The Abu Dhabi Global Markets (ADGM) is set to become a global cryptoasset hub as companies queue up to get licensed under the stringent regulatory framework the financial centre released for the digital asset class in June last year.

As digital assets such as Bitcoin and Ripple that use blockchain technologies grow exponentially, companies are looking for jurisdictions with clear and progressive regulations to base their operations in.

Many financial regulators around the world are as yet undecided on how to treat cryptoassets. Facebook, the world’s largest social media company, has said it plans to launch a digital currency, Libra, in 2020. The currency will be based in Switzerland in part due to a lack of regulatory clarity over the treatment of digital assets in the United States.

Officials at the Financial Services Regulatory Authority (FSRA), the ADGM’s regulator, told Zawya in a telephone interview last month that they view their regulations “comprehensive” and as a global “high water mark”.

Given the potential of cryptoassets to promote financial innovation and financial inclusion, “we saw it as untenable not to regulate them,” said Wai Lum Kwok, executive director - capital markets at the FRSA.

“Our framework is designed to address a wider range of risks associated with crypto asset activities, including anti-money laundering (AML) and counter financing of terrorism (CFT) risks, custody risks, technology, governance and exchange operations,” said Kwok.

That approach is attracting interest from around the world.

Executives at Securrency, a financial services blockchain company based in the US, began looking for an international operating base in early 2017 due to uncertainty at the time over how regulators in the US would treat digital assets.

Singapore, Switzerland, London, and Dubai, and Abu Dhabi were all considered, said John Hensel, chief operating officer at Securrency. After discussions with the FSRA in 2017, they decided to launch in ADGM’s RegLab sandbox and establish their international headquarters in Abu Dhabi.

Operating under the supervision of a single, unified regulator is beneficial, said Hensel, while the environment of capital-raising in the ADGM and in the UAE is part of the attraction too.

But the biggest drawcard has proven to be the thoroughness of the regulations, covering operational aspects including IT security, corporate governance, and market abuse and reporting.

“Finding the toughest regulator globally was the most important thing for us,” said Christopher Flinos, co-founder at Hayvn, an over-the-counter (OTC) trading platform targeting high volume clients, which has received an in-principle approval (IPA) from the FSRA.

Leon Smith, the CEO of DEX (Digital Assets Exchange), which also has an IPA, sees tough regulations as necessary. “In order for the digital asset industry to interface with institutions you need to be held to the same standard, and in some instances, you could say even a higher standard, just due to the opacity of some of the assets that you interface with,” Smith said in an interview in Dubai in April.

Not for everyone

When the rules were first released there was a flood of interest, with companies from around the globe looking to set up in UAE free zones, said Oliver Sykes, a partner in the Digital Trust at PwC Middle East, which has advised companies on the regulations. 

But it quickly emerged that while firms had significant amounts of capital, many lacked fully established IT, legal, compliance and risk functions in the region, said Sykes. “People underestimated the level of rigour that’s required in order to comply with the ADGM’s regulations,” he said in a telephone interview in April.

Kwok concurs. “I can say that for every ten applications, we turned away nine,” he said.

As to when final licences will be granted, Kwok said it’s a question of how fast companies can ramp up their operations. “We’d like it to be this year, but it’s hard for us to control.”

A broader economic impact

Along with the government-level focus on introducing blockchain technologies across the UAE, there’s potential for a broader economic impact arising from formal regulation of cryptoassets, such as in the remittance and real estate sectors, believes Monark Modi, the CEO of Bitex UAE, a Dubai-licensed crypto exchange.

Some participants in the UAE real estate market have been considering whether they could begin accepting crypto currencies as a means of payment properties, and regulations could give more clarity to the sector, he said. 

The ADGM could also become a hub for international and local companies to carry out international coin offerings (ICOs), something that could help create deal flow and liquidity for ADGM-licensed exchanges while creating capital raising opportunities for local companies, said Modi. 

And an influx of crypto firms will also help with ADGM’s mission to grow as a hub for FinTech and provide opportunities for innovation in the broader UAE financial sector. Beyond exchanges, brokers and custodians, they’re also seeing interest from the wider ecosystem of service providers, advisors, and other firms, said Simon O’Brien of the FSRA.

Attracting financial big guns

The focus for many of the companies seeking an ADGM licence is to build trading platforms and custody solutions that can utilised by institutional investors. While retail investors are typically willing to invest via unregulated or lightly regulated platforms, there’s a much higher bar for institutional investors, which have rigorous guidelines and on-boarding processes.

For Smith, whose DEX platform will target both retail and institutional investors, the goal is to satisfy both the law and the internal compliance requirements that large investors have. “When you have exchanges that institutional investors can interface with, if that financial institution is open to trading in digital assets, it gives them the option,” he said.

Flinos said while he currently needs to explain to international investors about the ADGM and why they’re based there, he is sure awareness about the financial centre will spread soon.

“As [the ADGM] continues to have success, that’s a discussion we won’t need to have as often because the ADGM will become a household name when it comes to digital currency regulation,” he said.

(Reporting by Stian Overdahl; Editing by Brinda Darasha)

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