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Regulation of digital securities evolves in the Abu Dhabi Global Market

Businesses planning to tokenise their security assets should review whether their tokens will be regulated in the Abu Dhabi Global Market (ADGM) in light of the publication of new guidance, an expert in financial services regulation has said.

Tom Bicknell of Pinsent Masons, the law firm behind Out-Law, was commenting after the Financial Services Regulatory Authority (FSRA) released new guidance on the regulation of digital securities activity in the ADGM. He said it is the first time a regulator in the Middle East has published detailed guidance on its approach to digital securities being offered in and from the ADGM.

For the purposes of the guidance, a ‘digital security’ is defined as types of digital assets that possess the features and characteristics of a security. Bicknell said the guidance would therefore be particularly relevant to firms looking to use new technology, such as blockchain, to expand their activities from the more 'conventional' securities space.

"The FSRA’s assessment of whether an offering of a digital token is regulated under ADGM law will be conducted on a case-by-case basis," Bicknell said. "What this means is that firms wishing to offer digital tokens in and from the ADGM should carefully assess whether any proposed token has the characteristics and legal features that resemble a traditional form of security, as defined under ADGM law. If an argument can be made that it does, then it’s likely that the FSRA will deem the digital token as being a ‘digital security’. That finding will trigger the need for firms to follow the correct regulatory steps when offering the token to the market."

"The guidance is clear that any offers of securities, whether through a blockchain platform, digital platform or other means, will be subject to consistent regulatory treatment by the FSRA," he said.

The FSRA's latest guidance builds on other papers it has previously issued that concern the regulation of cryptoassets in the ADGM. Those papers include guidance on 'initial coin offerings' (ICOs) and on operating a cryptoasset business – an activity that falls subject to regulation within the ADGM regardless of whether those businesses are issuing 'digital securities'.

The new guidance confirms that firms considered to be offering digital securities in or from the ADGM will, subject to an exemption applying, be obliged to publish an approved prospectus. The guidance sets out what information firms will be expected to include in their prospectuses as well as other requirements in relation to the prominence and language of disclosures.

The FSRA also said that it expects firms offering digital securities in or from ADGM to seek to trade those securities through recognised investment exchanges or multilateral trading facilities operating within the ADGM.

The guidance also addresses a number of other financial services activities within the ADGM that is relevant to digital securities. It sets out rules for exchanges and other trading venues on how to interact with digital securities, and further addresses activities performed by clearing houses, custodians, brokers and other intermediaries.

Guidance is also provided on the interaction of digital securities activities with rules on market abuse, technology governance, anti-money laundering, tax reporting and data protection, among other things, in the FSRA's paper.

Richard Teng, chief executive of the FSRA, said: "The FSRA’s guidance on digital securities provides technologically advanced industry players with the transparency and certainty required to effectively operate in a best-in-class regulatory environment. The publication of this guidance reinforces the FSRA’s position as a regulatory thought leader in the digital asset market."

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