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‘Crypto Assets’ / ‘Crypto Currencies’ have been a point of interest in recent times along with concerns around the risks associated with these. To address the global demand from industry players, the ADGM Financial Services Regulatory Authority (‘FSRA’) introduced a comprehensive framework last year for the regulation of exchanges, custodians and other intermediaries engaged in crypto asset activities.
While the framework provides for standard regulation of arranging, advising, dealing, and managing crypto assets, crypto asset exchanges are treated similarly to multilateral trading facilities, which require applicants to meet certain additional requirements in addition to those applicable for other crypto asset activities.
A crypto asset exchange is a multilateral digital system, operated by a person authorised to operate a crypto asset business in the ADGM or a recognised investment exchange (whose recognition includes a stipulation permitting it to do so). The system brings together multiple third-party buying and selling interests in crypto assets in accordance with non-discretionary rules, in a way that results in a contract in accordance with Financial Services and Market Regulations 2015 and such other rules in connection thereto (‘FSMR’).
A crypto asset exchange can be set up by either: (a) a person holding a financial services permission to carry on the regulated activity of ‘Operating a Crypto Asset Business’ (‘OCAB’); or (b) a recognised investment exchange holding an OCAB stipulation on its recognition order.
To be authorised to set up a crypto asset exchange, an applicant must satisfy the FSRA that all applicable requirements of FSMR have been and will continue to be complied with. Upon authorisation, as a holder of financial services permission, an applicant is considered to be authorised to carry out the regulated activity of operating a crypto asset exchange in and from the ADGM.
While there is no general restriction on the crypto assets that can be traded on an exchange, each crypto asset is required to meet certain criteria in order to be designated an ’Accepted Crypto Asset’ and thus eligible for trading. This is a measure to prevent higher-risk activities involving or relating to illiquid or ‘immature’ crypto assets. Therefore, one should not presume that a financial services permission for operating a crypto currency exchange is a blanket permission to deal with any or all crypto assets in and from the ADGM.
In determining if a crypto asset is eligible to be dealt in by duly authorised persons, the FSRA considers:
This is merely an indicative list and therefore there may be circumstances where the FSRA could request further information before it recognises a particular crypto asset as an Accepted Crypto Asset. Each of the criteria is assessed on a case by case basis and therefore each applicant may be assessed on different criteria.
Upon its review, the FSRA shall provide a list of Accepted Crypto Assets that can be traded by the prospective applicant along with its financial services permission for operating a crypto asset exchange.
The considerations we have set out above are merely an indicative list and an overview of what needs to be considered prior to making an application to the FSRA for undertaking a regulated activity of a crypto asset exchange. There are other factors such as compliance with anti-money laundering and countering financing of terrorism regulations, technology governance and controls, market abuse, transaction reporting, misleading impression, human resources and general commercial compliance related issues, which must also be considered.
Generally, OCAB licence holders will be issued with a single financial services permission for the purposes of ‘Operating a Crypto Asset Business’ irrespective of the Crypto Asset activity that they are conducting. However, given the very nature of operating a Crypto Asset Exchange or operating as a Crypto Asset Custodian, the activities attract an higher regulatory requirement, which makes the licensing process lengthier than usual. Therefore, applicants intending to obtain such licence at the ADGM, are expected to plan the process well in advance i.e. with considerable time in hand between starting the application process and starting the operation of the exchange.