4.7.1. Requirements related to a reserve of assets

(1) Issuer of a Fiat stablecoin must make reserve assets available for examination and for verification of the issuer of a Fiat stablecoin's disclosures on the AFSA’s request.

(2) Issuer of a Fiat stablecoin must fully back such stablecoin with reserve assets, meaning that the value of the reserve assets must at all times be at least equal to the nominal value of all outstanding units of the Fiat stablecoin in circulation.

(3) Issuer of a Fiat stablecoin must issue stablecoins whose reserve assets consist of only one of the following fiat currencies (“reference assets”):

(a) Australian dollar;

(b) British pound sterling;

(c) Canadian dollar;

(d) Chinese yuan renminbi;

(e) European euro;

(f) Japanese yen;

(g) New Zealand dollar;

(h) Norwegian krone;

(i) Swedish krona;

(j) Swiss franc;

(k) United States dollar; or

(l) any other currency, except for Kazakhstani tenge, agreed with the AFSA.

(4) Issuer of a Fiat stablecoin must ensure that the reserve of assets is operationally segregated from the issuer of a Fiat stablecoin’s proprietary assets and from the reserve of assets of other Fiat stablecoins.

(5) The reserve of assets must be composed and managed in such a way that the liquidity risks associated with the permanent redemption rights of the holders are addressed.

(6) Issuer of a Fiat stablecoin that offers two or more categories of Fiat stablecoins to the public must operate and maintain segregated pools of reserves of assets for each category of Fiat stablecoins. Each of these pools of reserve of assets must be managed separately.

(7) Issuer of a Fiat stablecoin must determine the aggregate value of reserve assets by using market prices. Their aggregated value must be at least equal to the aggregate value of the claims on the issuer of a Fiat stablecoin from holders of Fiat stablecoins in circulation.

(8) Issuer of a Fiat stablecoin must conduct monthly reconciliation of each Fiat stablecoin to demonstrate that the Fiat stablecoin is fully backed with reserve assets.

(9) The reconciliation must include the information that the issuer of a Fiat stablecoin meets requirements under DAA 4.7.1 and DAA 4.7.3.

Guidance:

If an issuer of a Fiat stablecoin accepts fiat currency from a Client in exchange for giving them Fiat stablecoins. The fiat currency held by the issuer would be considered as Client Money, and the issuer of a Fiat Stablecoin would need to comply with the Client Money provisions in the COB.

4.7.2. Independent audit

(1) Issuer of a Fiat stablecoin must mandate an independent third party audit of the reserve assets annually but not later than four months after the close of its financial year.

(2) The result of the audit conducted under (1) must be provided to the AFSA without delay, at the latest within 4 weeks of the reference date of the valuation. The result of the audit must be published within three weeks of the date of the provision of the result of the audit to the AFSA.

(3) The AFSA may instruct the issuer of a Fiat stablecoin to delay the publication of the result of the audit in the event that:

(a) the issuer of a Fiat stablecoin has been required to implement a recovery arrangement;

(b) the issuer of a Fiat stablecoin has been required to implement a redemption plan;

(c) it is deemed necessary to protect the interests of holders of a Fiat stablecoin;

(d) it is deemed necessary to avoid a significant adverse effect on the financial system of the AIFC;

(e) the AFSA considers appropriate in pursuing the Regulatory Objectives.

(4) The valuation referred to in DAA 4.7.1 (7) at market prices must be made by using mark-to-market.

(5) When using mark-to-market:

(a) the reserve asset must be valued at the more prudent side of the bid and offer unless the reserve asset can be closed out at mid-market; and

(b) only good quality market data must be used. The issuer of a Fiat stablecoin must record the basis on which they deem market data of good quality, and ensure that such data is assessed on the basis of all of the following factors:

(i) the number and quality of the counterparties;

(ii) the volume and turnover in the market of the reserve asset; and

(iii) size of the reserve of assets.

(6) If the use of mark-to-market is not possible or the market data is not of sufficient quality, a reserve asset must be valued conservatively by using mark-to-model.

(7) The mark-to-model must accurately estimate the intrinsic value of the reserve asset, based on all of the following up-to-date key factors:

(a) the volume and turnover in the market of that reserve asset;

(b) the size of the reserve of assets; and

(c) market risk, interest rate risk, and credit risk attached to the reserve asset.

(8) When using mark-to-model, the amortised cost method must not be used.

4.7.3. Custody of reserve assets

(1) Issuer of a Fiat stablecoin must establish, maintain and implement custody policies, procedures and contractual arrangements that ensure at all times that:

(a) the reserve assets are not encumbered nor pledged as Collateral;

(b) the reserve assets are held in custody;

(c) the issuer of a Fiat stablecoin has prompt access to the reserve assets to meet any redemption requests from the holders of Fiat stablecoins;

(d) concentration risk in the custody of reserve assets is mitigated and there is appropriate contingency planning in the event that a custodian is unable to perform its obligations; and

(e) concentration risks in the reserve assets are avoided; and  

(e) there is proper due diligence of the robustness of the custodian used, including as regards ensuring that there is a credible and comprehensive wind-down plan in place for each custodian used.

(2) Issuer of a Fiat stablecoin that issues two or more categories of Fiat stablecoins must have a custody policy for each pool of reserve of assets.

(3) Issuer of a Fiat stablecoin must operate and maintain only one custody policy per category of Fiat stablecoin.

(4) The reserve assets must be held in custody by no later than 5 working days after the issuance of the relevant Fiat stablecoins.

(5) A Person providing custody services must be a Person different from the issuer of a Fiat stablecoin.

(6) Issuer of a Fiat stablecoin must ensure that the Digital Asset Service Provider appointed as a custodian of the reserve assets has the necessary licences, expertise and market reputation to act as a custodian of such reserve assets, taking into account the accounting practices, safekeeping procedures and internal control mechanisms.

(7) The contractual arrangements between the issuer of a Fiat stablecoin and custodians must ensure that the reserve assets held in custody are protected against claims of the custodians’ creditors.

(8) The custody policies and procedures referred to in (1) must set out the selection criteria for the appointments of custodians of the reserve assets and the procedure to review such appointments at least annually.

(9) A custodian must comply with the rules relevant to Providing Custody, including those set out in chapter 8 of the COB (or, to the extent that the custodian is not based in the AIFC, in accordance with the rules of the jurisdiction of the custodian as well as any additional requirements which the AFSA may deem relevant to ensure that equivalent protections are in place as those provided by the Legal Framework provided by the AFSA).

4.7.4. Investment of reserve assets

(1) Issuer of a Fiat stablecoin must ensure that it has sufficient uninvested reserve assets to be able to meet the issuer of the Fiat stablecoin’s ongoing obligations under DAA 4.7.1 at all times.

(2) The instruments which the issuer of a Fiat stablecoin invests the reserve assets into must be held in custody in accordance with DAA 4.7.3.

(3) Issuer of a Fiat stablecoin must hold at least 95% of reserve assets denominated in the reference assets in:

(a) cash or cash equivalents including central bank reserve deposits, bank deposits and Central Bank Digital Currency, which must comprise at least 30% of reserve assets; or

(b) highly liquid financial instruments with minimal market risk, credit risk, and concentration risk, which could be liquidated rapidly with minimal adverse market impact, including the following:

(i) debt securities with residual maturity of 90 days or less, issued by governments or central banks of the reference assets specified in DAA 4.7.1(3) or local or international government agencies;

(ii) repurchase agreements with a maturity of 7 or less which are backed by (i) above; and

(iii) short-term government money market funds.

(4) Issuer of a Fiat stablecoin may invest up to 5% of reserve assets in precious metals. If an issuer of a Fiat stablecoin invests in precious metals, a 20% haircut applies to such investment.

(5) All losses, including fluctuations in the value of the financial instruments referred to in (3), must be borne by the issuer of a Fiat stablecoin.

(6) All profits or losses and any counterparty or operational risks that result from the investment of the reserve of assets must be borne by the issuer of a Fiat stablecoin.

(7) If an issuer of a Fiat stablecoin invests a part of the reserve of assets, it must describe in detail the investment policy and contain an assessment of how that investment policy can affect the value of the reserve of assets.

(8) Issuer of a Fiat stablecoin must, at all times, manage reserve assets effectively and prudently, at least by:

(a)maintaining reserve assets only with custodians, as agreed with the AFSA during the authorisation process:

(i) appropriately and validly authorised to hold the specific type of reserve assets; and

(ii) that segregate reserve assets maintained by them from their own funds;

(b) ensuring newly added reserve assets are held in accordance with their custody arrangements;

(c) putting in place policies and procedures to ensure reserve assets can be promptly accessed and converted into the reference assets at all times, for the purpose of processing and completing any redemption requests in accordance with DAA 4.11.2; and

(d) conducting regular risk assessments to evaluate the appropriateness of the composition of reserve assets in ensuring compliance with DAA 4.7.1(2).

(9) Issuer of a Fiat stablecoin must insert provisions in their agreements with the relevant financial services firms to ensure the AFSA has priority access to reserve assets, to the further extent permitted by applicable laws, for the purposes of the AFSA fulfilling its regulatory obligations.