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November 9, 2022

How ADGM is decoding the virtual asset landscape

In balancing regulatory risks against the needs of a fast-growing and ever-changing industry, Abu Dhabi Global Market has emerged as a global hub for innovation and trading in virtual assets.

By Emmanuel Givanakis

ADGM
Virtual assets like Bitcoin have become mainstream for trading and investment. (Photo by Have a nice day Photo/Shutterstock)

The potential of new financial technologies, particularly across distributed ledger technology and digital assets, including virtual assets (VAs), is becoming increasingly recognised as an engine for the transformation of financial services. 

The outcomes generated by these changes have the potential to make markets more transparent, cheaper and less vulnerable to fraud. The growing introduction and use of digital assets can potentially provide the ability to trade, transfer or hold large amounts of value globally. 

While certain blockchain technologies have been around for a decade, it is really only in the past couple of years that VAs like Bitcoin or Ethereum have truly moved into mainstream consciousness, particularly as a means of trading and investment. 

Recognising and understanding the recent market challenges within the VA industry, there is clearly a growing call for greater regulatory scrutiny and oversight of the industry, to ensure the risks posed by these activities are understood and mitigated appropriately. The conversations extend across investor protection requirements, custody arrangements, the use of various technologies within the industry, and the avoidance of illegal activities such as money laundering. 

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Against this backdrop, and being at the vanguard of providing an innovative and progressive regulatory approach to financial services, Abu Dhabi Global Market’s (ADGM) Financial Services Regulatory Authority (FSRA) established a first-of-its-kind comprehensive regulatory framework in 2018 for digital assets and a specific framework for VAs. 

ADGM’s Rationale for regulation

Since 2015, ADGM, as an international financial centre (IFC), has been taking a leading role in balancing regulatory risks against the needs of a growing and innovative industry. In doing so, ADGM has emerged as a truly revolutionary jurisdiction that provides certainty for, and responds to, regional and international players seeking opportunities to establish and grow their regulated VA activities. The establishment of these digital assets and VA regulatory frameworks has placed the UAE capital, Abu Dhabi, on the map as a regional and global virtual assets trading centre and blockchain hub.

The question as to why VAs should be regulated was one that the VA industry itself has continued to grapple with, as both industry and regulators question the merits and challenges of different regulatory approaches. That being said, ADGM is of the view that there are a number of key reasons why regulation is necessary, and that regulation is an important part of both the current and next steps in the evolution of the industry. 

Our view is that regulation will better protect investors from a variety of risks. In our experience of authorising, and now supervising, VA players, no one within the ADGM ecosystem contests that. For that reason, among many others, we credit the industry players now operating within ADGM, for they too believe that they are also better at protecting clients.  

And having the right players within ADGM now allows the FSRA to focus on the ever-changing way the industry, and our regulatory framework, respond to these risks, across transparency obligations, security and safekeeping, technology governance and operational requirements, money laundering, fraud and cyberattacks, custody arrangements and in relation to clear, transparent exchange operations, including in relation to market manipulation and price volatility. 

Regulatory authorities, such as the FSRA, can now also keep a close watch on new VAs wanting to be used by market participants, considering relevant key risks across security, traceability, exchange connectivity, functionality and maturity. 

Within a landscape that had little to no regulation before 2018 – and with many questioning the safety and practicality of investing in VAs – Abu Dhabi has sought to play its part in the global industry and regulatory developments, but in a manner that maintains credibility by providing transparency and integrity to the marketplace with a robust and comprehensive regulatory framework. 

How ADGM is growing the virtual asset ecosystem

In the years following the establishment of the framework, ADGM has evolved to become an IFC of choice for many regional and international businesses and investors who wish to enter the digital and VA market. Moreover, being the largest operational jurisdiction of VAs in the MENA region, ADGM aims to enable and encourage more local and global VA players to join its fast-growing virtual assets hub. We anticipate that such inclusions would support the expanding financial needs of investors, businesses and financial institutions across the region. 

It is important to stress that managing the unique yet complex regulatory environment that accompanies digital assets requires a strong and skilled regulatory team, ensuring that it has a depth of knowledge, insight and experience. To do this, the FSRA has had to continuously interact with the various and diverse VA asset players and stakeholders to stay up to speed with industry or product innovation and technological developments, thereby ensuring that licensed firms meet the desired regulatory requirements. 

The FSRA, as a financial services regulator, operates to world-class regulatory standards and principles, but also understands, and acknowledges that the VA landscape is dynamic and one that is constantly evolving. Therefore, creating a trustworthy and agile environment for our stakeholders is at the core of FSRA’s regulatory policy thinking.

While we are proud of how our regulatory framework has operated so far, we are humble enough to know that we do not have all the answers and that the journey has only just begun. To move forward, we look forward to even greater engagement with this industry and other like-minded regulators. 

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