Abu Dhabi's ADGM set to double number of cryptocurrency exchanges

Exclusive: Six companies are at various stages of preparations for a soft launch, chief executive of free zone's regulator says

The Abu Dhabi Global Market, the capital's financial free zone on Al Maryah Island, has robust systems in place to mitigate risks associated with digital assets. Photo: Mubadala

Abu Dhabi Global Market has three operational virtual assets, or what are commonly called cryptocurrency exchanges, and three more are at various stages of preparation for a soft launch as it looks to expand online asset trading options for investors, the financial hub's Financial Services Regulatory Authority chief executive said.

The soft launch phase refers to a stage where a company signs up clients and accepts their digital assets and fiat funds before commencing trading operations.

The regulator expects the “next few launches” to take place in the first half of next year, subject to final approvals, its chief executive Emmanuel Givanakis told The National in an interview.

Another six entities, including trading platforms and companies that offer custody services to investors, are looking at establishing operations.

“Apart from those 12, we have quite a large number of other firms looking to make applications,” said Mr Givanakis, who took over as chief executive of the financial free zone’s regulatory authority in April this year.

The regulator applies a “rigorous approach” to licence approvals as it wants to ensure entities are of “good quality”, he said.

The ADGM, which aims to connect the emirate with international markets in the Middle East, Africa and South and East Asian economies, is part of Abu Dhabi's efforts to diversify its economy.

The financial centre had 3,700 companies operating within it at the end of June, including global businesses, financial institutions, treasury centres, professional services firms, small and medium enterprises, start-ups and FinTech companies such as digital asset trading entities.

In 2018, the FSRA launched a comprehensive virtual asset framework for the trade of virtual assets by businesses, including platforms that the FSRA calls multilateral trading facilities (MTF), custodians and brokers.

These regulations have been continuously refined to mitigate risks and make the ADGM an attractive space for home-grown, regional and international companies.

“Upon the launch of the framework, the significant area of interest was in the exchange/MTF space,” Mr Givanakis said.

That interest has not waned. The FSRA expects it to continue amid “new and significantly growing interest in the dealing and custodian space”, he said.

“What this is reflecting is the systematic build-out of the entire virtual asset ecosystem, as part of the wider digital asset ecosystem, within the ADGM.”

Mubadala Investment Company-backed Midchains and Matrix are two fully operational virtual asset exchanges within the ADGM while the DEX, the third digital asset exchange, is in the process of soft launch, Mr Givanakis said.

The pipeline of new companies includes both start-ups and established international players, he said.

“What is interesting is that almost all of the launched firms, and the pipeline of firms coming in, represent a combination of international and regional players,” Mr Givanakis said.

International players that establish operations within the ADGM team up with local groups, particularly at the shareholding level.

Local and regional players and start-ups are also bringing in international players at the technical, managerial or ownership levels, which is a clear indication of the adaptability of the FSRA’s regulatory framework and its attractiveness, he said.

“Importantly, as the ADGM’s virtual asset framework continues to be understood globally, we continue to see leading virtual asset and conventional players across the globe reach out to the FSRA to see how and if they can establish virtual asset operations within ADGM,” Mr Givanakis said.

Despite scepticism from some regulators, there is growing acceptance of virtual assets and cryptocurrencies, he said.

“If you look globally, the American regulators, the European regulators and other regulators around the world [such as] Australia and New Zealand have not taken [China’s] course,” he said.

“If anything, they are all working towards coming out with some form of a framework [for cryptocurrencies] themselves.”

Investors are also increasingly accepting digital currencies as an asset class that are becoming part of their investment portfolios.

“I think it has already happened and it is happening more and more,” he said.

The volatile nature of cryptocurrency trading and the wild price swings in recent months have drawn regulatory ire.

Central banks around the world have been reluctant to endorse cryptocurrencies because of a lack of underlying value and regulatory oversight. The UAE Central Bank does not recognise cryptocurrencies as a legal tender.

Last month, China, the world’s second-largest economy, banned the mining and trading of Bitcoin and other digital currencies. However, proponents of online assets expect them to compete with traditional currencies.

El Salvador accepts Bitcoin, the world’s largest cryptocurrency, as legal tender.

Apart from those 12, we have quite a large number of other firms looking to make applications

Emmanuel Givanakis,
chief executive of the ADGM Financial Services Regulatory Authority

Despite the increased crackdown by regulators, cryptocurrencies have continued to trade higher over the past few weeks.

Bitcoin rose 6.6 per cent to $66,069.56 at 11.03am UAE time on Monday while Ether, the second-largest cryptocurrency, was up 4.2 per cent at $4,700, according to coinmarketcap.com, which tracks prices.

Bitcoin has rallied more than 50 per cent and Ether is up 57 per cent since the start of October.

In a report in June, the Bank for International Settlements, the global body for central banks, called cryptocurrencies speculative assets that, in many instances, enable criminal activity and “work against the public good”.

However, Mr Givanakis said that the virtual asset industry and “players in that industry that are reputable” want to be part of a regulated community.

“One of the key reasons we built this framework in the first place [was that] there just weren’t many robust frameworks globally and a lot of players in the market wanted to be regulated – they wanted to be open and transparent.”

Companies that have chosen to call the ADGM home “come from all corners of the world because they wanted the jurisdiction that not only understood them but [also] has a robust regulatory framework”, he said.

The FSRA is aware of all risks associated with online assets, including money laundering, and it has worked with other regulators to mitigate them.

The companies licensed by the FSRA have to show they have “clear and robust systems” and have to comply with the anti-money laundering rule book.

They also have to follow disclosure rules, corporate social responsibility guidelines, consumer protection rules, technology governance and the need to have a system to ensure cyber security among others.

“There is no escaping” for companies, he said. “We want firms that are prepared to grow with a robust regulatory framework.”