Consultation Paper No. 2 of 2018 – Introduction of Crypto Asset Regulatory Framework in ADGM

CONSULTATION PAPER
NO. 2 OF 2018
30 APRIL 2018
INTRODUCTION OF CRYPTO ASSET
REGULATORY FRAMEWORK IN ADGM

CONTENTS
INTRODUCTION..........................................................................................................................3
BACKGROUND............................................................................................................................6
PROPOSED LEGISLATIVE FRAMEWORK......................................................................................7
REGULATORY APPROACH...........................................................................................................................7
RISK MITIGATION..........................................................................................................................................8
NEW REGULATED ACTIVITY........................................................................................................................9
REGULATORY REQUIREMENTS............................................................................................................... 11
SUPPLEMENTARY GUIDANCE................................................................................................................. 11
RISK-BASED FEE STRUCTURE .................................................................................................................. 12
DRAFT AMENDMENTS TO OTHER FSRA RULEBOOKS...................................................................... 13

INTRODUCTION
WHY ARE WE ISSUING THIS PAPER?

1. The Abu Dhabi Global Market ("ADGM") together with the Financial
   Services Regulatory Authority ("FSRA") have issued this Consultation Paper to invite public feedback and comments on proposed amendments to ADGM regulations and specific FSRA rulebooks.
2. In October 2017, ADGM was the first jurisdiction in the MENA region to
   publicly support the development of certain digital assets, including Initial Coin Offerings (ICOs). Noting the value that ICOs can generate in transforming capital raising activities and the capital markets landscape generally, ADGM clarified its regulatory treatment of ICOs in respect of coins or tokens that have the characteristics of a Security. The guidance also confirmed the FSRA’s treatment of crypto assets as commodities, and clarified that derivatives over crypto assets would be regulated within ADGM.
3. In February 2018, the FSRA issued a press release informing the market that
   it is ‘reviewing and considering the development of a robust, risk￾appropriate regulatory framework to regulate and supervise activities of virtual currency exchanges and intermediaries’.
4. The FSRA would now like to invite comments on its proposed regulatory
   framework for the regulation of crypto asset activities conducted in or from ADGM, including exchanges, custodians and other intermediaries engaged in crypto asset activities (the “Spot Crypto Asset Framework”).
5. The proposed framework involves amendments to the ADGM’s regulations
   and FSRA Rules, including:
   a. the introduction of a new Regulated Activity of Operating a Crypto Asset Business (“OCAB”), to be set out in Chapter 17B of the Financial Services and Markets Regulations 2015 (“FSMR”); b. amendments to the FSRA Fees Rules 2015 (“FEES”) to introduce fees for the new Regulated Activity of Operating a Crypto Asset Business;

c. amendments to the FSRA Conduct of Business Rules (“COBS”) to
introduce a new Chapter 17 addressing specific requirements for the Regulated Activity of Operating a Crypto Asset Business; d. amendments to the FSRA Market Infrastructure Rulebook (“MIR”) proposing rules applicable to Recognised Investment Exchanges operating a Crypto Asset Exchange; and e. amendments to terms defined in FSMR and the FSRA Glossary (“GLO”).
6. The proposed Spot Crypto Asset Framework is set out in Annex A and
Appendices 1 - 4 to this Paper.
7. Unless otherwise defined, capitalised terms referred to in this Paper have
the meanings attributed to such terms as contained in FSMR or GLO.
WHO SHOULD READ THIS PAPER?
8. This Consultation Paper may be of interest to a number of parties, including
individuals, organisations and investors looking to carry on crypto asset activities in or from ADGM and their professional advisers, as well as Recognised Investment Exchanges wishing to operate a Crypto Asset Exchange within ADGM. HOW TO PROVIDE COMMENTS
9. All comments should be in writing and sent to the address or email
specified below. If sending your comments by email, please use the Consultation Paper number in the subject line. If relevant, please identify the organisation you represent when providing your comments.
10. 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 FSRA.

WHAT HAPPENS NEXT?
11. The deadline for providing comments on this proposal is 28 May 2018.
Once we receive your comments, we will consider whether any modifications are required to the proposed amendments to the ADGM’s legislative framework. The Board and FSRA will then proceed to enact the proposed regulatory framework. We will issue a notice on our website when this happens. COMMENTS TO BE ADDRESSED TO:
Consultation Paper No. 2 of 2018
Financial Services Regulatory Authority
Abu Dhabi Global Market Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: consultation@adgm.com

BACKGROUND

1. Technological innovation is transforming the financial services industry.
   Rapid advances in new technologies, including the development of distributed ledger technologies and creation and utilisation of crypto assets, have provided opportunities for significant change and disruption to financial services and other related activities globally.
2. From being almost non-existent ten years ago, crypto assets have now
   become an asset class in their own right, and are increasingly recognised as a medium of exchange for the payment of goods and services. Over 200 trading venues now exist worldwide for spot trading of over 1500 crypto assets.
3. To date, regulators have been monitoring developments in the trading
   activities of crypto assets very closely, given the significant risks involved, including the potential for criminal activity and fraud (e.g., tax evasion, money laundering and counter-terrorist financing (AML/CTF)) and significant consumer losses (due to price volatility and technology governance issues), as well as custody issues, information asymmetry and a lack of market integrity.
4. Worldwide, regulators have taken divergent approaches to the regulation
   of crypto asset spot trading:
    The majority of regulators do not licence spot crypto asset activities, focusing rather on AML/CTF risks;  In some jurisdictions regulators have banned spot trading of crypto assets; and  In a limited number of jurisdictions regulators have licenced entities undertaking crypto asset activities and sought to take a more holistic approach to their regulation.
5. This year has seen a significant shift in the position of regulators in relation
   to spot trading of crypto assets. The G20 has required that recommendations for the effective regulation of spot trading be put

forward by July 2018 and a general consensus appears to be forming amongst regulators that a global standard is required for the regulation of crypto asset spot trading. PROPOSED LEGISLATIVE FRAMEWORK REGULATORY APPROACH
6. Noting the growing global consensus that spot trading of crypto assets
should be regulated, the FSRA has sought to implement an appropriate and effective regulatory regime.
7. Based on its engagement with industry experts, one of the principal issues
that the FSRA has identified is that crypto asset markets have so far been predominately ‘retail’, and therefore highly volatile in nature, with institutional players remaining on the sidelines due to their concerns over current regulatory controls.
8. In formulating the proposed Spot Crypto Asset Framework, the FSRA has
identified and sought to address each of the key risks associated with spot crypto asset activities appropriately, in order to create a comprehensive framework so as to allow for both conventional institutional players as well as large crypto asset players to operate in ADGM.
9. While extremely important, the FSRA believes that the regulation of
AML/CTF/KYC risks alone will not sufficiently mitigate certain wider Crypto Asset related risks, and therefore would not allow us to meet our medium to long term regulatory objectives.
10. In order to provide regulatory certainty to operators, participants, and
investors both institutional and retail, engaged in crypto asset activities, the FSRA has addressed issues around consumer protection, custody, technology governance, disclosure/transparency, Market Abuse, and by applying controls over Crypto Asset Exchanges such that they are regulated in a manner similar to how securities exchanges are regulated globally.

11. By extending our regulatory oversight in this way, FSRA’s aim is to establish
    a first-in-the-world crypto asset market that all relevant players are comfortable participating in. RISK MITIGATION
12. The FSRA has identified five main risk areas associated with spot Crypto
    Asset markets, and has developed mitigations for each of these risks, as identified below. RISK MITIGATION STRATEGY AML/CTF/TAX The FSRA AML Rulebook applies in full to the new Regulated Activity of Operating a Crypto Asset Business (OCAB). Entities engaged in OCAB must consider their reporting obligations in relation to FATCA and Common Reporting Standards. CONSUMER PROTECTION All material risks associated with Crypto Assets generally, each particular Crypto Asset, and an OCAB entities’ products, services and activities must be disclosed. TECHNOLOGY GOVERNANCE Systems and controls in relation to:
     Crypto Asset wallets
     Private keys
     Origin and destination of Crypto Asset funds  Security  Risk management. ‘EXCHANGE-TYPE’ ACTIVITIES Crypto Asset Exchanges will be regulated in a manner similar to FSRA’s regulation of Multilateral Trading Facilities (MTFs), and will be required to have in place, among other requirements, the following:
     Market surveillance

 Settlement processes
 Transaction recording
 Transparency & public disclosure mechanisms
 Exchange-like operational systems and controls (including in relation to access). CUSTODY Crypto Asset Custodians will be regulated in a manner similar to FSRA’s regulation of ‘conventional’ custodians. Changes have been made to include Crypto Assets as Client Assets and Investments, and to require more frequent reconciliations/ reporting. NEW REGULATED ACTIVITY
13. To implement the proposed Spot Crypto Asset Framework, the FSRA
proposesto introduce a new Regulated Activity of Operating a Crypto Asset Business. This will differentiate the regulation of Crypto Asset activities from the FSRA’s current regulatory framework which was designed with traditional Financial Instruments in mind.
14. The new Regulated Activity would include:
(a) General activities, such as -
 buying or selling Accepted Crypto Assets(see paragraph 17 below) as principal or agent;  making arrangements with a view to another person buying, selling or providing custody of Accepted Crypto Assets; and  advising on the merits of buying or selling Accepted Crypto Assets. (b) Specific activities, that will attract additional regulatory requirements, namely -  Operating a Crypto Asset Exchange; or

 Operating as a Crypto Asset Custodian.
15. OCAB will not cover certain activities, such as –
 the creation or administration of Crypto Assets that are not Accepted Crypto Assets;  the development, dissemination or use of software for the purpose of creating or mining Crypto Assets;  the transmission of Crypto Assets; and  loyalty point schemes denominated in a Crypto Asset.
16. The FSRA’s definition of ‘Crypto Assets’ is based on the well accepted
definition of ‘virtual currency’ of the Financial Action Task Force (FATF).
17. FSRA would have a general power to determine Accepted Crypto Assets –
those Crypto Assets that will be permitted in relation to OCAB activities within ADGM, in order to prevent higher-risk activity involving or relating to illiquid or immature Crypto Assets, by – (a) applying a market capitalisation/maturity threshold (proposed to be of at least 4 USD billion); and (b) retaining sufficient discretion for the FSRA to take additional factors (e.g., security, connectivity, market demand/volatility, type of distributed ledger, innovation and practical application) into account in order to assess the suitability of Crypto Assets based on our risk appetite. ISSUES FOR CONSIDERATION Q1: DO YOU AGREE WITH PROPOSED APPROACH TO REGULATE CRYPTO ASSET EXCHANGES AND CUSTODIANS AS WELL AS INTERMEDIARIES? Q2: DO YOU AGREE WITH THE PROPOSED DISTINCTION BETWEEN GENERAL ACTIVITIES CAPTURED WITHIN THE REGULATED ACTIVITY OF OCAB AND SPECIFIC ACTIVITIES (SUCH AS OPERATING A CRYPTO ASSET EXCHANGE OR A CRYPTO ASSET CUSTODIAN) ATTRACTING ADDITIONAL REGULATORY REQUIREMENTS?

18. Please refer to Annex A for the proposed amendments to FSMR, including
    the new Regulated Activity, definitions and consequential amendments. REGULATORY REQUIREMENTS
19. Once granted a Financial Services Permission, OCAB entities will be
    regulated under the FSMR and the FSRA Rulebooks as Authorised Persons.
20. To implement the Spot Crypto Asset Framework, the FSRA proposes to
    introduce a new Chapter 17 to COBS setting out additional Rules applicable to the OCAB activity. These requirements will be applied proportionately, depending on the level of risk that the proposed activity poses, with -  general obligations imposed on all OCAB entities, including dealers and advisors (such as AML/CTF protections, capital requirements, technology governance and controls, and specific disclosure requirements); and  further obligations applicable to Crypto Asset Exchanges and Crypto Asset Custodians in addition to the general obligations (in the case of a Crypto Asset Exchange, specific MTF obligations, including market surveillance, settlement processes, transaction recording and transparency requirements, and in relation to a Crypto Asset Custodian, additional client asset protections).
21. Please refer to Appendix 1 for the proposed amendments to COBS.
    SUPPLEMENTARY GUIDANCE
22. The features and regulatory requirements of the Spot Crypto Asset
    Framework, as well as FSRA’s approach to the regulation of OCAB activities, ISSUES FOR CONSIDERATION Q3: DO YOU HAVE ANY CONCERNS ABOUT THE PROPOSAL FOR THE FSRA TO DETERMINE ACCEPTED CRYPTO ASSETS FOR THE PURPOSE OF ENGAGING IN THE OCAB ACTIVITY IN OR FROM THE ADGM? Q4: HAVE THE MARKET CAPITALISATION AND OTHER DISCRETIONARY FACTORS THAT FSRA MAY TAKE INTO ACCOUNT BEEN APPROPRIATELY SET?

will be set out in detail in Guidance. The FSRA will publish this Guidance shortly. RISK-BASED FEE STRUCTURE
23. The proposed risk-based fee structure for the new Regulated Activity is
tiered, as set out in Table 1 below:
Table 1
Activity Authorisation
Fee
Supervision
Fee
Trading Levy
OCAB - General $20,000 $15,000 N/A
Operating a Crypto
Asset Exchange
$125,000 $60,000 0.0015% of daily trading value, payable monthly
24. The proposed fee structure sets a high watermark in order to –
 recognise the substantial risks posed by the new Regulated Activity; and  cater to those Applicants who are able to demonstrate their willingness and ability to comply with the requirements of the Spot Crypto Asset Framework.
25. The higher authorisation and supervision fees and Trading Levy proposed
for Crypto Asset Exchanges reflect a heightened supervisory burden for FSRA in terms of human resources, technology and technical costs.
26. Please refer to Appendix 2 for the proposed amendments to FEES.
27. The FSRA is also considering the establishment of a Compensation Scheme
in the future, aimed to assist with compensation of Crypto Asset Exchange clients who have suffered a loss in certain circumstances, and is proposing to apply a proportion of the Trading Levy towards this scheme. The FSRA is currently considering the manner in which such a scheme would be governed, the circumstances in which it would offer an avenue of redress for clients and the appropriate timeframe for the scheme to be established. We will update the market on the developments in this regard in due course.

DRAFT AMENDMENTS TO OTHER FSRA RULEBOOKS
28. FSRA also proposes to introduce a number of consequential amendments,
including - a. amendments to MIR, proposing rules applicable to Recognised Investment Exchanges operating a Crypto Asset Exchange, as set out in Appendix 3 to this Paper; and b. new definitions associated with the Spot Crypto Asset Framework, mirroring the definitions introduced in section 258 of the FSMR, in GLO, as set out in Appendix 4 to this Paper. ISSUES FOR CONSIDERATION Q7: DO YOU HAVE ANY CONCERNS ABOUT ANY OF THESE PROPOSALS? IF SO, WHAT ARE THESE CONCERNS AND HOW SHOULD THEY BE ADDRESSED? ISSUES FOR CONSIDERATION Q5: DO YOU HAVE ANY COMMENTS ON THE PROPOSED FEES IN RELATION TO EACH CRYPTO ASSET ACTIVITY? Q6: DO YOU HAVE ANY COMMENTS ON THE PROPOSAL TO ESTABLISH A COMPENSATION SCHEME OR VIEWS ON THE MANNER IT OUGHT TO BE GOVERNED?

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Annex A
FINANCIAL SERVICES AND MARKETS
(AMENDMENT NO 2) REGULATIONS 2018
*In this Annex, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Annex A
FINANCIAL SERVICES AND MARKETS (AMENDMENT NO 2) REGULATIONS 2018 Regulations to amend the Financial Services and Markets Regulations 2015. Date of Enactment: [] 2018 The Board of Directors of the Abu Dhabi Global Market, in exercise of its powers under Article 6(1) of Law No. 4 of 2013 concerning the Abu Dhabi Global Market issued by His Highness the Ruler of the Emirate of Abu Dhabi, hereby enacts the following Regulations–

1. Amendments to the Financial Services and Markets Regulations 2015
   Part 2 Rules and Guidance
   Chapter 1 Rule-making Powers
   ….
2. Islamic Finance Rules
   The Regulator may make Rules applying to Authorised Persons— (a) prescribing the requirements that must be met by a person applying for a Financial Services Permission to carry on Islamic Financial Business; (b) providing for such requirements to be varied in cases where an Application is made by an Applicant which is, at the time at which it submits its Application, regulated in a jurisdiction other than the Abu Dhabi Global Market; (c) prescribing certain persons or categories of person to be exempted from the requirements referred to in paragraph (a); and (d) prescribing exemptions from any requirements imposed by or under these Regulations under paragraph (a) that are to be— (i) limited to certain Islamic Financial Business activities or Specified circumstances; or (ii) subject to certain conditions and restrictions as the Regulator may determine. 5A. Operating a Crypto Asset Business (1) The Regulator may by Rules prescribe – (a) Accepted Crypto Assets that meet the requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market; (b) requirements and factors that, in the opinion of the Regulator, are to be taken into account in determining whether or not the relevant Crypto Asset meets the requirements to be considered an Accepted Crypto Asset; (c) the requirements applicable to the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market; and

Annex A
(d) such additional requirements as the Regulator considers appropriate that Authorised Persons Operating a Crypto Asset Business must comply with, including any requirements imposed under the Rules made under these Regulations. (2) Without limiting the generality of its powers the Regulator may, by written notice— (a) exclude the application of any requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market imposed by the Rules; or (b) impose on an Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market any additional obligations that the Regulator considers appropriate; or (c) require an Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market to take such action as is specified by the Regulator; or (d) require an Authorised Person Operating a Crypto Asset Exchange to obtain a Recognition Order to become a Recognised Investment Exchange under section 121 of these Regulations, and the Rules made under these Regulations, where the Regulator is satisfied that it is in the interests of the Abu Dhabi Global Market to do so and on such terms and conditions as the Regulator considers appropriate. ….
Part 8 Market Abuse
Market abuse
92. Market abuse
(1) For the purposes of these Regulations, Market Abuse is Behaviour (whether by one person alone or by two or more persons jointly or in concert) which— (a) occurs in relation to— (i) Financial Instruments admitted to trading on a— (A) Prescribed Market; or (B) a similar market or trading venue situated inside or outside the Abu Dhabi Global Market and accessible electronically, or otherwise, from within the Abu Dhabi Global Market; (ii) Financial Instruments in respect of which a request for admission to trading on such a market has been made; or (iii) in the case of subsection (2) or (3) Behaviour, instruments which are Related Instruments in relation to such Financial Instruments; and or (iv) an Accepted Crypto Asset admitted to trading on a Crypto Asset Exchange; and (b) falls within any one or more of the types of Behaviour set out in subsections (2) to (6).

Annex A
...
93. Supplementary provision about certain Behaviour
(1) Behaviour is to be taken into account for the purposes of this Part only if it occurs— (a) in the Abu Dhabi Global Market; or (b) in relation to— (i) Financial Instruments which are admitted to trading on a Prescribed Market situated in, or operating in, the Abu Dhabi Global Market; or (ii) Financial Instruments for which a request for admission to trading on such a Prescribed Market has been made. or (iii) Accepted Crypto Assets admitted to trading on a Crypto Asset Exchange. ….
Part 9 Misleading Statements and Impressions
102. Misleading Statements
(1) Subsection (2) applies to a person ("P") who— (a) makes a statement which P knows to be false or misleading in a material respect; (b) makes a statement which is false or misleading in a material respect, being reckless as to whether it is; or (c) dishonestly conceals any material facts whether in connection with a statement made by P or otherwise. (2) P commits a contravention of these Regulations if P makes the statement or conceals the facts with the intention of inducing, or is reckless as to whether making it or concealing them may induce, another person (whether or not the person to whom the statement is made)— (a) to enter into or offer to enter into, or to refrain from entering or offering to enter into, a Relevant Agreement; or (b) to acquire, dispose of, subscribe for or underwrite, or refrain from acquiring, disposing of, subscribing for or underwriting; or (bc) to exercise, or refrain from exercising, any rights conferred by – a Financial Instrument, a Specified Investment or an Accepted Crypto Asset, as applicable. ….
103. Misleading Impressions
(1) A person ("P") who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any Financial Instruments or Accepted Crypto Assets commits a contravention of these Regulations if—

Annex A
(a) P intends to create the impression; and
(b) the case falls within either subsection (2) or (3) or both.
…
Chapter 4 Transaction Reporting
149. Obligation to report transactions
(1) A Recognised Investment Exchange or MTF shall report details of transactions in Financial Instruments traded on its platform which are executed, or reported, through its systems. (2) A Crypto Asset Exchange shall report details of transactions in Accepted Crypto Assets traded on its platform which are executed, or reported, through its systems. (23) The Regulator may make Rules specifying— (a) the information to be included in reports made under subsection (1) and (2); and (b) the manner in which such reports are to be made. …
Part 22 General
….
258. Definitions
(2) In these Regulations, unless the context otherwise requires— E-money means a digital representation of Fiat Currency used to electronically transfer value denominated in Fiat Currency. Fiat Currency means, for the purpose of paragraph 73B of Schedule 1, government issued currency that is designated as legal tender in its country of issuance through government decree, regulation or law. Operating a Crypto Asset Business means the Regulated Activity specified in paragraph 73B of Schedule 1. Accepted Crypto Asset means a Crypto Asset that, in the opinion of the Regulator, meets the requirements for engaging in the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market. Crypto Asset means a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store

Annex A
of value, but does not have legal tender status in any jurisdiction. A Crypto Asset is - (a) neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Crypto Asset; and (b) distinguished from Fiat Currency and E-money. Crypto Asset Custodian means operating as a Crypto Asset Custodian operating within Abu Dhabi Global Market as part of the Regulated Activity of Operating a Crypto Asset Business. Crypto Asset Exchange means a Crypto Asset Exchange operating within Abu Dhabi Global Market as part of the Regulated Activity of Operating a Crypto Asset Business. Direction means, for the purposes of— (a) sections 9 and 10, a direction under section 9; (b) Reporting Entities and their obligations under
Part 6, a direction under section 84;
(c) suspending an investigation into Market Abuse, a direction under section 99; (d) the name of a Fund or Sub-Fund, a direction under section 117; (e) the Regulator's powers under Part 12, a direction under sections 130, 132, 133 and 137; (f) the Regulator's powers under Part 13, a direction under sections 153, 162 and 164; and (g) the Regulator's powers under Part 17, a direction under sections 206 and 217.; and (h) Authorised Person Operating a Crypto Asset Business, a direction under sub-section 5A(2). Relevant Agreement means, for the purposes of sections 102(2), an agreement— (a) the entering into or performance of which by either party constitutes an activity of a kind specified in the Rules made by the Regulator; and (b) which relates to a Designated Investment.

Annex A
…
Schedule 1
“Chapter 17B Operating a Crypto Asset Business The activity 73B. Operating a Crypto Asset Business (1) Operating a Crypto Asset Business is a specified kind of activity. (2) Operating a Crypto Asset Business involves undertaking one or more Crypto Asset activities in or from the Abu Dhabi Global Market. (3) For the purposes of sub-paragraph (2), Crypto Asset activities include – (a) Buying, Selling or exercising any right in Accepted Crypto Assets (whether as principal or agent); (b) making arrangements with a view to another person (whether as principal or agent) Buying, Selling or providing custody of Accepted Crypto Assets; (c) advising on the merits of Buying or Selling of Accepted Crypto Assets or any rights conferred by such Buying or Selling; and (d) operating - (i) a Crypto Asset Exchange; or (ii) as a Crypto Asset Custodian. (4) In sub-paragraph 3(c)(i), Operating a Crypto Asset Exchange means the trading, conversion or exchange of - (a) Fiat Currency or other value into Accepted Crypto Assets; (b) Accepted Crypto Assets into Fiat Currency or other value; or (c) one Accepted Crypto Asset into another Accepted Crypto Asset. (5) In sub-paragraph 3(d)(ii), Operating as a Crypto Asset Custodian involves - (a) safeguarding, storing, holding or maintaining custody of Accepted Crypto Assets belonging to another person; or (b) controlling or administering Accepted Crypto Assets for the purpose of sub-paragraph 5(a). Exclusions 73C. The following activities do not constitute Operating a Crypto Asset Business– (1) the creation or administration of Crypto Assets that are not Accepted Crypto Assets; (2) the development, dissemination or use of software for the purpose of creating or mining a Crypto Asset; (3) the transmission of Crypto Assets; (4) a loyalty points scheme denominated in Crypto Assets; or (5) any other activity or arrangement that is deemed by the Regulator to not constitute Operating a Crypto Asset Business, where necessary and appropriate in order for the Regulator to pursue its objectives.” ….

Annex A
2. Short title, extent and commencement
(1) These Regulations may be cited as the Financial Services and Markets (Amendment No 2) Regulations 2018. (2) These Regulations shall apply in the Abu Dhabi Global Market. (3) These Regulations come into force on the date of their publication.

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Appendix 1
Conduct of Business Rulebook (COBS)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 1
Contents

1. Introduction ............................................................................................................1
2. Client Classification.................................................................................................1
3. Core Rules – Investment Business, Accepting Deposits, Providing Credit and
   Providing Trust Services........................................................................................13
4. Additional Rules – Accepting Deposits and Providing Credit ...............................22
5. Additional Rules — Providing Trust Services........................................................24
6. Additional Rules – Investment Business...............................................................27
7. Core Rules – Insurance..........................................................................................41
8. Additional Rules: Operating an MTF or OTF ........................................................51
9. Core Rules – Operating A Credit Rating Agency ...................................................55
10. Core Rules – Operating a Central Securities Depository ......................................67
11. Records of Orders and Transactions.....................................................................69
12. Key Information and Client Agreement................................................................72
13. Periodic Statements..............................................................................................74
14. Client Money Provisions .......................................................................................76
15. Safe Custody Provisions......................................................................................101
16. Recovery and Resolution Planning for Client Money and Safe Custody Assets.107
17. Additional Rules - Operating a Crypto Asset Business 112

Appendix 1
17. ADDITIONAL RULES – OPERATING A CRYPTO ASSET BUSINESS
17.1. Application and Interpretation
17.1.1. This chapter applies to Authorised Persons Operating a Crypto Asset Business.
17.1.2. Authorised Persons Operating a Crypto Asset Business must comply with all requirements
applicable to Authorised Persons in the following Rulebooks, unless the requirements in this
chapter expressly provide otherwise –
(a) this Conduct of Business Rulebook (COBS);
(b) the General Rulebook (GEN);
(c) the Anti-Money Laundering and Sanctions Rules and Guidance (AML); (d) the Islamic Finance Rules (IFR); and (e) the Rules of Market Conduct (RMC), made by the Regulator in accordance with section 96 of the Financial Services and Markets Regulations 2015.
17.1.3. For the purposes of Operating a Crypto Asset Business all references to -
(a) “Investment Business” shall be read to include “Operating a Crypto Asset Business”; (b) “Client Investments” in GEN shall be read as encompassing “Crypto Asset” or “Crypto Assets”, as applicable; and (c) “Financial Instruments” in RMC shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.1.4. The following COBS Rules should be read as applying to all Transactions undertaken by an
Authorised Person Operating a Crypto Asset Business, irrespective of any restrictions on application or any exception to these Rules elsewhere in COBS - (a) Rule 3.4 (Suitability); (b) Rule 6.5 (Best Execution); (c) Rule 6.7 (Aggregation and Allocation); (d) Rule 6.10 (Confirmation Notes); (e) Rule 6.11 (Periodic Statements); and (f) Chapter 12 (Key Information and Client Agreement).
17.2. Accepted Crypto Assets
17.2.1. An Authorised Person engaged in the Regulated Activity of Operating a Crypto Asset Business
in or from the Abu Dhabi Global Market when using Crypto Assets must only use Accepted Crypto Assets.
17.2.2. For the purposes of determining whether, in its opinion, a Crypto Asset meets the
requirements of being an Accepted Crypto Asset, the Regulator will consider – (a) a maturity/market capitalisation threshold in respect of a Crypto Asset; and (b) other factors that, in the opinion of the Regulator, are to be taken into account in determining whether or not a Crypto Asset in question meets the requirements to be considered appropriate for the purpose of the Regulated Activity of Operating a Crypto Asset Business in or from the Abu Dhabi Global Market.

Appendix 1
17.2.3. For the purposes of Rule 17.2.1, the maturity/market capitalisation requirements are set out
in Guidance to this chapter.
17.3. Capital Requirements
17.3.1. The capital requirements set out in MIR Rule 3.2 (Capital Requirements) shall apply to
Authorised Persons Operating a Crypto Asset Business.
17.3.2. For the purposes of Operating a Crypto Asset Business, all references in MIR Rule 3.2 to
“Recognised Investment Exchange” shall be read as references to “Authorised Person”.
17.4. International Tax Reporting Obligations
17.4.1. Authorised Persons Operating a Crypto Asset Business where applicable should consider any
reporting obligations in relation to, among other things – (a) FATCA, as set out in the Guidance Notes on the requirements of the Intergovernmental Agreement between the United Arab Emirates and the United States, issued by the UAE Ministry of Finance in 2015 and as amended from time to time; and (b) Common Reporting Standards, set out in the ADGM Common Reporting Standard Regulations 2017.
17.5. Technology Governance and Controls
An Authorised Person Operating a Crypto Asset Business must, as a minimum, have in place systems and controls with respect to the following:
Crypto Asset Wallets
(a) Procedures describing the creation, management and controls of Crypto Asset wallets, including:
(i) wallet setup/configuration/deployment/deletion/backup and recovery; (ii) wallet access privilege management; (iii) wallet user management; (iv) wallet rules and limit determination, review and update; and (v) wallet audit and oversight. Private keys (b) Procedures describing the creation, management and controls of private keys, including:
(i) private key generation;
(ii) private key exchange;
(iii) private key storage;
(iv) private key backup;
(v) private key destruction; and
(vi) private key access management.
Origin and destination of Crypto Asset funds
(c) Systems and controls to mitigate the risk of misuse of Crypto Assets, setting out how –

Appendix 1
(i) the origin of Crypto Assets is determined, in case of an incoming transaction; and (ii) the destination of Crypto Assets is determined, in case of an outgoing transaction. Security (d) A security plan describing the security arrangements relating to:
(i) the privacy of sensitive data;
(ii) networks and systems;
(iii) cloud based services;
(iv) physical facilities; and
(v) documents, and document storage.
Risk management
(e) A risk management plan containing a detailed analysis of likely risks with both high and low impact, as well as mitigation strategies. The risk management plan must cover, but is not limited to:
(i) operational risks;
(ii) technology risks, including ‘hacking’ related risks; (iii) market risk for each Accepted Crypto Asset; and (iv) risk of Financial Crime.
17.6. Additional disclosure requirements
17.6.1. Prior to entering into an initial Transaction for, on behalf of, or with a Client, an Authorised
Person Operating a Crypto Asset Business shall disclose in a clear, fair and not misleading manner all material risks associated with (i) its products, services and activities (ii) Crypto Assets generally and (iii) the Accepted Crypto Asset that is the subject of the Transaction.
17.6.2. The risks to be disclosed pursuant to Rule 17.6.1. include, but are not limited to, the following

(a) Crypto Assets not being legal tender or backed by a government; (b) the value, or process for valuation, of Crypto Assets, including the risk of a Crypto Assets having no value; (c) the volatility and unpredictability of the price of Crypto Assets relative to Fiat Currencies; (d) that trading in Crypto Assets is susceptible to irrational market forces; (e) that the nature of Crypto Assets may lead to an increased risk of Financial Crime; (f) that the nature of Crypto Assets may lead to an increased risk of cyber-attack; (g) there being limited or, in some cases, no mechanism for the recovery of lost or stolen Crypto Assets; (h) the risks of Crypto Assets being transacted via new technologies, (including distributed ledger technologies (‘DLT’)) with regard to, among other things, anonymity,

Appendix 1
irreversibility of transactions, accidental transactions, transaction recording, and settlement; (i) that there is no assurance that a Person who accepts a Crypto Asset as payment today will continue to do so in the future; (j) that the nature of Crypto Assets means that technological difficulties experienced by the Authorised Person may prevent the access or use of a Client’s Crypto Assets; (k) any links to Crypto Assets related activity outside ADGM, which may be unregulated or subject to limited regulation; and (l) any regulatory changes or actions by the Regulator or Non-ADGM Regulator that may adversely affect the use, transfer, exchange, and value of a Crypto Asset.
17.7. Additional Rules Applicable to Authorised Persons Operating a Crypto Asset Exchange
17.7.1. In addition to the general requirements applicable to Authorised Persons Operating a Crypto
Asset Business, as set out in Rules 17.1 – 17.6 above, Authorised Persons that are Operating a Crypto Asset Exchange must comply with the requirements set out in – (a) COBS, MIR and GEN, as set out in Rules 17.7.2 – 17.7.6 below; and (b) Rule 17.8 below if also Operating as a Crypto Asset Custodian.
17.7.2. Authorised Persons that are Operating a Crypto Assets Exchange must comply with the
requirements set out in COBS, Chapter 8, save for Rules 8.4.6 and 8.6.
17.7.3. For the purposes of Rule 17.7.2, the following references in COBS, Chapter 8 should be read
as follows:
(a) references to “Operating a Multilateral Trading Facility ("MTF")” or “Operates a Multilateral Trading Facility ("MTF")” shall be read as references to “Operating a Crypto Asset Exchange”; (b) references to an “MTF Operator” shall be read as references to a “Crypto Asset Exchange Operator”; (c) references to an “MTF” or “Facility” shall be read as references to a “Crypto Asset Exchange”; (d) references to “Investment” or “Investments” shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable; and (e) references to “Financial Instrument” or “Financial Instruments” (including those in MIR as incorporated by virtue of COBS Rule 8.2.1) shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.7.4. Authorised Persons that are Operating a Crypto Asset Exchange must comply with the
following requirements set out in MIR, Chapter 5 - (a) Rules 5.1 - 5.3; and (b) Rule 5.4.1, in the circumstances identified in Items 18, 19, 23 (a) and (b), 26, 27, 31, 32, 33, 34, 36, 37, 38, 39, 40, 42, 44, 45, 47, 48, 49, 51, 52, 53, 54, 56, 57, 58, 59, 60 and 61.
17.7.5. For the purposes of Rule 17.7.4 all references to -

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(a) “Recognised Body” or “Recognised Bodies” shall be read as references to “Authorised Person”; and (b) “Financial Instrument” or “Financial Instruments” shall be read as references to “Crypto Asset” or “Crypto Assets”, as applicable.
17.7.6. Rule 5.2.14 of GEN shall apply to Authorised Persons Operating a Crypto Asset Exchange, and
all references to –
(a) a “Multilateral Trading Facility” shall be read as references to a “Crypto Asset Exchange”; and (b) “Investment” shall be read as references to “Crypto Assets”.
17.8. Additional Rules Applicable to Authorised Persons Operating as a Crypto Asset Custodian
17.8.1. In addition to the general requirements applicable to Authorised Persons Operating a Crypto
Asset Business, as set out in Rules 17.1 – 17.6 above, an Authorised Person that is Operating as a Crypto Asset Custodian must comply with the requirements set out in COBS, Chapters 14, 15 and 16, as set out in Rules 17.8.2 – 17.8.3 below.
17.8.2. For the purposes of Rule 17.8.1, the following references in Chapters 14, 15 and 16 should be
read as follows -
(a) references to “Client Assets” shall be read as encompassing “Crypto Assets”; (b) references to “Investment” or “Investments”, (and, a result, the corresponding references to “Client Investments”) shall be read as encompassing Crypto Asset” or “Crypto Assets”, as applicable; (c) references to “Investment Business” shall be read to include “Operating a Crypto Asset Business”; and (d) references to “Providing Custody” in COBS, Chapters 14, 15 and 16 shall be read as references to “Operating as a Crypto Asset Custodian”, within the Regulated Activity of Operating as a Crypto Asset Business, as defined in sub-paragraph 73B(5) of Schedule 1 of the Financial Services and Markets Regulations 2015.
17.8.3. For the purposes of Authorised Persons that are Operating as a Crypto Asset Custodian, the
following requirements in COBS, Chapters 14 and 15 shall be read as follows - (a) the reconciliations of the Client Accounts required under COBS Rule - (i) 14.2.12(a) shall be carried out at least every week; and (ii) 14.2.12(d) shall be carried out within 5 days of the date to which the reconciliation relates; (b) the statements required under COBS Rule 15.8.1(a) shall be sent to a Retail Client at least monthly; and (c) all reconciliations required under COBS Rule 15.9.1 shall be conducted at least every week.

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Appendix 2
Fees Rules (FEES)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 2
3. SPECIFIC AUTHORISATION AND SUPERVISION FEES
….
3.14 Operating a Crypto Asset Business
3.14.1 An applicant for a Financial Services Permission to carry on the Regulated Activity of Operating
a Crypto Asset Business must pay to the Regulator an initial authorisation fee of (as applicable):
(a) $20,000; or
(b) $125,000 if the Regulated Activity is Operating a Crypto Asset Exchange.
3.14.2 An Authorised Person with a Financial Services Permission to carry on the Regulated Activity
of Operating a Crypto Asset Business must pay to the Regulator an annual supervision fee of:
(a) $15,000; or
(b) $60,000 if the Regulated Activity is Operating a Crypto Asset Exchange.
3.14.3 An Authorised Person with a Financial Services Permission to carry on the Regulated Activity
of Operating a Crypto Asset Business being a Crypto Asset Exchange must pay to the Regulator a trading levy of [0.0015%] of the trade value of each transaction, payable monthly. ….

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Appendix 3
Market Infrastructure Rulebook (MIR)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 3
3 RULES APPLICABLE TO RECOGNISED INVESTMENT EXCHANGES ….
3.4A Rules Applicable to Recognised Investment Exchanges operating a Crypto Asset Exchange 3.4A.1 A Recognised Investment Exchange may operate a Crypto Asset Exchange, as part of the Regulated Activity of Operating a Crypto Asset Business, provided that its Recognition Order includes a stipulation permitting it to do so. 3.4A.2 If the Recognition Order referred to in rule 3.4A.1 above does include such a stipulation, the Recognised Investment Exchange must comply with all requirements in respect of the Regulated Activity of Operating a Crypto Asset Business, as set out in – (a) section 5A of the Financial Services and Markets Regulations 2015; and (b) COBS, Chapter 17 and, in particular, the Rules applicable to operating a Crypto Asset Exchange as set out in COBS, Rule 17.7. ….

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Appendix 4
Glossary (GLO)
*In this Appendix, underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Appendix 4
Defined Terms Definitions
E-money Has the meaning given in section 258 of FSMR.
Fiat Currency Has the meaning given in section 258 of FSMR.
Operating a Crypto Asset
Business
Has the meaning given in paragraph 73B of Schedule 1 of FSMR.
Accepted Crypto Asset Has the meaning given in section 258 of FSMR.
Crypto Asset Has the meaning given in section 258 of FSMR.
Crypto Asset Exchange Has the meaning given in section 258 of FSMR.
Crypto Asset Custodian Has the meaning given in section 258 of FSMR.