Introduction
In August 2024, the Financial Services Regulatory Authority (“FSRA”) of Abu Dhabi Global Market (“ADGM”) issued Consultation Paper No. 7 of 2024 (“Paper”) for public comments on a newly proposed regulatory regime for Fiat-Referenced Tokens (“FRTs”). As mentioned in the Paper, these are a category of “stablecoins” that are backed by high-quality, liquid assets denominated in the same currency as the FRT and that can be liquidated rapidly with minimal adverse price effect.
FSRA aims to implement a comprehensive regulatory framework to address increasing demand for stablecoins and ensure that innovation does not compromise safety and soundness. As said, FRTs are distinct from other stablecoins in that they maintain their value by being backed by high-quality, liquid assets that can be redeemed on demand.
Background and Rationale
FSRA aims to implement a comprehensive regulatory framework to address increasing demand for stablecoins and ensure that innovation does not compromise safety and soundness. As said, FRTs are distinct from other stablecoins in that they maintain their value by being backed by high-quality, liquid assets that can be redeemed on demand.
Main Features of Proposed Regulatory Regime
FRTs are digital assets defined to be:
FRTs differ from virtual assets by avoiding the speculative characteristics associated with them. Unlike virtual assets, FRTs provide stable value through redemption rights. The FSRA also distinguishes FRTs from stored value instruments, which have a more limited issuance and redemption cycle.
Accordingly, FRTs' issuers are obliged to necessarily back their tokens with high-quality liquid assets, such as cash and government securities, as well as any other form that may be prescribed by FSRA. In all cases, the market value of such reserves must always be equal to or superior to the value of the FRTS in circulation.
The FSRA is of the view that FRT holders must have a right to redeem their FRTs at par value upon demand within two business days (T+2). The timeframe can be extended by FSRA for specific situations, which may allow for longer liquidation periods in stress events that could impact the stability of reserve assets.
FSRA keeps the strong stand in prohibiting algorithmic stablecoins, as these are not backed by assets and depend on the algorithms to hold the value.
The FSRA has concluded that FRTs issuers would be required to maintain all proceeds from the issuance of FRTs, provided that par value of tokens is preserved. However, the FRT cannot be promoted as a security; In addition, any issuer must disclose that there is no guarantee on the distribution of any income.
FSRA proposes implementation of the minimum capital requirement of US$2 million or the audited annual expenditure, whichever is greater, to ensure financial stability of the FRTs issuers. Furthermore, it would not allow issuers to conduct any other regulated activity in order to limit further potential risk to FRT holders.
Issuers of FRTs must ensure that the white paper is transparent, accurate, and easy to understand. It must be shared with the FSRA at least 20 business days before the initial issuance of FRTs and published on the issuer’s website prior to the launch, remaining available while the FRT is in circulation. Required disclosures include information on the issuer, FRT operations, associated risks, rights and obligations of holders, redemption policies, and the technology used to issue the FRT.
Implementation and Public Comment
Public comments might be provided within a consultation period that ends on October 3rd, 2024. The final regulatory framework, shall be constructed as a legislation, taking into consideration received public comments which shall aim to keep ADGM as a competitive and safe jurisdiction for the FRTs issuers.
Conclusion
The Paper was designed to bring clarity and structure to the growing virtual assets market in ADGM, which was lacking closer elaboration and addressing to FRTs in the earlier legislations. It will certainly enable FSRA to ensure that the market participants comply with the regulatory standards while further encouraging innovation within the virtual asset ecosystem. Therefore, issuers and stakeholders are encouraged to review the proposal and provide feedback to help shape the final regulatory landscape.