On October 9, 2017, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) announced guidance for token offerings (ICOs) and virtual currencies as part of its Financial Services and Market Regulations (FSMR). The full guidance is available here.
The FSRA deemed token offerings a “novel and potentially more cost-effective way of raising funds,” but requested that market participants approach the financial authority to determine appropriate regulatory treatment.
“ICOs have transformed the capital formation landscape and global regulatory frameworks are evolving to adapt to such innovation,” said Richard Teng, chief executive director for the FSRA. “Participants exploring the issuance of ICOs that offer real value to the market and wish to operate within our regulatory framework are encouraged to engage us early to gain insights into the applicable regulatory regime.”
There is a high chance of fraud in the unregulated space, said the FSRA in its release. The regulator also explained that due to the various functions of tokens, a “one size fits all” approach is inappropriate.
“Among others, tokens can represent a medium of exchange such as a virtual currency, a regulated financial instrument such as a share, or a person’s identity record.”
However, there is one consistent thread across all projects. That is, all virtual tokens “are pieces of information recorded on a DLT [distributed ledger technology] network.”
In addition to its guidance on token offerings, the FSRA indicated that virtual currencies are treated as commodities. The regulator did not cite specific examples, so it’s a bit ambiguous how the FSRA would handle complex digital assets that meet multiple classifications. Like other financial authorities, the FSRA also warned investors of price volatility, noting the tendency for speculation in the hopes of outsized returns.
The guidance did explain that “ICOs comprising tokens which exhibit the characteristics of Specified Investments will be treated as such.” For further information, readers may consult the definitions on the ADGM website.
In August 2017, ADGM partnered with UAE Exchange to engage startups for participation in its regulatory lab. The capital of the United Arab Emirates, Abu Dhabi, has quickly become a blockchain pioneer. In June 2017, the Abu Dhabi Securities Exchange hosted annual general meetings for six listed companies using blockchain technology.