Consultation Paper No. 11 of 2024 - Proposed Amendments to the Digital Asset Regulatory Framework

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CONSULTATION PAPER
NO. 11 OF 2024
PROPOSED AMENDMENTS TO THE
DIGITAL ASSET REGULATORY
FRAMEWORK
5 DECEMBER 2024

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Table of Contents
Introduction.................................................................................................................... 3
Section A: Current regulatory framework for Virtual Assets ............................................... 5
Section B.1: Proposed revisions to the VA framework ....................................................... 7
Section B.2: Discussion points relating to the VA framework........................................... 12
Section C: Criteria for Acceptance of Fiat-Referenced Tokens ........................................ 17
Section D: Scope of investible assets for Venture Capital Funds ..................................... 18
Annexes, appendices and attachment........................................................................... 19

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Why we are issuing this consultation paper

1. The Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market
   (“ADGM”) has issued this consultation paper to invite public comment on proposed amendments to its regulatory framework for Authorised Persons conducting Regulated Activities involving Virtual Assets (“VAs”) in ADGM (“VA Firms”) and to seek feedback on potential changes to that framework.
2. The paper also seeks feedback on the criteria to be applied in determining whether
   Fiat-Referenced Tokens (“FRTs”) issued by issuers outside ADGM should be accepted within ADGM and outlines a proposal to expand the scope of investments in which Venture Capital Funds (“VC Funds”) may invest.
3. The consultation paper is structured as follows:
   a) Section A provides a high-level summary of the FSRA’s current VA framework. b) Section B considers the future form of the FSRA’s VA framework.

• Section B.1 outlines several proposed policy updates and amendments
  to the VA framework, including a proposal to revise the process by which VAs are accepted for use within ADGM and proposed refinements to capital requirements and fees relevant to VA Firms.
• Section B.2 seeks feedback on several questions relevant to the
  development of the FSRA’s VA framework, including questions relating to staking and other emerging business models involving VAs. c) Section C seeks feedback on the criteria to be applied in determining whether FRTs issued by issuers outside ADGM should be accepted for use within ADGM. d) Section D outlines a proposal to expand the scope of investments in which VC Funds may invest.

4. Capitalised terms contained in this consultation paper have the meanings attributed
   to them in the FSRA’s Glossary Rulebook (“GLO”), unless otherwise defined in this consultation paper. Who should read this consultation paper
5. This consultation paper should be of particular interest to VA Firms, Authorised
   Persons intending to conduct Regulated Activities involving FRTs, Fund Managers of Introduction

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VC Funds, Applicants considering undertaking any of the foregoing activities, other Persons active in the VA sector, and their respective professional advisors. How to provide comments
6. All comments should be made in writing and sent to the mail address or email
address specified below. If sending your comments by email, please put the consultation paper number in the subject line. If relevant, please identify the organisation you represent in providing your comments. The FSRA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making any comments. Comments supported by reasoning and evidence will be given more weight by the FSRA. What happens next
7. The deadline for providing comments on these proposals is 31 January 2025. When
we receive your comments, we will consider whether any modifications to the proposed amendments are required. The Board of ADGM and the FSRA will then proceed to enact the proposed amendments in their final form. You should not act on the proposed amendments described in this consultation paper until the relevant Regulations and Rules are amended and we will issue a notice on our website when that happens. Comments to be addressed to:
Consultation Paper No. 11 of 2024
Financial Services Regulatory Authority
Abu Dhabi Global Market
ADGM Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: fsra.consultation@adgm.com

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1. When the FSRA introduced its regulatory framework for VAs in 2018, it comprised a
   single Regulated Activity, that of Operating a Crypto-Asset Business (“OCAB”). Firms engaging in OCAB activities were required to meet specific prudential and conduct requirements, which included the use of only “accepted” VAs with which such firms could serve clients. Accepted VAs (i.e., AVAs) required prior FSRA approval, granted upon the satisfaction of certain qualifying criteria which focussed on risks inherent to the specific VA, as well as risks related to a specific firm’s proposed use of such VA. This two-stage approach meant that a VA could be approved for use by some VA Firms while not by others, depending on the adequacy of the systems and controls of the relevant VA Firm.
2. In 2020, the FSRA, with the benefit of a greater understanding of the scope of VA￾related activities in ADGM, replaced the Regulated Activity of OCAB with amended
   descriptions of the following Regulated Activities, which could be undertaken in relation to VAs, namely:
   a) Dealing in Investments as Principal; b) Dealing in Investments as Agent; c) Advising on Investments or Credit; d) Arranging Deals in Investments; e) Managing Assets; f) Providing Custody; g) Arranging Custody; and h) Operating a Multilateral Trading Facility (“MTF”).
3. As was the case under the OCAB regime, firms engaging in any of these Regulated
   Activities are expected to satisfy the activity-specific conduct of business and prudential requirements which apply to such Regulated Activity generally, as well as the additional VA-specific requirements set out in chapter 17 of COBS, referred to as the “VA framework” in this consultation paper. In addition, VA Firms remain limited to working with Accepted Virtual Assets (“AVAs”), which must satisfy certain criteria before being approved by the FSRA for use within ADGM. AVA assessment criteria
4. As currently outlined in the Guidance - Regulation of Virtual Asset Activities in
   ADGM (the “VA Guidance”), the following criteria are considered by the FSRA when
   Section A: Current regulatory framework for Virtual Assets

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a) Traceability / monitoring: whether the VA Firm is able to demonstrate the origin and destination of the specific VA, if the VA enables the identification of counterparties to each transaction, and if on-chain transactions in the VA can be adequately monitored; b) Maturity: the sufficiency, depth and breadth of demand, the proportion of the VA that is in free float, and the controls/processes to manage volatility of the VA; c) Security: consideration of whether the VA is able to withstand, adapt, respond to, and improve on its specific risks and vulnerabilities, including relevant factors/risks relating to its on-boarding or use (including size, testing, maturity, and ability to allow the appropriate safeguarding of secure private keys); d) Exchange connectivity: whether there are exchanges that support the VA; the jurisdictions of these exchanges and whether these exchanges are suitably regulated; e) Type of distributed ledger technology (“DLT”): whether there are issues relating to the security and/or usability of the DLT used by the VA; whether the VA leverages an existing DLT for network and other synergies, and, if not, whether a new DLT has been demonstrably stress tested; f) Innovation / efficiency: whether, for example, the VA helps to solve a fundamental problem, addresses an unmet market need or creates value for network participants; and g) Practical application/functionality: whether the VA possesses quantifiable functionality.
5. A number of these criteria are considered by the FSRA having regard both to the
features of the specific VA being assessed and to the relevant VA Firm’s systems and controls. For instance, even where a VA may be sufficiently traceable, it would not be considered an AVA acceptable for use by a VA Firm not possessing the necessary surveillance tools.

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Revisions to the process whereby VAs are accepted for use in ADGM
6. When the FSRA assumed responsibility for the assessment of each VA in 2018, its
decision was based on the potentially significant risks associated with a nascent VA sector and the relatively small universe of VAs in existence, of which only a limited number could meet the FSRA’s traceability requirements. Since the launch of the AVA approval process, the FSRA has approved 91 VAs as AVAs for use in ADGM.
7. The FSRA notes that the VA sector and the global regulatory landscape in respect
of VAs have rapidly developed since the creation of the AVA approval process, and VA Firms have gained experience with operating in a regulated environment, alongside which the technical, governance, risk management and compliance systems of VA Firms have improved. Therefore, at this juncture the FSRA considers it appropriate to permit VA Firms to play a more significant role in the assessment of VAs for use as AVAs in ADGM, building upon the existing requirement on VA Firms to understand the VAs they propose to use and conduct a risk assessment prior to offering any product or service related to a VA to their clients. Self-assessment and notification
8. For this purpose, the FSRA proposes to replace the current FSRA-led AVA approval
model with a self-assessment and notification process. This would require each VA Firm to self-assess each VA it proposes to use in the conduct of a Regulated Activity against the current AVA assessment criteria, applying weighting to each criteria consistent with the risks posed by the activities undertaken by such VA Firm, in accordance with revised VA Guidance which the FSRA will publish in tandem with the proposed legislative amendments.
9. Before working with a VA, each VA Firm would also be required to notify the FSRA
and provide information describing the due diligence process that the VA Firm has conducted in respect of that VA. Such supporting information would be required to demonstrate how the VA Firm concluded that the AVA assessment criteria were satisfied in respect of that VA. The FSRA would prescribe the format of the required notification, including details of the information to accompany the notification. Non-objection by the FSRA
10. The FSRA will raise an objection to the proposed use of any VA if it is of the view that
the VA does not comply with applicable assessment requirements or, in its view,
Section B.1: Proposed revisions to the VA framework

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Confidential the VA Firm has not conducted adequate due diligence. Where the FSRA raises an objection, the relevant VA Firm may choose to engage with the FSRA to determine whether it is possible to remediate the grounds for the FSRA’s objection.
11. Where the FSRA does not raise a written objection to a VA identified by such VA Firm
within twenty business days, or where the grounds for any FSRA objection are addressed to the FSRA’s satisfaction, the VA will qualify as an AVA for such firm. Every VA Firm must publish a current list of the AVAs it uses on its website. Ongoing obligations
12. VA Firms will be required to continuously monitor its firm-specific suite of AVAs to
ensure that such AVAs continue to satisfy AVA assessment criteria. Where the FSRA is of the view that a particular VA should no longer be considered an AVA, either for all VA Firms or a particular VA Firm, the FSRA may take appropriate regulatory action.
13. In addition, as part of the FSRA’s ongoing supervisory activities, each VA Firm is
likely to be subject to enhanced reporting requirements concerning its AVAs. Current AVAs
14. It is proposed that all AVAs approved for use by VA Firms as at the date of
implementation of these changes would retain their AVA status for such firms without the need for formal assessment or notification to the FSRA. However, such AVAs must be included on the list of AVAs published by a VA Firm on its website and will be subject to the ongoing monitoring and compliance requirements the FSRA plans to introduce.
15. The proposed amendments to COBS Rule 17.2 are set out in Appendix 1.
Question 1
Do you agree with the proposed changes to the process by which VAs are accepted for use within ADGM? Revisions to capital requirements for VA Firms Current approach
16. COBS Rule 17.3 specifies that the capital requirements set out in Rule 3.2 of MIR
apply to an Authorised Person conducting a Regulated Activity in relation to VAs. In accordance with that, an Authorised Person must hold the following amount of Capital Resources:
a) an amount equal to 6 months' operational expenses; plus

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17. In practice, as outlined in the VA Guidance, the FSRA has applied proportionality in
considering whether the additional capital buffer must be held, based on the size, scope, complexity and nature of the activities and operations of the Authorised Person. For VA Firms, the FSRA has considered that an Authorised Person Operating an MTF must hold regulatory capital equivalent to 12 months’ operational expenses, i.e. it is subject to the additional capital buffer requirement. A capital requirement of 6 months’ operational expenses has been applied to other VA Firms. Proposed Revisions
18. The VA ecosystem in ADGM has grown since the launch of the VA regulatory
framework in 2018 and now comprises a range of market participants and a variety of different business models. In the course of supervising those VA Firms, the FSRA has gained supervisory insights enabling it to calibrate capital requirements to better match the prudential risks facing those firms.
19. In respect of both VA Firms and non-VA Firms engaged in Operating an MTF, the
FSRA proposes that the relevant capital requirements remain in MIR 3.2 and that the additional capital buffer would generally not be applied, absent specific circumstances. This is considered appropriate as the FSRA requires the segregation of custody operations in a separate legal entity from MTF operations, enabling a simpler orderly wind-down of the Operator of a MTF in the event of insolvency.
20. For all other Regulated Activities conducted in relation to VAs as referred to above,
the FSRA proposes that the capital requirements be detailed in Chapter 3 of PRU. For all such Regulated Activities, other than that of Providing Custody, the FSRA considers that the same capital requirements should apply as those applicable to Authorised Persons carrying on the same Regulated Activities in relation to non￾VAs, on the basis that the associated prudential risks are similar in nature.
21. For VA Firms Providing Custody, the FSRA proposes a capital requirement of the
higher of a Base Capital Requirement (“BCR”) of $250,000 or an Expenditure Based Capital Minimum (“EBCM”) of 6 months’ Annual Audited Expenditure (“AAE”). The proposed BCR is the same as that applicable to Authorised Persons Providing Custody in relation to non-VAs and the proposed ECBM is broadly aligned with the current capital requirement of 6 months’ operational expenses under MIR 3.2, although there may be some marginal differences in how “operational expenses” and AAE are calculated.

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22. The table below summarises the FSRA’s current capital requirements for VA Firms
and the proposed amendments to Rule 3.7.1 of PRU, with the detailed amendments set out in Appendix 2. Regulated Activity Current – operational expenses Proposed Prudential Category 2 Dealing in Investments as unmatched Principal 6 months’ operational expenses (“Opex”) Higher of:
(i) BCR of $2 million
(ii) Risk Capital
Requirement (“RCR”)
Prudential Category 3A

• Dealing in Investments as
  Matched Principal
• Dealing in Investments as
  Agent
  Higher of:
  (i) BCR of $500,000
  (ii) RCR
  Prudential Category 3C
  Providing Custody
  Higher of:
  (i) BCR of $250,000
  (ii) EBCM of 26/52nds of AAE
  Prudential Category 3C
  Managing Assets
  Higher of:
  (i) BCR of $250,000
  (ii) EBCM of 18/52nds of AAE if holding Client Assets or 13/52nds of AAE otherwise Prudential Category 4
• Arranging Deals in
  Investments
• Advising on Investments or
  Credit
• Arranging Custody
  Higher of:
  (i) BCR of $10,000
  (ii) EBCM of 6/52nds of AAE
  Prudential Category 4
  Operating an MTF
  12 months’ Opex 6 months’ Opex¹
  Note

1. Subject to the addition of a further 6 months’ operational expenses if required by the FSRA
   Future considerations
2. The FSRA is currently considering the proportionality of the prudential framework
   applicable to Category 3 and 4 firms more generally, including applicable capital requirements. Changes considered as part of that work would also affect capital requirements for VA Firms belonging to those categories. The FSRA intends to publish a consultation paper on that topic in 2025. Question 2

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Do you agree with the proposed changes to the capital requirements applicable to VA Firms? Revisions to fees
24. The current formulations of FEES Rules 3.17.1(a) and 3.17.2(a) refer to an additional
fee being levied for each Regulated Activity undertaken in relation to VAs, across both application fees and annual supervision fees.
25. Based on the FSRA’s experience of, and to better reflect, both the work involved in
assessing applications and the allocation of resources for the supervision of VA Firms, it is proposed to charge the current single supplemental application or annual supervision fee regardless of the number of Regulated Activities undertaken in relation to VAs.
26. For example, an Applicant that wishes to carry on the Regulated Activities of
Dealing in Investments as unmatched Principal and of Arranging Deals in Investments, both in relation to VAs, will be subject to the following fee schedule at the application stage and thereafter as an Authorised Person. Application FEES Rule Fee (USD k) Dealing in Investments as unmatched Principal 3.4.1 40 Arranging Deals in Investments 3.8.1(c) 10 Virtual Assets activity 3.17.1(a) 20 Total 70 Annual Supervision1 Dealing in Investments as unmatched Principal 3.4.2 50 Arranging Deals in Investments 3.8.2(c) 10 Virtual Assets activity 3.17.2(a) 15 Total 75 Note

1. Prorated for period from time of authorisation until end of first calendar year
2. The proposed amendments to FEES are set out at Annex B.
   Question 3

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Do you have any comments on the proposed change to fee requirements for VA Firms? Enhancing FSRA powers in relation to VAs and introducing express prohibition on the use of privacy tokens and algorithmic stablecoins in ADGM Product intervention power
28. To enhance its supervisory powers in respect of VAs, the FSRA proposes to
introduce a new power within section 5A of FSMR enabling the FSRA to halt dealings in a particular VA. This product-specific power would apply to persons in ADGM generally, not only Authorised Persons conducting a Regulated Activity. For example, this power may be used in circumstances where, for example, the FSRA considers that a particular VA poses a risk to the public, or where AML concerns have arisen. The FSRA proposes that FRTs would also fall within the scope of this new power. Prohibited products
29. In addition, and consistent with the FSRA’s existing policy in respect of algorithmic
stablecoin tokens and privacy tokens, the FSRA proposes including an express prohibition in FSMR on the use of algorithmic stablecoin tokens, privacy tokens, or any digital asset employing similar technology in carrying on any Regulated Activity in ADGM.
30. The proposed amendments to section 5A of FSMR are set out in Annex A.
Question 4
Do you have comments on the proposals outlined in paragraphs 28 and 29? AVA assessment criteria
31. The current AVA assessment criteria in paragraph 4 above reflect certain risks,
including the ability to address AML-type risks through tracing, the ability to secure VAs held on behalf of clients as well as a consideration of VA-specific risks as a form of investment. 1 See VA Guidance, paragraphs 25 and 165.
Section B.2: Discussion points relating to the VA framework

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32. The FSRA is of the view that the existing criteria remain appropriate: however, we
seek the views of the VA sector concerning the relevance and relative importance of those assessment criteria in the context of different Regulated Activities. The FSRA intends to issue additional guidance in future on the relevance and relative importance of such criteria alongside proposed amendments to the VA framework. Question 5 Do you agree with the current AVA assessment criteria? Question 6 Do you consider that certain criteria should only be applicable to particular Regulated Activities? Question 7 Do you consider that some or all of the AVA assessment criteria should apply to Regulated Activities other than those referred to in paragraph 2? Scope of the Regulated Activity of Providing Custody
33. The scope of the Regulated Activity of Providing Custody under FSMR currently
encompasses Financial Instruments, VAs and Spot Commodities. As outlined above, all VAs held in custody must be AVAs.
34. The FSRA welcomes feedback on whether Authorised Persons engaged in Providing
Custody should be permitted to hold digital assets other than AVAs. Question 8 Should custodians be permitted to hold a broader range of digital assets? If so, what assets should custodians be permitted to hold? Staking and other emerging business models for VA Firms
35. As the global landscape for VAs continues to evolve, new VA related activities and
business models have emerged. One such activity is that of “staking”, which is a process by which users or participants of a blockchain network or protocol participate in a Proof-of-Stake (“PoS”) consensus mechanism.
36. The FSRA has summarised the features of certain staking business models and the
key risks associated with staking activity in Attachment 1.
Key factors for regulation of staking
37. The FSRA considers that the two key factors in determining whether an activity
involving staking should be considered a Regulated Activity in future are the level of

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Confidential intermediation involved, and the extent to which the staking activity is carried out by way of business for non-related participants. The extent to which these two factors are present in the activity would depend on whether:
(a) the intermediary has control over the staked VAs of the participants, e.g. through custodial staking; or (b) the intermediary has discretion or responsibility over the deployment of clients’ VAs in the staking activities, e.g., deploying VAs into a staking infrastructure or decentralised finance (“DeFI”) protocol.
38. Based on these key factors and having regard to the business models described in
Attachment 1, the FSRA outlines below its preliminary considerations in respect of the regulatory perimeter for staking-related activities. (a) Solo staking should not be a Regulated Activity as participants are operating without intermediation and are carrying on staking on their own account. (b) Staking-as-a-service should not be a Regulated Activity where the technology service provider is only offering technical services to set up, operate and maintain the staking infrastructure without control over the participants’ VAs. In this case, the participant selects the validator intended to validate new blockchain transactions, stakes on their own account and has control over its VAs. (c) Pool Operators and Centralised Intermediaries should be required to hold a Financial Services Permission (“FSP”), as they would have either custody of the staked VAs or discretion in respect of the deployment of such VAs. In this regard, the FSRA considers that such staking activities may come within scope of either the Regulated Activity of Providing Custody or that of Managing Assets.
39. Based on the above analysis, the FSRA is considering permitting an Authorised
Person which holds an FSP to Provide Custody and/or Manage Assets in respect of VAs to be able to undertake staking activities on behalf of their clients. Specific regulatory requirements and restrictions for staking activities
40. The FSRA may also consider introducing certain staking-specific requirements into
its regulatory framework. Such additional requirements could include a requirement to disclose to clients staking-specific risks, a requirement to conduct due diligence in respect of the custodian’s / validator’s suitability in providing the staking services for clients, a requirement to conduct due diligence and risk assessment on the relevant PoS protocol and a requirement to have insurance

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41. The FSRA may also consider introducing certain restrictions on the business
models of Authorised Persons undertaking staking activities to mitigate contagion and prudential risks. Other yield-generating strategies
42. The FSRA notes that other yield-generating strategies, such as yield farming and
liquidity mining, are often referred to loosely in the VA sector as staking. The FSRA considers these strategies to be distinct activities that differ significantly from staking in their risk and reward profile. While the above analysis focuses on regulatory considerations relevant to staking, the FSRA welcomes comments on the regulatory considerations which should inform its approach to yield farming and other yield-generating activities. Pending the formalisation of a regulatory framework for such activities, the FSRA will continue to work with firms interested in offering such services on a case-by-case basis. VA borrowing/lending services and margin trading
43. Finally, the FSRA is aware of other business models offering what are termed “VA
borrowing and lending services” and other financing arrangements, including “collateralised VA financing” i.e. margin trading. VA borrowing and lending activities generally involve:
(a) a VA owner (“Lender”) entering into an agreement with a VA service provider (“VA Intermediary”) to lend out the VAs custodied with the VA Intermediary for a fee or yield. The VA Intermediary will lend out the VAs to others (“Borrowers”) for liquidity or investment purposes. The Borrower is required to put up collateral in the form acceptable to the VA Intermediary; (b) The VA Intermediary charges a fee, such as a spread or premium on the loan, in return for facilitating the transaction. The borrowing and lending activities are governed by lending agreements, which set out the terms of loan including duration, interest rates, lender’s fees, and the nature of the collateral; and (c) The VA Intermediary may also allow a client to purchase VAs on margin (i.e. collateralised VA financing), or to settle VA transactions on behalf of the client as part of cash flow management or settlement obligations.
44. The FSRA considers that the key risks associated with such activities include
counterparty risk, market risk in respect of leveraged trading, liquidity risk and conduct-related risk. Certain risks may also arise due to the digital nature of VA

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45. The FSRA considers that that there are similarities of VA borrowing and lending with
Securities borrowing and lending in traditional finance. In Securities borrowing and lending, the Securities owner / lender will enter into an agreement with a dealing intermediary to lend out Securities in return for a yield payment. The borrower will enter into an agreement with the dealing intermediary to borrow Securities, setting forth the terms of the loan with appropriate collateral placed with the dealing entity.
46. Such Securities borrowing and lending activities, which include activities of
transaction execution and settlement, will generally be undertaken as part of Securities dealing activities. Based on the above analysis, the FSRA is considering permitting an Authorised Person which holds an FSP to Deal in Investments or Providing Custody in respect of VAs to be able to undertake such activities on behalf of their clients.
47. The FSRA welcomes comments on whether such models may involve activities
other than VA borrowing and lending and margin trading and seeks views on the key associated risks and regulatory considerations that should inform its approach to such business models. Question 9 Do you have any comments on the VA staking business models identified by the FSRA? Are you aware of additional business models? Question 10 Do you have any comments on the preliminary considerations outlined by the FSRA in respect of regulating VA staking, including the Regulated Activities that may apply to such activity? Question 11 Do you have any comments on the key risks that relate to VA staking? Are there are specific regulatory requirements that should be introduced for that activity? Question 12 Do you have any comments on yield farming and other yield-generating activities involving VAs? What are the considerations that should inform the FSRA’s regulatory approach to such activities?

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Question 13
Do you have any comments relating to business models offering VA borrowing and lending and other forms of financing arrangement and the key associated risks? What are the considerations that should inform the FSRA’s regulatory approach to such business models?
48. As noted in Consultation Paper No. 7 of 2024, the FSRA’s treatment of FRTs
distinguishes FRTs from VAs on the basis that FRTs are intended to operate as a stable medium of exchange, while VAs are viewed by the FSRA as a form of investment, similar to a commodity. It was noted in that consultation paper that Authorised Persons transacting in FRTs will be prohibited from using FRTs which have not been accepted by the FSRA for use within ADGM (“Accepted FRTs”), which will be identified on a list maintained and published by the FSRA, which may be relied upon by all firms.
49. The FSRA does not intend to restrict acceptance to FRTs issued only by issuers
located in ADGM (“Domestic FRTs”). However, the FSRA notes that FRTs issued by issuers outside ADGM (“Foreign FRTs”) may not be subject to standards as stringent as those applied to Domestic FRTs.
50. Given this, Foreign FRTs approved as Accepted FRTs for use within ADGM will be
categorised as such to distinguish them from Domestic FRTs, which are subject to FSRA standards. All Authorised Persons that use Foreign FRTs in conducting Regulated Activities will have to disclose to their Clients that such Accepted FRTs are not subject to the FSRA’s requirements for issuers of Domestic FRTs.
51. The FSRA proposes that Accepted FRTs will be subject to similar assessment
criteria as employed for the assessment of VAs. However, given the smaller number of such requests expected from Authorised Persons for the acceptance of FRTs, the FSRA will conduct individual assessments of FRTs. Question 14 Do you agree with the proposed approach to enabling Authorised Persons to transact in FRTs?
Section C: Criteria for Acceptance of Fiat-Referenced Tokens

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Question 15
Do you have any view on the criteria to be applied when considering whether a Foreign FRT should be considered as an Accepted FRT? Current approach
52. The FSRA launched a dedicated regulatory framework for VC Funds in May 2017,
with the objective of supporting the development of a vibrant start-up ecosystem in ADGM. Recognising that the method of operation and risk profile of VC Funds may be distinguished from other investment funds, the framework streamlines certain regulatory requirements, while imposing investment and operating restrictions.
53. The framework means that VC Funds are restricted to operate as closed-ended
funds, available only to Professional Clients, and may currently invest only in the Securities of companies in an early stage of development, where those Securities are not admitted to trading on an exchange. Proposed revisions
54. Based on feedback from the fund management sector, as well as the emergence of
new methods used by start-ups to raise capital, the FSRA proposes to expand the scope of investments in which a VC Fund may invest to include VAs, instruments enabling the Fund to acquire Securities or VAs, certain governance tokens and utility tokens, any representation of value in the form of digital tokens and the right to buy certain tokens, where any of the foregoing have been issued by a start-up business.
55. The FSRA notes that start-up businesses may issue such tokens, as well as
agreements enabling the VC Fund to acquire Securities or digital tokens issued by the start-up business in the future, such as simple agreements for future equity (“SAFEs”), simple agreements for future tokens (“SAFTs”) and token warrants.
56. The draft legislative amendments to FUNDS are set out in Appendix 3.
Question 16
Do you agree with the proposal to allow managers of VC Funds to invest in instruments or tokens issued by start-up businesses which do not currently qualify as a Security under section 258 of FSMR?
Section D: Scope of investible assets for Venture Capital Funds

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The proposed legislative amendments are set out in the following documents.

• Annex A - Financial Services and Markets Regulations 2015 (FSMR)
• Annex B - Fees Rules (FEES)
• Appendix 1 - Conduct of Business Rulebook (COBS)
• Appendix 2 - Prudential - Investment, Insurance Intermediation and Banking
  Rules (PRU)
• Appendix 3 - Fund Rules (FUNDS)
  Attachment 1 outlines certain regulatory considerations relevant to VA staking. Annexes, appendices, and attachment