On 20 August, 2024, the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) issued Consultation Paper No. 7, proposing a regulatory framework for the issuance of Fiat-Referenced Tokens (FRTs). This paper outlines regulations for these tokens. FRTs are stablecoins backed by high-quality, liquid assets denominated in a single fiat currency. The proposed paper addresses key areas such as reserve asset requirements, redemption rights, capital adequacy, and governance to ensure that FRTs are issued and managed in a manner that promotes financial stability, transparency, and consumer protection within the ADGM.
While the FSRA had previously established guidelines for virtual assets, the FRTs necessitate a tailored regulatory approach. Unlike other stablecoins that may be backed by volatile assets, FRTs are intended to maintain a stable value by being backed by high-quality, liquid assets denominated in the same currency as the token to ensure their use as a reliable medium of exchange, distinguishing them from other forms of virtual assets that may be used for speculative or investment purposes.
The FSRA defines FRTs as a type of digital asset designed to maintain a stable value by being backed by high-quality, liquid assets denominated in a specific fiat currency. FRTs are intended to function as a reliable medium of exchange, offering stability through their redemption feature, which allows holders to exchange the token for a fixed amount of the corresponding fiat currency from the issuer upon demand.
The FSRA is the supervisory and regulatory authority overseeing the issuance and management of FRTs within ADGM. Companies wishing to issue FRTs must obtain a Financial Services Permission (FSP) from the FSRA, authorizing them to engage in the regulated activity of issuing Fiat-Referenced Tokens. To apply for a license, an issuer must submit a detailed application to the FSRA, including a proposed white paper that outlines the operational mechanics of the FRT, the reserve asset management strategy, and the redemption policies. The application must be submitted at least 20 business days before the initial issuance of the FRT.
The paper proposes requirements that FRT issuers must fulfill to stay operational in the jurisdiction. Issuers of FRTs must maintain reserve assets that are at least equal to the par value of all outstanding tokens. These assets must be highly liquid and of high quality, such as cash or cash equivalents, debt securities with short maturities, and certain government or central bank-issued securities. The reserves must be independently attested to on a monthly basis, with the results published to ensure transparency. The paper mandates that FRT holders must be able to redeem their tokens at par value within two business days of a redemption request. The FSRA proposes that FRT issuers maintain a minimum level of capital resources. The requirement is set at the higher of $2 million or the issuer’s annual audited expenditure. This capital buffer is intended to absorb potential losses and ensure that issuers can continue to operate even under adverse market conditions.
Interestingly, the consultation paper introduces stress testing as a vital part of the ongoing obligations for issuers of FRTs within the ADGM. This requirement is designed to ensure that issuers maintain the stability and reliability of their tokens, even under adverse market conditions. The stress tests include liquidity stress, where the issuer’s ability to quickly convert Reserve Assets into cash is assessed, especially during periods of high redemption demand. Stress tests simulates sharp declines in the value of Reserve Assets to evaluate whether the issuer can still meet redemption requests at par value to test against market volatility.
The consultation paper outlines the importance of modeling large-scale redemptions, often referred to as a “run” on the issuer, to determine if the issuer can liquidate assets efficiently without significantly impacting the token’s value. Operational risks, such as technological failures or cybersecurity threats, are also considered, ensuring that issuers are prepared to manage and redeem FRTs even in the face of potential disruptions.
The FSRA requires these stress tests be conducted annually, though more frequent testing may be necessary if concerns about the issuer’s Reserve Assets arise. By incorporating stress testing into the regulatory framework, the FSRA aims to safeguard the stability of FRTs and protect the interests of token holders, contributing to the overall resilience of the digital assets market in the ADGM.
The process of setting up an FRT within the ADGM comes with specific financial commitments. The FSRA has proposed application and annual supervision fees of $70,000 each for entities wishing to engage in FRT issuance.
The FSRA is currently in the consultation phase, inviting feedback from stakeholders on the proposed framework. Stakeholders can provide feedback on the proposed framework until 3 October, 2024. The final regulations will be enacted based on this feedback, and issuers should refrain from initiating any FRT-related activities until the official rules are published.
(Source: https://adgmen.thomsonreuters.com/rulebook/consultation-paper-no-7-2024-proposed-regulatory-framework-issuance-fiat-referenced-tokens, https://adgmen.thomsonreuters.com/sites/default/files/net_file_store/Consultation_Paper_No._7_of_2024_FRTs.pdf)
