How Abu Dhabi is laying the groundwork for a digital financial sector

To fully reap the benefits of a digital economy, the collective efforts must be supported with robust governance practices in addition to progressive regulatory frameworks that ensure fairness, equal opportunity, and transparency across the board.

In recent years, Abu Dhabi Global Market (ADGM) has set the regional industry standards when it comes to fostering exactly this type of holistic ecosystem; one that encourages innovation and experimentation in the financial industry. Two particular sectors that have been thriving under ADGM’s oversight are digital securities and virtual assets frameworks.

In a step that was once seen as far-fetched, ADGM’s progressive yet rigorous regulatory framework addresses the full range of associated risks, including those relating to market abuse and financial crime, consumer or investor protection, technology governance, custody, and exchange operations.

ADGM’s advanced virtual asset framework tackles the issue related to ensuring the long-term linkage between tokens and real assets like gold bars, apartment buildings, works of art, and many more. As a forward-thinking jurisdiction, ADGM has also taken into consideration the uncertainty that comes with a hyper-liquid market that could become vulnerable to cybersecurity threats and hacking.

Nevertheless, in order to fully realise the importance of developing such regulatory measures around digital securities and virtual assets, one has to realise the true value each of them brings to the ecosystem.

The benefits of empowering digital securities are many. For example, digital securities give investors (of all stages) a permission-based blockchain certificate that adds a layer of trust and transparency, while also avoiding human error and lowering the risk for companies and investors alike.

In addition, the immutable nature of digital securities ensures minimal disruption from future disputes, especially as processes are tracked and automated. Besides, when a company goes through capital activity in the future (capital raise, being acquired, IPO, reverse takeover, etc) it won’t need to hire lawyers to review the books just to ensure consistency and accuracy, since it had already been sorted – reducing time and cost in the process.

ADGM is focused on developing a leading global hub for digital assets

Lastly, knowing that digital securities are blockchain-based, means that it allows for efficient secondary market trading without distributing the day-to-day operations of a company.

On the other hand, a token economy promises a more efficient and balanced financial sector by streamlining the process of creating, buying, and selling securities. More specifically, virtual assets generate greater liquidity on the market by tokenising assets – giving investors and sellers more freedom to trade and benefit from liquidity premium (for example, a Banksy graffiti on a wall, a high-value real estate owned by 200 people or a collectible memorabilia item).

While still early to fully realise the impact of the token economy, it has shown clear signs that it could make the financial sector more accessible, cheaper, faster, and easier – unlocking millions of dirhams in illiquid assets and increasing the volume of trades globally.

ADGM’s ability to foresee the opportunity and prepare the regulatory frameworks needed to encourage homegrown innovation, market adoption, and expansion, has proven to be effective. With the launch of one of the most comprehensive, transparent, and robust regulatory frameworks in the world, ADGM is focused on developing a leading global hub for digital assets. With 10 digital assets exchanges and service providers approved so far, ADGM has become a strong draw as the destination of choice for virtual assets and digital securities activities.

Along with the UAE government’s focus on introducing innovative technologies across the country, there is potential for a broader economic impact arising from the regulation of digital assets. It will open up new possibilities enabled by the tokenisation of currencies, securities, fund units, and real estate investment trusts in the region.

International players are embracing this space, with DBS, the largest bank in South East Asia planning to launch its own digital assets exchange, PayPal enabling customers to pay using virtual assets as well as trade such assets, and JP Morgan allowing its digital currency, JPM Coin, to be used commercially for the first time by its clients to send payments around the world.

Though, beyond the regulatory obstacles that ADGM is taking active measures to address, the issue of compliance, which requires a level of alignment between cross-border jurisdictions, is becoming more apparent. This is needed not just for the creation and initial sale of securities or tokens, but also for trading them on secondary markets.

As more jurisdictions adopt progressive measures, it would consequently unlock free and international exchange of security tokens. Some companies are already helping to solve the compliance issue. Securrency, for example, another Abu Dhabi-based startup has created powerful regtech and fintech infrastructure technology that delivers unmatched multi-jurisdictional identity and compliance portability across different networks.

Laying the regulatory groundwork needed for a fully digital economy is a data-driven process that requires continuous experimentation and innovation, however, the return will reap tremendous opportunities for all stakeholders in all industries. Such debates and more will be discussed during the upcoming virtual edition of FinTech Abu Dhabi, MENA’s leading fintech festival, on November 24-26.

Richard Teng is CEO, Abu Dhabi Global Market Financial Services Regulatory Authority