The Abu Dhabi Global Markets (ADGM) issued the Guidelines concerning the use of Initial Coin or Token Offerings (the ICO Guidelines) on 9 October 2017 to regulate fund-raising through coin or taken sale including the use of virtual currencies. These guidelines were issued by the Financial Services Regulatory Authority (FSRA) of the ADGM as per section 15(2) of the Financial Services and Markets Regulations of 2015 (FSMR). Under the ICO Guidelines, virtual instruments have been classified into the following categories: -
I. Virtual tokens or coins with the characteristics of securities;
II. Virtual tokens or coins without the attributes of an instrument;
III. Virtual currencies; and
IV. Derivatives of virtual currencies or virtual tokens or coins with the characteristics of securities.
Virtual Coins and Tokens
Section 3.3 of the ICO Guidelines have stated that the FSRA will assess whether ICOs should be regulated by the FSRA on a case-to-case basis after analyzing the nature of the asset or coin. Initial Coin and Token Sales are conducted through Distributed Ledger Technology (DLT); where a client (or investor) would provide an ICO issuer with virtual currencies for another digital medium such as a ‘coin’ - and these coins or tokens do not represent an underlying financial asset. The increasing use of DLT in the financial markets has led to circumstances where such coins represent other forms of regulated instruments such as shares, units in investment funds and/ or debentures. The FSRA will regulate the coins as per section 58(2)(b)2 of the FSMR if the virtual coins represent or have the features of securities in an ICO. In such cases, the issuers should contact Commercial Lawyers in Abu Dhabi and the FSRA before issuing the ICOs in ADGM. As far as the technicalities in the regulations are concerned, the FSRA will regulate securities issued through ICOs same as ‘general securities’ in accordance with section 258 of the FSMR. Money exchanges, market intermediaries or any person dealing with coins with an underlying security should meet one of the following criteria: -
Should hold a Financial Services Permission by the FSRA;
Should be a recognized investment exchange;
should be a recognized clearing house.
This regime is expected to protect clients who invest in coin securities in private placement using DLT platforms by elevating transparency and reporting mechanisms. Issuers have to meet many conditions while raising funds by issuing securities to the public, and the foremost condition is to draft a prospectus. Although, issuers may make an offer of securities without a prospectus under rule 4.3 of the Market Rules after meeting any of the below conditions: -
the ICO is specifically directed towards professional clients (or investors);
less than fifty (50) persons would subscribe during the period of one (1) year; or
the consideration paid to purchase these securities is at least US Dollars one hundred thousand (USD 100,000).
As mentioned earlier, not all coins have the characteristics of shares, units in investment funds and/ or debenture. This means that all ICOs will not fall within the purview of the Market Rules and will not be termed a ‘regulated activity’ under the FSMR. The ICO Guidelines have stated that clients should exercise substantial due diligence before investing in these coins that are unregulated by the FSRA since, in practice, there is lesser information regarding the issuer and their business plan to invest the money further.
Virtual currencies have an underlying value and can be used for purchasing goods and/ or services, but are not considered as legal tender. Therefore, virtual currencies are commodities and not specified investments; which means that mining of virtual currencies does fall within the purview of ‘Regulated Activities’ of the FSRA. The lack of any specific regulations governing virtual currencies make them highly volatile and simultaneously, increases the level of risk involved. Although spot-dealing of virtual currencies are unregulated, companies that are regulated by the FSRA should portray that they meet the AML/ CFT requirements and lay down the technology or financial-related risks while dealing in these currencies. Companies dealing with the derivatives of virtual currencies such as futures, contracts for difference (or CFDs) are regulated as commodity derivatives (a form of specified investment) under the FSMR.
Investors are advised to exercise caution and take the opinion of our Lawyers in Abu Dhabi before issuing or investing in virtual currencies (such as Bitcoins) in ADGM.