ADGM strikes wise balance with fintech approach

Cryptocurrency issues remain risky, but bans ignore potential

The guidance issued yesterday by Abu Dhabi Global Market’s regulatory body on initial coin offerings (ICOs) and virtual currencies is well timed, as the free zone looks to unlock the potential of blockchain and other fintech innovations while at the same time protecting investors.

The UAE is leading the Arabian Gulf region in its efforts to cultivate a fintech-friendly business environment.

Such efforts – including ADGM’s RegLab and the DIFC’s FinTech Hive – are designed to enhance the country’s start-up culture, streamline the delivery of government services, and promote fintech-driven innovation in sectors including financial services, retail and telecoms.

Such rapid innovation is not without risks, with no subset of the growing fintech industry more controversial than virtual currencies and ICOs, underpinned by the same Blockchain technology that promises to revolutionise the delivery of public services throughout the country.

Blockchain’s distributed ledger technology is the foundation on which mainstream digital currencies such as bitcoin and ether are based.

But it is also the foundation for ICOs, which enable companies to raise funds by having interested parties use a cryptocurrency to buy tokens (or coins) in an enterprise.

Such tokens represent the working currency within the enterprise and are typically either exchanged for services provided or can be sold in a similar way to shares.

While plenty of enterprises use ICOs for legitimate fundraising purposes (more than US$2 billion has been raised so far this year), such offerings all too often happen in a regulatory grey area, and are open to massive abuse.

The US last month charged two companies with operating fraudulent ICO offerings after investors were promised high-returns from businesses that were little more than shell companies.

Such cases have prompted regulators around the world to take action. China and South Korea last month announced that it was banning ICOs, with several other countries considering similar action.

ADGM’s guidance reaffirms the importance of ICOs in a modern financial system but urges both issuers and investors to exercise caution when considering such issuances, which may be subject to the free zone’s regulations.

Such guidance is wise. ICOs require added oversight from regulators worldwide and extreme caution from investors; but the positive potential of cryptocurrencies and blockchain services should not be ignored either.