterpretation is that a firm applies for a FSRA Category 3C or a FSRA Category 4 license. As described above, the activity defines the category, i.e. a company that wishes to engage in Asset Management, advisory and arranging activities falls in the Category 3C, by virtue of the highest activity of Managing Assets, even though advisory activities fall in category 4.
Virtual Asset Service Providers that wish to provide a platform for trading of virtual assets, will have to apply for the activity of Operating a Multilateral Trading Facility, which comes under the Category 4 licensed activities.
| Category 4 | Base Capital |
|---|---|
| Operating a a Multilateral Trading Facility | US$ 140,000 |
Other VASPs will be licensed according to the intended activities.
The FSRA expects that the VASP have transparent and non-discriminatory rules and procedures to ensure fair and orderly trading of investments, and objective criteria governing access to its facility. The regulator also requires the VASP to have objective and transparent criteria for admitting securities that will be traded on the platform, adequate technology resources and procedures for proper market conduct.
A Virtual Asset Service Provider may only trade investments that reference to an underlying benchmark or index provided by a Price Information Provider, which is usually a price reporting agency or an index provider like Refinitiv.
The VASP is also required to provide adequate pre-trade and post-trade transparency to its market participants. Since an MTF is not authorised to provide clearing and settlement services, it will have to make arrangements for clearing and settling trades from an existing clearing house in the ADGM.
Technology and governance requirements for VASPs that deal in Virtual Assets.
MTFs that allow primary listing and secondary trading of Virtual Assets will have to ensure that the DLT applications used by the facility operate on permissioned access. Privacy tokens and anynomous trading are not allowed.
The FSRA would be interested in reviewing the criteria for market participants who access and update records on the platform, network security and ongoing compliances. They would also review the IT design of the DLT implementation adopted by the facility that trades security tokens, and whether it is able to address how the rights and obligations relating to the tokens are properly discharged.
Technology governance mechanisms would also be reviewed, including IT architecture, storage and transmission of data, procedures to address soft and hard forks, cyber-security measures, decision-making protocols and interfaces with providers of digital wallets.
A comprehensive IT audit, conducted by an independent third-party IT expert would be required to be submitted to the FSRA annually.
The FSRA expects that the Virtual Asset Service Provider be adequately staffed depending on the scale, scope and nature of the product portfolio that is proposed to be offered from the ADGM. At a minimum, the FSRA would like to see the following appointments:
A well-organized Board with robust governance policies. The Chair would have to be a non-executive Director.
Senior banking professional with over 10 years of experience, ordinarily resident in the UAE.
Senior compliance professional with over 10 years of experience, ordinarily resident in the UAE.
This position is usually outsourced, and not mandatory.
suitably qualified and experienced IT expert.
Senior AML professional with over 10 years of experience, ordinarily resident in the UAE. This function can be combined with Compliance and one individual can carry out both responsibilities.
Senior and suitably-qualified finance professional. In case of a group, the FO can be from the parent company and does not have to be resident in the UAE. This role can also be outsourced.
The CO and MLRO roles can also be outsourced.
Senior and suitably qualified internal audit professional. Usually outsourced to a professional firm.
FSRA-recognised auditor.
Suitably qualified IT expert (e.g CISA, CISM, ISACA, CISSP qualified)
The category of license will determine the amount of capital required. The base capital requirement for a Category 4 firm is $10,000. This rises to $500,000 for a Category 3 firm, $2 million for a Category 2 firm and $10m for a Category 1 firm.
Capital waivers may be available to the ADGM branch of a regulated financial institution having its head office in a recognised regulatory jurisdiction.
Actually, there are three components of capital - base capital, risk-based capital and expense-based capital. The higher of the three is set to be the capital requirement. These figures are calculated using the financial models that we make for the Regulatory Business Plan during the application process, and so are mostly unique to the company that applies for the license.
The figures given above are for base capital only, and actual capital may vary depending on the business model and the associated expenses and risks.
In general, for MTFs that hold Client Assets - 18/52 of the projected annual expenses of the firm.
Calculation of capital is a detailed process and involves many factors. We recommend that you contact us for more details on the application process and capital calculations.
Here are some specific advantages of establishing in the Abu Dhabi Global Market.
The ADGM application process commences with formal introductions to the ADGM and the FSRA.
Following the introductory call, a detailed Regulatory Business Plan (RBP) is prepared, along with financial projections, for a quick review by the regulator.
The comments of the regulator are incorporated into the RBP, and a comprehensive application is compiled, comprising policies, processes and other related documentation. The KYC and associated forms of all key individuals are also prepared for submissions.
The formal application is then sent across to the FSRA, who reviews the pack over a period of 7-10 business days, and then accepts it. The detailed review process then commences, and this can take anywhere between 90-120 days to complete.
The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The FSRA also meets with the SEO, FO, Technology Head and CO/MLRO designates, and conducts a detailed interview with them.
An in-principle approval is issued in case the application is successful. The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm.
Once done, a final submission is made to the FSRA, following which the regulator issues the Financial Service Permissions and the process is then complete. The firm is now open for business.
The data protection notification is part of the process of registering a new entity in the ADGM. The costs involved are as follows:
US$ 300
US$ 300
Every entity registered in the ADGM is required to lease a physical office. You can choose from the four buildings in the ADGM, or a range of business centers.
Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:
from a two-desk office at US$ 20,000.
from US$ 55 per square foot.
| Establishment Card Application | Deposits | Visas (per visa) | PSA Deposit (per visa) |
|---|---|---|---|
| US$ 630 | US$ 682 | From US$ 1,500 | US$ 682 |
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