The Advent Of Digital Asset Regulations In The GCC Is Good For The Region's Startup Landscape
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While some might view regulations as a hindrance to innovation and creativity, in many cases, it actually supports entrepreneurs and startups to be able to innovate, create, and market their products and solutions in a legally and regulatory supportive environment. In the GCC, this can be seen through the framework of digital asset regulations that are being initiated and developed across the region.
One of the ways the digital asset regulations in the GCC is assisting startups is through the ability to increase liquidity, which is a major impediment for many startups in the region. How does this work? When startups can issue digital assets and exchange them, it allows them to bring in investment from a broader investment base, surpassing traditional investment entities, the bank ing sector, and family offices, but without excluding them. Digital assets issuance is also much more practical and easier than conventional securities to launch.
With this new form of liquidity comes great responsibility towards the protection of investors. Unregulated digital assets like those we witnessed in the form of initial coin offerings are a thing of the past. Today, instead of banning crypto assets, regulators in the GCC have held consultations and discussion with market players. Today, the GCC is home to some of the finest regulations in the digital asset space. Examples include Abu Dhabi Global Market (ADGM) in the UAE, and the Central Bank of Bahrain, both of whom have been leaders in this space.
ADGM’s framework paves way for issuance, trading, and exchange of virtual assets, digital securities, fiat tokens, and other derivatives from the free zone. Similarly, Bahrain’s framework contains the rules concerning trading, dealing, advisory services, and portfolio management services in accepted crypto assets as a principal, agent, custodian, or crypto-asset exchange within or from the Kingdom of Bahrain. Both ADGM and Bahrain have kept the costs of incorporation competitive for the startups under their framework.
As such, today, investors are more confident in investing in digital assets issued under the guidance of these regulators. For the “once-bitten-twice-shy” category of investors who have lost their investments in the preregulation era in digital assets, they can find comfort in the fact that GCC regulators are treating digital assets at par with other investment models. For instance, the legal requirements of issuance of digital securities are at par with those of issuance conventional securities under the ADGM framework.
Similarly, crypto assets exchanges are treated at par with multilateral trading facilities (MTF). This means that the set-up and governance obligations for a crypto-exchange are as rigorous under the markets and infrastructure rules of ADGM as that of an MTF. My company, KARM Legal, has had the good fortune of working on multiple transactions related to digital assets, and we can safely conclude that both ADGM and Bahrain have taken a consumer-first approach, but at the same time, haven’t stifled technology in any manner.
The regulators hold detailed discussions on the aspects of technology governance with the entities seeking licenses- for instance client onboarding, business continuity, disaster recovery plans, and security operating procedures. As a result, we have seen a massive surge in the sectors of tokenization of securities of special purpose vehicles, fund units, and real estate investment trusts. Different sectors like hospitality, art, real estate, and natural resources have also seen a significant penetration of digital assets-based models.
Just as regulations have allowed startups to be able to receive increased liquidity and open their digital assets to a wider range of investors, digital asset regulations in the GCC have also spurred the launch of new startups in the fintech, regtech, insurtech, compliance, digital identity, cyber security, and other areas.
This is paving the way for new startups and industries to flourish in the region. Most of the regulators in the GCC as well as other entities have also developed sandboxes to offer startups the environment needed to develop their solutions while adhering to laws and regulations. These include ADGM, Dubai International Finance Center (DIFC), and even Bahrain Fintech Bay in cooperation with the Central Bank of Bahrain.
For instance, DIFC has recently permitted capital raise on crowdfunding platforms through tokens to a few entities under the sandbox model of DIFC, and KARM has had the privilege of advising a few of such participant entities. In addition, another firm regulated out of ADGM has been able to launch the first regulated private equity financing platform and has successfully tokenized shares for six startups. Further, in order to boost startups and SMEs, ADGM has introduced a regime for digital banking to promote financial inclusion accessing untapped, unbanked, and underserved clients across markets. Digital banks focusing on lending to small and mediumsized businesses with advances in AI, data management, and analytics are enabling more risk-sensitive and timely credit decisions at a lower cost.
So, all in all, it is not just the digital assets regulations that are facilitating the startups, it’s the entire GCC ecosystem that is trying to send a message loud and clear: stop perceiving us merely as oil economies. We are ready for you, and we are ready for the fourth industrial revolution.