The Registration Authority of Abu Dhabi Global Market (ADGM) officially released the Distributed Ledger Technology (DLT) Foundations Regulations 2023, referred to as the “Regulations”, published on November 1, 2023. This marks a significant milestone in the evolution of digital assets regulatory frameworks across the region and at an international level.

This legal framework has been crafted to establish a comprehensive structure catering to the specific requirements of the blockchain industry, encompassing DLT foundations and decentralized autonomous organizations (DAO).

As per the Regulations, DLT foundations are defined as a legal entity with separate legal personality established to use, deploy, develop, facilitate or support DLT or to issue tokens. These foundations have legal personality and accordingly can sue and be sued.

The governance structure of a DLT foundation:

DLT foundations must have (i) founders (persons establishing DLT foundations, who may, until they resign or step down, participate in managing certain activities); and (ii) a council (with a minimum of two and no more than sixteen councillors managing the day-to-day operations).

DLT foundations may also involve other governing bodies, namely (i) beneficiaries (persons with rights to the DLT foundations’ assets); and (ii) tokenholders (persons holding rights to tokens issued by DLT foundations). Tokenholders may or may not be beneficiaries; tokenholders may not have rights to the DLT foundations’ assets but have governance rights regarding project management.

The Regulations stipulate each DLT foundation to have a charter, which must include the following provisions:

- Rules for the appointment, removal and decision-making quorum of the governing bodies,
- Guidelines for token issuance, specifying types, purposes and attached rights, and
- Provisions concerning the DLT foundation’s assets, white papers, and DLT frameworks, including audit frequency and security measures.

If a DLT foundation issues tokens, its charter must outline the rights and categories of relevant tokenholders, including whether the tokens are voting or non-voting and the scope of matters decided upon by the voting (delegated matters). Delegated matters reserved for tokenholders must be distinguished from reserved matters falling within the competence of the DLT foundation council. As part of the reserved matters, the councillors are responsible for ensuring compliance with applicable laws. Councillors must exercise their veto rights on decisions of tokenholders which (i) violate applicable laws, public order, morality, or the charter, (ii) contradict the principles set forth in the white paper, or (iii) could lead to a detrimental result caused by an attack on the DLT framework.

Under certain circumstances specified in the Regulations, councillors and other persons exercising control over DLT foundations, including beneficial owners may be held accountable for breaches by DLT foundations, and be liable for any loss in value of the DLT foundation assets resulting from the breach.

Registration of a DLT foundation:

To register a DLT foundation, the founder must submit several documents to the ADGM Registration Authority (Registrar), including:

- a charter,
- a declaration of compliance with the applicable laws,
- a statement of initial beneficial ownership, and
- if developed, a hyperlink to the white paper providing project details and DLT framework outlining details of the DLT used.

Additionally, the Registrar may also require founders to submit legal opinions and security audit reports with respect to the DLT charter, white paper, and DLT framework.

In order to be registered by the Registrar, the charter must require the DLT foundation to have initial assets with the minimum initial asset value. The minimum initial asset value of a DLT foundation must be paid within six months following the receipt by the DLT foundation of the registration certificate under section 9 of the Regulations, or when the DLT foundation becomes active as prescribed by the Registrar, whichever comes first. Nothing in this subsection shall be construed as allowing the DLT foundation to operate before it receives the registration certificate. The minimum initial asset value must be paid in fiat currency and cannot be contributed in any other form, including tokens.

Furthermore, existing foundations can become a DLT foundation under the Regulations as outlined in Sections 107-111.

DLT foundation obligations:

DLT foundations must disclose certain information (such as names of founders and councillors), keep adequate and fair accounting records, appoint auditors to review annual accounts, and conduct periodic security audits on data protection and security systems.

Councillors may be liable for breach of these requirements, with fines determined depending on the type of breach as outlined in the Regulations. Additionally, Section 120 thereof also allows striking off DLT foundations for default.

The Regulations represent a significant step in the field of digital assets regulation and foster a conducive environment for innovation. This regulatory framework not only enhances standards within the region but also provides regulatory certainty and establishes a global precedent as the world’s pioneering model of its kind.