The rapid, exciting rise of the United Arab Emirates (UAE) over the past two decades needs little introduction, and the jurisdiction continues along an inexorably rising trajectory. Despite some setbacks along the way, the federation of seven emirates provides exciting investment opportunities, centred around a number of key financial centres.
Few will be unfamiliar with the story of Dubai which entered a new era of growth following the discovery of oil in the late 1960s. Those oil reserves are not huge, however, and the further acceleration of Dubai’s fortunes was fuelled by a strategy to establish the jurisdiction as a tourism, transport and business centre. The turn of the millennium marked a dramatic acceleration in those fortunes. In 2002, the Dubai International Financial Centre (DIFC) was inaugurated, becoming fully established two years later, ushering in a further phase of development which focused on establishing stable and world-leading regulatory environments in order to encourage businesses to invest, operate, and arbitrate their disputes, in the jurisdiction.
Meanwhile, Abu Dhabi grew up in parallel. Oil – and plenty of it – was discovered there in 1958, and the emirate was made provisional capital of the newly independent UAE in 1971 (becoming the permanent capital around 20 years later). Similarly to Dubai, there was also a focus on establishing tourism and cultural attractions, and later, international finance. This emirate’s international financial centre – the Abu Dhabi Global Market (ADGM) – was only established in 2015, but is the world’s largest such jurisdiction in physical terms, and, according to many commentators, one of the most innovative and dynamic, too.
Speaking in his personal capacity, Nishanth Nottath, Head of AML, ABC and RegTech at Mashreq Bank, says ADGM has positioned itself “quite effectively as a regional regulator seeking to provide a forward looking, risk based and cutting edge technology.” He goes on to describe ADGM’s environment as “supportive, in a safe way.”
English common law is applied directly in the ADGM jurisdiction, which is overseen by four authorities, including the Financial Services Regulatory Authority (FSRA). A key message of the FRSA (and the ADGM as a whole) is progressive and robust regulation, and this has noticeably included an embrace of cutting edge technology across all aspects of the financial services lifecycle.
It is no surprise, then, that fintech has featured as a key element of the UAE’s growth story, and has already reached advanced stages of maturity. There are a number of “unicorn” fintech companies established in the UAE, and well entrenched in prominent areas of the economy, including cloud-kitchen platform Kitopi, the Emerging Markets Property Group, and ride-sharing app Careem, as well as companies in the payment services, credit and “buy now pay later” spaces.
A significant factor allowing companies like these to flourish is undoubtedly the supportive regulatory regime in the region. This is centred on the Central Bank of UAE which has issued a number of important regulations and guidance for the industry, centred on its Rulebook. It set up the FinTech Office in 2020 which is mandated to implement the UAE’s fintech strategy. This year, the Central Bank was also instrumental in setting up the COP28 UAE TechSprint Initiative, which aims to fast-track innovative fintech solutions (with a focus on challenges in green and sustainable finance).
This top-level direction has influenced individual emirati regulators in their approaches: by way of example, in May 2021, the DIFC set up its Innovation Lab which has now grown to house more than 700 growth-stage tech firms, and the largest financial technology in the region.
The ADGM also operates a highly supportive regime, and the relative youth of the market may have been a factor in its growth path. It was able to draw on the experience of other players in the UAE, and beyond, to move more quickly in many areas of innovation: ADGM was the first to set up a digital assets regulatory regime, although this has now been followed by Dubai’s Virtual Assets Regulatory Authority (VARA).
In September 2023, TOKO FZE became one of the first firms to obtain operating licence approval from VARA. The licence permits the firm to undertake “virtual asset broker dealer and exchange services” from Dubai. Commenting on the approval, Scott Thiel, TOKO’s managing director noted that VARA is the world’s only exclusive regulator for the virtual assets sector, and applauded the emirate’s “commitment to leading the world in virtual asset regulation by providing a responsible, comprehensive and clear roadmap for the virtual asset industry via a trusted and regulated ecosystem for individuals and businesses to engage with digital assets.”
Although the regulatory approach across the UAE is supportive, with financial and economic growth has come an explosion in the number of regulators, and an inevitable increase in the complexity of regulation. Regulators’ acronyms are prolific in the region (CBUAE, DFSA, FSRA, ESCA, VARA and ADGM are just a few relevant agencies), and a number of key government Ministries have also been actively issuing their own specific regulations.
Nottath points out that this proliferation of rules and regulations will mean an increased role for regtech, too.
“All this will only increase the complexity and scope of regulatory obligations for regulated firms in the financial and non financial space, thereby requiring better regtech offerings and services as manually scaling is expensive and increasingly less than efficient,” he says.
Local players are clearly aware of this trend, not least the ADGM, where the FRSA leads work on exploring the use of regtech in the centre. The ADGM Regtech Report is one of its flagship publications, and sets out the work it has carried out in partnership with local and international regtech firms. There are two stated objectives: helping regulated financial services firms achieve better compliance and risk management outcomes, while reducing regulatory costs and burden; and providing regulators the supervisory tools (dubbed “suptech”) to better supervise their markets and firms more effectively and efficiently.
The Regtech Report is worth a closer look. It looks at six regtech case studies, which provide a useful indication of what ADGM regards as key in this area:
- Virtual Asset Regulatory Compliance: monitoring virtual assets and assisting firms in meeting their regulatory obligations when transferring virtual assets;
- Digital Regulation: using AI to provide financial institutions with a more accessible and contextual understanding of its legislation;
- Client Money Monitoring: exploring a more real-time approach to verifying how financial institutions safeguard their clients’ monies;
- Monitoring of Third Party Provider of Fintech Services: using new technology to collect key regulatory statistics on a real-time, at-will basis;
- Enabling Trade Finance: collaborating with international government agencies to facilitate the use of digital documents for trade finance; and
- FSRA Connect: implementing a new digital workflow process to streamline the authorization and supervision of firms, and enforcement of breaches of regulations and rules.
As a regulator, ADGM unsurprisingly focuses on the ways in which regtech can be used as a risk mitigation tool for firms operating in its jurisdiction. In the Report, ADGM explains that it sees four main areas where regtech can suit this purpose. The first is to reduce prudential risk, by assisting with managing capital adequacy, market and liquidity; secondly, in relation to conduct risk, where examples are. managing disclosure, or dealing with customer assets and market integrity issues; thirdly, with regard to anti-money laundering and countering the financing of terrorism, where regtech can assist firms in meeting their customer due diligence and transaction monitoring obligation; and finally, in various areas of operational risk management, such as reporting, cybersecurity and data protection.
This list will be very useful for tech firms seeking to develop their regtech offerings, and financial services firms looking to find ways to use regtech to streamline their operations.
ADGM has shown itself to be a proactive regulator in this area, too. In 2020, it launched three of its own regtech pilot initiatives, aiming to bring about better compliance and risk management outcomes and at the same time decrease the compliance burden on its regulated entities. These initiatives included an AI-enabled licence application process for venture capital fund managers. The so-called RegBot was built in collaboration with private sector company Nexus FrontierTech. Meanwhile, in 2022, outside of the international financial centre Abu Dhabi’s Department of Economic Development launched the “e-link” digital platform intended to connect four of the emirate’s free zones through a single unified portal.
Private assistance?
Globally, there has been a trend towards governments asking – and often expecting – the private sector (well funded, often relatively agile, and able to access cutting edge tech and leading human talent) to take on a bigger role in developing a jurisdiction’s regulatory infrastructure. Whether this is through formal partnerships, secondment of employees, input into consultations, knowledge sharing, or even more formal outsourcing arrangements, public-private partnerships have now become the norm in many circumstances.
But what part should the private sector play in assisting Abu Dhabi – and the UAE – in further developing and integrating regtech as a key part of the economy?
“The private sector has a key role in terms of developing offerings in line with regulatory obligations and expectations,” says Nottath, who points to an active PPP programme in the UAE overseen by the Executive Office of the UAE’s National Anti Money Laundering and Combatting Financing of Terrorism and Financing of Illegal Organizations Committee (NAMLCFTC) as well as good dialogues between regulators and financial institutions through the UAE Banks Federation.
Clear opportunities
As regtech continues to emerge and develop into an area as wide and impactful as fintech, and as jurisdictions around the world continue to grapple with the best ways of integrating technology into their regulatory ecosystems, opportunities for firms in this space will only continue to increase.
While there are challenges, as with any area of innovation, firms which embrace regtech are able to hedge their bets in many ways. There will be opportunities to develop better relationships with regulators by offering regtech resources and knowhow; there will be chances to lead market development and set trends; and, internally, regtech will provide a valuable means of mitigating risk across almost all areas of operations, both internally and outward-facing.
Where a jurisdiction and its regulators take an open and supportive approach, and are willing to work collaboratively with private sector pioneers, those opportunities – and potential returns on investment – will only increase further. With many jurisdictions vying for attention, Abu Dhabi has set itself out as a key player in this area, with ADGM providing adept leadership.
