In 2018, international financial centre and free zone Abu Dhabi Global Market (ADGM), home of the capital’s Financial Services Regulatory Authority (FSRA), became the first jurisdiction in the world to introduce a comprehensive regulatory framework for the regulation of virtual asset activities.
Since opening for business in 2015, ADGM has been the focal point of innovation within the emirate's finance sector, and its propensity for said innovation has pushed it to drive growth and transformation within this industry.
Today, blockchain and the technologies stemming from it like cryptocurrencies and NFTs are proving themselves a viable component of the future of the web. The pseudoscience facade surrounding this field has begun to dissipate, and both the public and private sectors are looking for ways to be involved. Given that the global Web 3.0 blockchain market is estimated to be valued at $87.8 billion by 2030, this should come as no surprise.
The Abu Dhabi SME Hub spoke with ADGM to learn more about its role within the overall Web 3.0 equation, the current state of this sector within the MENA market, and the opportunities present.
The FSRA introduced the world's ﬁrst of its kind comprehensive virtual asset regulatory framework at a time when virtual assets and blockchain technology were still breaking into the mainstream regionally. What was the vision and strategy behind launching these regulations at such an early stage?
By introducing a risk-based, proportionate and progressive regulatory framework, Abu Dhabi Global Market and the Financial Services Regulatory Authority aimed to take a leading role in instilling proper governance, oversight, and transparency over virtual asset activities.
Our vision was to strategically position ADGM as the destination of choice for established tech companies, tech startups, venture capitalists, or virtual asset enthusiasts who were ready to take advantage of the future of finance.
With the increasing adoption of blockchain, virtual assets were quickly becoming a part of the new age of finance and responsible virtual asset players were seeking a regulatory regime upholding high standards that fostered market confidence both regionally and internationally. Our strategy for enhancing our progressive regulatory framework revolved around that.
We wanted to set best-in-class standards of regulations for virtual assets to address the full range of risks associated with virtual asset activities to cater to serious global participants seeking a trusted and well-regulated environment to operate in this space. These include stringent regulatory requirements on Anti-Money Laundering and Combatting the Financing Terrorism (AML/CFT) due diligence and surveillance, investor protection, safe custody of customer money, technology governance, as well as fair and orderly market operations.
Engagement with fellow global regulators also validated our position that the key risks highlighted must be addressed for virtual assets to be more widely accepted and institutionalised.
Fast-forward to 2022, how have these regulations helped establish Abu Dhabi's position within the sphere of virtual assets, both regionally and globally?
Abu Dhabi and the UAE exist as one of the most financially innovative jurisdictions in the world that seamlessly connects global financial markets to power the future of the digital economy. Virtual assets and the broader Digital Assets including digital securities were the natural next step for the economy to explore and grow in this space.
Financial Innovation is an integral part of ADGM’s DNA. Through ADGM FSRA’s pioneering movement to provide a safe and regulated infrastructure in financial services, we were able to bring together multilateral trading facilities, brokers, custodians, asset managers and other intermediaries conducting virtual asset activities in Abu Dhabi and the UAE from the region as well as globally.
Working closely with the Abu Dhabi government and key agencies, ADGM has a holistic ecosystem and regulatory framework for virtual assets players, entrepreneurs and startups to innovate, market their products and solutions and grow their businesses in a reliable and supportive environment. Businesses and consumers investing in virtual assets can be assured that the holder of the ADGM licence complies with the highest level of standards.
Along with the government's focus on introducing innovative technologies across the UAE, there’s potential for a broader economic impact arising from the regulation of virtual assets. It will open new possibilities enabled by the tokenisation of currencies, securities, fund units, and real estate investment trusts in the region.
In March 2022, to continue our innovative and progressive leadership in the financial markets, the ADGM’s FSRA published a consultation paper proposing significant changes to the capital markets framework including strengthening our innovative leadership in virtual assets and spot commodities trading regionally and internationally, and drive advancements to position ADGM and Abu Dhabi well for the future.
The enhancements in the consultation paper to our capital markets framework serve to unlock the next stage of investment and growth opportunities in virtual assets and spot commodities (including emission allowances).
We have developed a framework to facilitate a growing ecosystem, and as part of our innovative approach towards financial services regulations and rules, we embraced the new technologies around fintech and how it interplays with traditional finance.
As a regulator, we establish a robust, transparent and fair regulatory framework and we encourage people to set up and utilise this framework. Ultimately, as a regulator, we have to make sure that we licence businesses with the right risk mitigation in place and appropriate supervision to ensure the stability and integrity of the financial centre.
Earlier this year, international virtual exchange Kraken indicated its intention to launch in ADGM. What benefits can companies such as Kraken access from being registered at ADGM?
With the growing knowledge, awareness and demand amongst the broader community for virtual assets, international companies such as Kraken will always look for ways and means to operate within a stable and advanced ecosystem to continue their journey of crypto adoption across borders.
As one of the pioneers in regulating the digital assets space, we have been for example actively participating in global regulatory and industry forums, such as IOSCO, International Association of Trusted Blockchain Applications and Global Digital Finance to share and discuss our regulatory approach and experiences. We continue to work closely with global stakeholders to ensure we provide the best-in-class regulatory environment for market participants to pursue their business strategies and expand their growth.
Along with a progressive framework, market access and investment opportunities, ADGM’s initiatives such as Digital Lab make it the ideal launchpad for fintech companies, especially for tech startups and VCs.
A unique environment hosted by the FSRA, the Digital Lab enables open innovation and collaboration between the financial industry, tech innovators and regulators to identify and address shared challenges together. It includes a virtual space to pose industry challenges, and develop and test solutions to address those challenges.
It is one of the world’s most active regulatory sandboxes comprising a dynamic community of over 100 participants including financial institutions, fintech startups and innovators, public sector organisations, academic institutions, VC investors and professional services firms.
What are the greatest opportunities for innovation within the realm of Web 3.0 today that entrepreneurs can capitalise on?
Today, all businesses are in some way reliant on the development of Web 3.0 and the demand for blockchain, crypto assets, metaverse, NFTs, tokenisation, etc. This will only increase in the coming years as it is set to become even more crucial to the way companies function.
Entrepreneurs are finding new ways to use the decentralised architecture of Web 3.0 to offer immense utility to businesses.
Decentralised Finance, or DeFi, is an area that we, as regulators, are at the forefront of as it entails the evolution of financial technology. Recently in April 2022, ADGM’s FSRA issued a paper to engage the DeFi community, including financial institutions, digital asset businesses, policymakers, industry practitioners and other stakeholders, and foster a dialogue on the FSRA’s views on the direction of DeFi, high-level policy positions that the FSRA is considering adopting, and what a DeFi regulatory framework might look like.
DeFi is a way of delivering financial services through automated software protocols. In light of regulatory developments in crypto assets, DeFi will likely go through similar iterations to realise the potential opportunities arising from it, address associated risks and evolve what a future regulatory framework may resemble.
Our desire for innovation continues to be ingrained in our corporate DNA as we adapt to the ever-changing demands of businesses in the sectors we serve, especially for finance and tech startups.
What are the most notable challenges facing Web 3.0 innovation in the region today, and how can they be addressed?
When thinking of challenges within the Web 3.0 realm, we can travel back more than 25 years ago to the early days of the internet.
Back then, people across borders recognised the potential but concerns and scepticism existed for things (that an individual does not think twice about today) like giving out their credit card information online to buy something.
Some of the key risks with DeFi relate to financial crime including fraud, money laundering and the financing of terrorism and proliferation.
ADGM takes its commitment towards protecting the integrity of the financial system and users of financial services seriously and is continuously working to understand how to mitigate emerging risks arising from Web 3.0 innovation, and where necessary, introduce appropriate regulatory safeguards. In doing so, it is important to use a consultative approach and work closely with the Web 3.0 community to ensure that any such regulatory framework is robust yet progressive and practical for the industry.
With increasing crypto participation by both consumers and investors, ADGM has been increasing its efforts in accelerating new strategies in the virtual assets sector to provide growth and investment opportunities while supporting the financial sustainability and the economic diversification of Abu Dhabi.
At the same time, FSRA will need to remain agile and provide timely updates to its regulatory policies and requirements in response to the rapid pace of transformation. This is key to bringing clarity, credibility and confidence to businesses, investors and stakeholders to move in and further energise Web 3.0 innovation.
How do you foresee virtual assets and blockchain tech co-existing with traditional finance? We are already seeing startups step in to fill the gap.
Notwithstanding the recent correction in the virtual asset markets that has shaken investor confidence, the blockchain industry is expected to continue growing. The use of blockchain, which forms the foundation of all virtual assets, goes beyond powering cryptocurrencies. Over time, the gap between new-age finance enabled by blockchain and traditional finance will get smaller.
In terms of blockchain technology for digital securities, one key area is institutional investments backed by securities in assets such as private equity, real estate and corporate bonds. For instance, Securrency – an FSRA-licensed firm, provides enterprise-grade platforms and infrastructure with programmable compliance capabilities for moving, storing and issuing digital assets. Recently, Securrency launched the first tokenised fund in ADGM.
There is also the use of blockchain in the Web 3.0 economy. Particularly, DeFi has the potential to act as a bridge between TradFi and the virtual asset world, allowing for customisation and integration of financial services efficiently. An example we cited in the FSRA discussion paper, is that of a TradFi broker offering margin accounts. Instead of holding customers’ collateral as cash in the bank or in money market funds, which have low returns, the broker may stake the fund in a DeFi protocol and earn a relatively higher return. As soon as the customer puts in a trade order, the protocol automatically converts the virtual asset back into fiat and executes the transaction. This can potentially lower the cost of service for TradFi customers.
However, I cannot emphasise enough the importance of regulation. We can expect TradFi players to start exploring this space very carefully because it is not regulated, and they have obligations to safeguard their customers’ interests. For traditional financial services firms to incorporate DeFi in a more meaningful way, they will need more regulatory certainty.
We are seeing a growing number of VCs and investors focused on Web 3.0 deploying investments in the region. Why are Abu Dhabi and the UAE ideal destinations for these companies and individuals?
The number of investors that financed UAE-based startups in 2021 grew by 54% when compared to 2020. Fintech and e-commerce accounted for 36% of all transactions registered in the UAE in 2021. UAE-based startups accounted for 26% of all transactions closed across the MENA region.*
These numbers reflect the strength and exponential growth of the SME and startup industry in Abu Dhabi and the wider region of the UAE; also showcasing the underlying potential of this industry to attract VCs and accelerators.
In merely 7 years, ADGM has been able to shape and transform the local, regional, and global regulatory landscape with robust and progressive regulations and rules that are in line with international best practices and standards, cutting-edge digital solutions such as FSRA’s Digital Lab, and a well-developed tech innovation ecosystem that connects them with mentors, investors and accelerators to support their growth and aspirations.