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The emirate of Abu Dhabi is continuing to push its bold financial technology (fintech) agenda in 2018, with Abu Dhabi Global Marketplace (ADGM) at the heart of the strategy.
Abu Dhabi’s approach to the regulation of initial coin offerings (ICOs), often used to finance startups, is evidence of its desire to attract fintech developers.
In 2017 there were regular announcements of new initiatives to foster the growth of new and innovative financial technologies.
This year looks set to be no different. For example, ADGM will launch the Innovation Centre – a physical hub where fintech communities can come together to foster an ecosystem for local innovation. The centre will house a co-working space for fintech startups to meet with financial institutions, investors and potential partners.
It will also be home to participants of the Regulatory Laboratory (RegLab) – ADGM’s regulatory sandbox that allows companies to live-test innovative fintech products in collaboration with Abu Dhabi’s Financial Services Regulatory Authority (FSRA). The centre has said it welcomes startups focused on artificial intelligence (AI), blockchain, DLTs, biometrics, e-payments and regtech.
In 2017, Abu Dhabi became the first state globally to look at regulating ICOs. This new form of funding is similar to crowd funding, but “crypto” startups raise money by issuing a new “cryptocoin”, while users pay them in bitcoin or ethereum.
Abu Dhabi’s FSRA released guidelines on ICOs and virtual currencies in October 2017 for the first time. It said if an ICO has the characteristics of a security, such as giving a person ownership of shares in a company, then the FSRA would regulate it.
Under the new guidelines, prospective ICOs are asked to publish a prospectus, just like when firms apply for a more conventional initial public offering (IPO). Any market intermediaries or secondary market operators dealing with ICOs must be approved, the FSRA said.
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However, there are some ICOs that will remain unregulated. If a token issued as part of an ICO does not constitute an offer of securities then it will remain unregulated. The regulator said investors should exercise “extreme caution” before committing money.
Richard Teng, CEO at FSRA of ADGM, said in a statement: “ICOs have transformed the capital formation landscape and global regulatory frameworks are evolving to adapt to such innovation.
“Participants exploring the issuance of ICOs that offer real value to the market and wish to operate in our regulatory framework are encouraged to engage us early to gain insights into the applicable regulatory regime.”
Attitudes to cryptocurrency
The FSRA’s open approach has contrasted with other approaches to cryptocurrency globally. Neighbouring emirate Dubai, for example, recently issued a warning about ICOs and is against ICO regulation. China has completely banned ICOs.
Uzair Usman, CEO of global business consultants Kincsem Consultancy, praised Abu Dhabi for being “forward thinking”.
Usman told Computer Weekly: “If regulated in the right way, ICOs could prove to be an exciting way of raising new funds. I believe Abu Dhabi is well positioned to develop a thriving cryptocurrency startup scene if it supports ICOs for the whole Gulf and even the global region.”
But Usman admits that cryptocurrencies are a completely new financial instrument that – if not regulated – can lead to a huge grey economy. “In theory, cryptocurrencies can be started by anyone and traded across countries. If left unregulated, illegal payments, money laundering and even criminal activities can be funded through cryptocurrencies.
“ICOs are attractive due to deregulation, however for Abu Dhabi to really make something out of it, it would need minimum regulation to at least safeguard investor funds,” added Usman.
Philip Nunn, CEO of the UK-based investment house Blackmore, agreed that Abu Dhabi is “innovative”.
“Countries and states that aspire to attract new innovation will thrive if they embrace ICOs and don’t over regulate,” he said.
“People mocked the advent of the internet; they said it was never going to work. Then people mocked the advent of peer-to-peer lending and platforms that allowed companies to offer shares in their growing business in exchange for fairer returns and with no need to use bank lending. But ICOs are huge, it’s here to stay, and it’s going to be very big.”
Boon for startups
However, Raghu Mandagolathur, head of research at Kuwait-based research house Markaz, warned that the ICO market is “diverse” in terms of quality and still at a very nascent stage.
“The grey area surrounding ICOs could potentially pave way for fraudulent activities and money laundering,” he said.
Referring to the banning of ICOs in some countries, Mandagolathur said these bans might be temporary.
“It shows that regulations need to keep up with these crypto-currencies to avoid major scams. This would be the major challenge for Abu Dhabi’s FSRA as it needs to regulate ICOs and bring the offering companies under a regulatory framework, while monitoring their progress closely.”
On balance, Mandagolathur at Markaz, said if ICOs are regulated efficiently, they could prove to be a boon for startups in Abu Dhabi.
“They offer better liquidity to investors unlike venture capital, where funds are locked until there is an IPO or an acquisition,” he said. “Hence, it would be easier for budding startups to find more investors through ICOs at a very early stage rather than relying on VCs.”
Mandagolathur said the United Arab Emirates (UAE) is already at the forefront among Arab nations in the startups space, but “could further consolidate its position and compete globally due to this advancement”.