Setting Up Virtual Assets Service Providers In The Adgm - 10 Leaves

By Author: Nitya
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Setting up Virtual Assets Service Providers in the ADGM:
Why setup a financial services firm in the ADGM?
The ADGM is one of two international financial centres in the UAE. Established in 2015, it quickly rose through the rankings and is now counted as one of the top 25 financial centres in the world. ADGM’s innovative SPV regime, its initiatives in the fintech space and its issuance of the region’s first cryto-asset regulatory framework, have all contributed to its success.
Clients who wish to cater primarily to the Abu Dhabi market, sovereign wealth funds and Abu Dhabi family offices may consider setting up in the ADGM.
What is a Virtual Asset Service Provider?
Digital Asset Entities (DAE):
DAE can be any business that is built around crypto transactions. These include Virtual Asset Service Providers (VASP) such as crypto exchanges, ATMs that allow crypto transactions and conversion, gaming sites, business incubators and any other such entity that deals in digital assets. They are also called Virtual Asset Entities or Crypto Asset Entities.
Digital Asset Customer (DAC):
Any ...
... Digital Asset Entity that uses the services of a bank or any other financial institution is a DAC. They are classified thus mainly to account for increased AML monitoring and compliance checks.
Virtual Asset Service Providers:
Enhanced anti-money laundering/counter terrorism financing and compliance obligations apply to DAEs that engage in financial services. These DAEs are referred to as Virtual Asset Service Providers and include exchanges/platforms that allow for fiat-virtual or virtual-virtual asset conversions (Alternative Trading Systems or Multilateral Trading facilities), transfers of virtual assets, custody of virtual assets such as digital custodians, and issuers/distributors and advisors on virtual assets, such as asset managers and investment advisors.
Most regulators define VASPs in a way to capture the above activities carried out “for and behalf of another person”, so for instance, mining crypto at home or on an individual basis may not come under regulation, but mining pools could be classified as VASPs.

The ADGM’s Virtual Assets Framework is designed to cover all activities concerning virtual assets. This includes non-fiat virtual currencies such as Bitcoin and Ether, Digital Securities that include tokenised offerings of securities (Security Tokens), Fiat tokens or Stablecoins and associated derivatives. Utility Tokens are also mentioned in the framework but may not come under the purview of regulation, if they do not exhibit features and characteristics of a regulated investment.
The ADGM Virtual Assets Framework is of interest to Virtual Asset Service Providers, especially issuers of Virtual Assets, Digital Exchanges that wish to admit Virtual Assets to trading, or performing clearing and settlement services, operators of exchanges such as Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF) that wish to trade Virtual Assets, providers of Digital Wallets who provide custody and storage services for such virtual assets, technology providers and in general, any licensed firm that wishes to advise, arrange or manage virtual assets.
What does ADGM consider to be a Virtual Asset?
As per the ADGM’s definition, "Virtual 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 of value, but does not have legal tender status in any jurisdiction.
A Virtual 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 Virtual Asset; and
(b) distinguished from Fiat Currency and E-money."
Virtual Assets are treated as Commodities and hence not deemed Specified Investments, under the ADGM Regulations.
What does the FSRA consider to be a Digital Security?
In addition, a Digital Security is defined as a token that confers rights and obligations that are:
(i) the same as those conferred by a share, debenture or futures contract (Investments); or (ii) substantially similar in nature, purpose or effect, to those conferred by Investments.
In effect, a Digital Security is a token that behaves as a security (equity, debenture, convertible, future, option etc.) and is hence considered by the FSRA as a Security and a Specified Investment.
What is a Security?
The FSRA has a list of instruments that they consider a security. In general, a transaction is considered a security if a) there is an investment of money, b) there is an expectation of profit, c) the investment of money is in a common enterprise and d) any profit comes from the efforts of a promoter or third party. This is also commonly known as the Howey Test.
How are Utility Tokens classified under the ADGM Virtual Assets Framework?
Utility Tokens, i.e. tokens that can be redeemed for access to a specified product or service are treated as commodities and hence not deemed Specified Investments. Trading and transactions in Utility Tokens are not regulated, unless they are caught as Accepted Virtual Assets.
What are Accepted Virtual Assets in the ADGM?
The FSRA would require third-party verification to demonstrate that the Virtual Asset meets security requirements to be deemed an accepted Virtual Asset. The considerations would include:
Market capitalization and sufficiency of client demand, proportion in free float and the control mechanisms to manage volatility
Security – the ability of the Virtual Asset to respond and adapt to vulnerabilities
Origin and destination of the virtual asset, ability to identify counterparties in transactions and monitoring of on-chain transactions
Number of exchanges where the Virtual Asset is listed and the depth of regulation of such exchanges
Type of DLT used
Depth of innovation of the Virtual Asset and practicaility of application.
Virtual Asset Service Provider activities in the ADGM:
The VASP activities that are covered by the ADGM Virtual Assets Framework include:
dealing as Principal or Agent in accepted virtual assets
managing virtual assets of clients
Arranging deals in investments where such investments are virtual assets
Trading in virtual assets or providing trading platforms/exchanges such as Multilateral Trading Platforms
Marketing of virtual assets
Providing or arranging custody of virtual assets
marketing of accepted virtual assets
Advising on the purchase or sale of virtual assets
Trading of Virtual Assets:
The ADGM has an existing framework for the authorization and regulation of Exchanges, Alternative Trading Systems and Clearing houses. Under the regulation for conventional securities, exchanges are licensed as Authorised Market Institutions (AMI), and MTFs and OTFs are licensed as Alternative Trading Systems. Accordingly, the FSRA permits such institutions to perform the same activities for Virtual Assets as well. However, privacy tokens and anonymous trading will not be allowed.
There are additional requirements applicable to such facilities, mainly comprising KYC and technology-related compliances.
Additional IT-related requirements:
The FRSA would be interested in reviewing the criteria for market participants who access and update records on the platform, network security and ongoing compliances. They would also review the IT design of the DLT implementation adopted by the VASP that trades virtual assets, and whether it is able to address how the rights and obligations relating to the tokens are properly discharged.
Technology governance mechanisms would also be reviewed, including IT architecture, storage and transmission of data, procedures to address soft and hard forks, cyber-security measures,
decision-making protocols and interfaces with providers of digital wallets.
A comprehensive IT audit, conducted by an independent third-party IT expert would be required to be submitted to the FSRA annually.
What is an Multilateral Trading Facility?
A Multilateral Trading Facility is a platform that is more loosely regulated than an exchange. It is used to match large orders mainly from institutional clients, and hence work as broker-dealers rather than exchange houses. They are also referred to as Multilateral Trading Facilities in Europe.
MTF operators allow for trading of a wide variety of equity and non-equity securities, including shares, warrants, options, derivatives, futures, CFDs, fund units and crypto assets. Contracts between buyers and sellers are formed according to a set of transparent rules that do not discriminate between members or their clients (non-discretionary basis).
Organised Trading Facilities on the other hand, are facilities where contracts for the exchange of non-equities such as bonds, structured finance products, emission allowances or derivatives are formed, on a discretionary basis. An MTF is usually operated by a regulated investment firm or an operator, whereas an OTF can only be operated by a regulated investment firm.
Why are MTFs of interest in the ADGM?
Virtual Asset Service Providers that wish to provide a platform for the listing and trading of Virtual Assets, will need to seek authorisations from the ADGM to operate an MTF. There are already 6 VASPs in the ADGM, with some more at In-Principle Approval stage.
What are digital wallets?
Digital wallets are VASPs that store the public and private keys that enable users to interact with DLT to trade in tokens and monitor their balances. These can be hot wallets, i.e. software/cloud-based wallets connected to the Internet, or cold wallets, i.e. hardware devices such as USB sticks with security features.
DLT networks usually provide their own wallet functions, like Bitcoin Core for Bitcoin. There are also specialized wallet providers who hold client’s tokens – these include the likes of Coinbase, Exodus and Mycellum.
Providers of Digital Wallet services will have to be licensed to Provide Custody, either by the FSRA or an equivalent regulator. Clients also have the option to self-custody by using their own digital wallets, in which case, the Virtual Assets are held at their own risk. VASPs can also take custody of clients’ Virtual Assets by holding their private keys in a DLT-based account under the operator’s own private key, and hence will have to be licensed by the FSRA to provide such services.
Additionally, the FSRA allows operators of MTFs to hold Client Money, so that they can trade Virtual Assets. Such MTFs will be subject to Client Money requirements from the FSRA.
Token Issuers:
The prospectus requirements that apply for public offers of Securities, i.e. Initial Public Offerings, will continue to apply to IPO’s of Security Tokens. In these cases, the white papers released by the issuers can be considered as Prospectuses, provided they contain the information as mandated by the FSRA for issuances of securities. Also, there will be additional information and disclosures required for Security Token issuances.
The FSRA has provisions for exempt offers in the case of conventional securities, and an offer of Security Tokens denominated in an amount of at least US$ 100,000 or equivalent will be considered an exempt offer. However, any further fractional interest in such security tokens (for less than US$ 100,000) will not be exempt.
Token Funds:
Funds can also be tokenised. The FSRA allows Security Tokens that represent rights and obligations similar to Units in a Fund, in which case they will be regulated in the same manner as Units of Funds. Additional prospectus disclosures will be required, similar to those required in the case of initial offers of other Security Tokens. Such tokens can be offered both to the public and via private placement, and the same rules and eligibility criteria will apply to the Fund Managers.
Funds will also be allowed to invest in other crypto-tokens, subject to appropriate disclosures in the Fund Prospectus.
Regulatory approvals:
Virtual Asset Service Providers interested in carrying out financial services from the ADGM are required to submit applications to the Financial Services Regulatory Authority, or FSRA.
The type of business that the VASP wishes to engage in defines the category of License that is required. For example, a firm undertaking low risk activities such as advising or arranging will require a Category 4 License, while a discretionary portfolio manager will require a Category 3C License. A STP broker, dealing on a matched principal basis will require a Category 3A License, whereas a market maker or provider of credit provider will require a Category 2 License. Full-fledged banks, that accept deposits, will come under a Category 1 License.
A common misinterpretation is that a firm applies for a FSRA Category 3C or a FSRA Category 4 license. As described above, the activity defines the category, i.e. a company that wishes to engage in Asset Management, advisory and arranging activities falls in the Category 3C, by virtue of the highest activity of Managing Assets, even though advisory activities fall in category 4.
Virtual Asset Service Providers that wish to provide a platform for trading of virtual assets, will have to apply for the activity of Operating a Multilateral Trading Facility, which comes under the Category 4 licensed activities.
Category 4 – Operating a a Multilateral Trading Facility
Base Capital – US$ 140,000
Other VASPs will be licensed according to the intended activities
Key requirements:
The FSRA expects that the VASP have transparent and non-discriminatory rules and procedures to ensure fair and orderly trading of investments, and objective criteria governing access to its facility. The regulator also requires the VASP to have objective and transparent criteria for admitting securities that will be traded on the platform, adequate technology resources and procedures for proper market conduct.
A Virtual Asset Service Provider may only trade investments that reference to an underlying benchmark or index provided by a Price Information Provider, which is usually a price reporting agency or an index provider like Refinitiv.
The VASP is also required to provide adequate pre-trade and post-trade transparency to its market participants. Since an MTF is not authorised to provide clearing and settlement services, it will have to make arrangements for clearing and settling trades from an existing clearing house in the ADGM.
Technology and governance requirements for VASPs that deal in Virtual Assets:
MTFs that allow primary listing and secondary trading of Virtual Assets will have to ensure that the DLT applications used by the facility operate on permissioned access. Privacy tokens and anynomous trading are not allowed.
The FSRA would be interested in reviewing the criteria for market participants who access and update records on the platform, network security and ongoing compliances. They would also review the IT design of the DLT implementation adopted by the facility that trades security tokens, and whether it is able to address how the rights and obligations relating to the tokens are properly discharged.
Technology governance mechanisms would also be reviewed, including IT architecture, storage and transmission of data, procedures to address soft and hard forks, cyber-security measures,
decision-making protocols and interfaces with providers of digital wallets.
A comprehensive IT audit, conducted by an independent third-party IT expert would be required to be submitted to the FSRA annually.
Staffing
The FSRA expects that the Virtual Asset Service Provider be adequately staffed depending on the scale, scope and nature of the product portfolio that is proposed to be offered from the ADGM. At a minimum, the FSRA would like to see the following appointments:
Board of Directors – a well-organized Board with robust governance policies. The Chair would have to be a non-executive Director.
Senior Executive Officer (SEO) – Senior banking professional with over 10 years of experience, ordinarily resident in the UAE.
Finance Officer (FO) – Senior and suitably-qualified finance professional. In case of a group, the FO can be from the parent company and does not have to be resident in the UAE. This role can also be outsourced.
Risk Officer – This position is usually outsourced, and not mandatory.
Chief Technology Officer – suitably qualified and experienced IT expert.
Compliance Officer (CO) - Senior compliance professional with over 10 years of experience, ordinarily resident in the UAE.
Money-Laundering Reporting Officer – Senior AML professional with over 10 years of experience, ordinarily resident in the UAE. This function can be combined with Compliance and one individual can carry out both responsibilities.
The CO and MLRO roles can also be outsourced.
Internal Auditor - Senior and suitably qualified internal audit professional. Usually outsourced to a professional firm.
External Auditor – FSRA-recognised auditor.
Independent IT Auditor – Suitably qualified IT expert (e.g CISA, CISM, ISACA, CISSP qualified)
FSRA Capital requirements
The category of license will determine the amount of capital required. The base capital requirement for a Category 4 firm is $10,000. This rises to $500,000 for a Category 3 firm, $2 million for a Category 2 firm and $10m for a Category 1 firm.
Capital waivers may be available to the ADGM branch of a regulated financial institution having its head office in a recognised regulatory jurisdiction.
Actually, there are three components of capital - base capital, risk-based capital and expense-based capital. The higher of the three is set to be the capital requirement. These figures are calculated using the financial models that we make for the Regulatory Business Plan during the application process, and so are mostly unique to the company that applies for the license.
The figures given above are for base capital only, and actual capital may vary depending on the business model and the associated expenses and risks.
In general, for MTFs that hold Client Assets - 18/52 of the projected annual expenses of the firm.
Calculation of capital is a detailed process and involves many factors. We recommend that you contact us for more details on the application process and capital calculations.
Specific Advantages
Here are some specific advantages of establishing in the Abu Dhabi Global Market:
LEGAL AND REGULATORY FRAMEWORK
Legal framework supports cross-border activities
100% foreign ownership permitted
No restriction on foreign talent or employees
No restrictions on capital repatriation
TAX BENEFITS
Zero tax for 50 years on profits, capital or assets from 2004
Zero tax on employee income
COUNTERPARTY CONFIDENCE
Well regarded, independent regulator
Independent, English-speaking, common law judicial system
Distinct from the UAE legal system
Risk-based regulatory approach
DIVERSE ECOSYSTEM
Central to regional deal making
High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
World-class regional and international law and auditing firms, and other professional services
A growing fund domicile in the region
GEOGRAPHIC EPICENTRE:
Management offices, holding companies and family offices are located closer to the assets they own or manage
The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
The UAE plays a central role in the growing South-South trade, principally between Asia and Africa
Well-positioned to harness the potential of emerging markets:
The Application Process:
The ADGM application process commences with formal introductions to the ADGM and the FRSA.
Following the introductory call, a detailed Regulatory Business Plan (RBP) is prepared, along with financial projections, for a quick review by the regulator.
The comments of the regulator are incorporated into the RBP, and a comprehensive application is compiled, comprising policies, processes and other related documentation. The KYC and associated forms of all key individuals are also prepared for submissions.
The formal application is then sent across to the FSRA, who reviews the pack over a period of 7-10 business days, and then accepts it. The detailed review process then commences, and this can take anywhere between 90-120 days to complete.
The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The FSRA also meets with the SEO, FO, Technology Head and CO/MLRO designates, and conducts a detailed interview with them.
An in-principle approval is issued in case the application is successful. The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm.
Once done, a final submission is made to the FSRA, following which the regulator issues the Financial Service Permissions and the process is then complete. The firm is now open for business.
Costs:
1. The fees for filing an application to be licensed as an MTF that allows for trading in virtual assets will be US$ 125,000 and annual license fees will be US$ 60,000.
2. The admission fees for listing and trading will be US$ 3,000.
3. A Multilateral Trading Facility using a virtual assets exchange must pay a monthly trading levy to the FSRA on a sliding scale basis.
Data Protection:
1. The data protection notification is part of the process of registering a new entity in the ADGM. The costs involved are as follows:
2. Registration - US$ 300
3. Annual renewal – US$ 300
Office spaces:
1. Every entity registered in the ADGM is required to lease a physical office. You can choose from the four buildings in the ADGM, or a range of business centers.
2. Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:
3. ADGM Business Centres – from a two-desk office at US$ 20,000.
4. ADGM Fitted Offices – from US$ 55 per square foot.


Visas:
1. Establishment Card Application – US$ 630
2. Deposits – US$ 682
3. Visas (per visa) – from US$ 1,500
4. PSA Deposit (per visa) – US$ 682
Visa allocation is calculated as 80 square feet per visa.
Our Services:
1. Fintech Advisory
Consultations on structuring fintech businesses in the UAE and Saudi Arabia. Starts with advice on holding structures, share vesting plans, investor and founder legal packs. In case of regulated fintechs, we also advise and assist in authorisations from the relevant financial regulators.
Sectors – Money Service Businesses, Open Banking, Robo-Advisory (passive, automated and hybrid), crowdfunding platforms (investment, loan-based, property) and decentralised applications (DeFi and Blockchain-based solutions).
Regulators – UAE Central Bank, Emirates Security and Commodity Authority, Dubai Financial Services Authority (DFSA/DIFC), Financial Services Regulatory Authority (FSRA/ADGM) and the Central Bank of Bahrain.
Regulated licenses – Electronic Money Institutions (EMI), Payment Institutions (PI), Crowdfunding Platforms, AISP/PISP, Automated Investment Advisors and Asset Managers
2. Regulatory Sandbox Consulting:
Approach and structuring of regulatory sandbox licenses in the DIFC (Innovation Testing License, or ITL) and the ADGM (Fintech Reglab).
Sectors – Money Service Businesses, Robo-Advisory (passive, automated and hybrid), tokenized crowdfunding platforms (investment, loan-based, property) and decentralised applications (Blockchain-based solutions).
Regulators –Dubai Financial Services Authority (DFSA/DIFC), Financial Services Regulatory Authority (FSRA/ADGM) and the Central Bank of Bahrain.
Regulated licenses – Electronic Money Institutions (EMI), Payment Institutions (PI), Alternate Trading Systems (ATS), DeFi, Blockchain-based regulated fintech
3. Blockchain and Crypto
Consultations
Compliant Token Design, Crypto asset Product Design, Jurisdictional Scoping, KYC/AML Policy Development for Crypto asset Products, Privacy and Data Protection Compliance Strategy for Crypto asset Products
4. Corporate Structuring
Corporate Structuring – Holding structures, IP vesting, ESOPs, Investor on-boarding, customized Articles, Legal documentation
Jurisdictional Selection
Assistance in incorporation
Jurisdictions – Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), Dubai World Trade Centre Free Zone (DWTC), Dubai Multi-Commodities Centre (DMCC), Luxembourg
5. Regulatory Licensing
Tokenised Crowdfunding Licensing
DeFi
Crypto-asset Licensing
Crypto-asset Facility Licensing – MTF, OTF
Crypto Trading Platforms
Crypto-related advisory and asset management permissions

6. Legal
Crypto-asset Purchase Agreements
Crypto-asset Terms and Conditions
Key Features Documents for Security Tokens
Private Placement Memorandums for Tokenised Funds
STO Prospectuses
Simple Agreement for Future Tokens (SAFT)
Privacy Notices
7. Tokenisation of Assets
Legal and technical consultancy services on tokenization of physical or digital assets such as securities, real estate, financial assets, luxury goods, art, and initial public offerings. Assistance in legal documentation, compliance framework for the offering and selection of suitable jurisdictions.
We also assist with corporate and commercial documentation through our legal consultancy - 10 Leaves Legability. We assist in the drafting of:
Crypto-asset Purchase Agreements
Crypto-asset Terms and Conditions
Key Features Documents for Security Tokens
Private Placement Memorandums for Tokenised Funds
STO Prospectuses
Simple Agreement for Future Tokens (SAFT)
Privacy Notices
Founder agreements
Shareholder agreements
Investor agreements
Share vesting/ESOP plans
Client/Supplier/Distributor agreements
Employment agreements

Team
Rohit Ghai – Founder & Blockchain Specialist
Rohit is the Founder of 10 Leaves. With over eighteen years of experience in the region, Rohit consults firms on corporate structuring, market entry strategies, fintech, fund structuring, regulatory authorisations and startup funding. He conducts workshops on doing business in the region and is a regular presenter to visiting trade delegations from Europe and Asia.
Rohit advises clients on legalities related to blockchain technologies and applications, including tokenization, DeFi and DApps, Tokenomics, STOs and secondary listings.
Master in Business Administration:
Capabilities – Fintech, Blockchain, Funds, Venture Capital
Jurisdictions – DIFC, ADGM, UAE Mainland, DWTC, DMCC
Bishr Shiblaq:
Bishr established and headed the MENA office of the leading Luxembourg law firm, Arendt & Medernach for around 10 years. In this capacity he advised leading financial institutions, sovereign wealth funds, asset managers, MNCs and family offices in both Europe and the Middle East on all issues relating to the structuring of international transactions and the setting up of regulated and unregulated investment structures.
Certified Investment Fund Director (CIFD)
Master of Laws (L.L.M.) in International Economic Law from the University of Warwick (UK). Capabilities – Legal, Structuring, STOs and secondary offerings, Islamic Finance, Funds
Jurisdictions – DIFC, ADGM, Luxembourg, Europe
Soumen Ghosh
Soumen is a Master of Computer Applications and has over 20 years of experience in media and technology applications. He has consulted international organisations on technology transformation and helped implement holistic media solutions across India and the United Arab Emirates. Soumen now consults on fintech applications in money services, robo-advisory and blockchain-related solutions. He is an active NFT creator, with profiles on OpenSea and Mintable.

Get in touch! for more information on setting up virtual assets service providers in the adgm