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22 - 23 OCTOBER 2024


DIFC registers 'strong interest' from digital asset companies and hedge funds

The DIFC Gate building. The DIFC has a pipeline of more than 50 hedge funds that are waiting to be licensed. Ruel Pableo / The National

The Dubai Financial Services Authority, the regulator of Dubai International Financial Centre, has a strong pipeline of digital asset companies and global hedge funds that are looking to set up in the emirate’s financial centre, its chief executive has said.

There are “dozens of companies” looking to establish several trading platforms, provide alternative trading systems or be able “to put crypto assets into a fund”, Ian Johnston told The National in an interview.

“That's a broad range but the pipeline for us, at the moment, is predominantly existing financial services players that we've licensed, who then want to add this into the investment mix or into their services,” he said.

The DFSA has yet to issue a licence in the cryptocurrency space and it may take longer for companies looking to set up a new business than for those already licensed by the regulator.

Interest in the digital asset industry eased towards the end of last year after a global crisis that resulted in the collapse of one of the world's biggest cryptocurrency exchanges by trade value, FTX, and several others.

This eroded investor confidence globally as some questioned regulations, transparency and the future of digital assets as a whole.

However, there is “a shift going on where people say, 'we would rather be regulated than not regulated'”, and the appetite to pursue new licences is back, Mr Johnston said.

“The turmoil that happened towards the end of last year slowed things down but the interest has picked up again. We've got quite a number of them going through the process, but are not quite there yet,” he said.

“Some of the bigger international financial institutions are prominent among those who are speaking to us.”

Similar to other regulators across the region and beyond, the DFSA is developing a framework to maintain a balanced oversight of the cryptocurrency industry and digital asset space.

The regulator unveiled its cryptocurrency token policy for digital assets in November, the second phase of its work in this area after the introduction of a regulatory framework overseeing digital assets in October 2021.

“We've taken a balanced approach there, an approach that's very much in line with everything else that we do. So, we want that [industry] to evolve in a balanced, measured, responsible and transparent manner,” Mr Johnston said.

“We might broaden the regime and look at decentralised finance … but we've taken a relatively small target to begin with, and then we will evolve and see how the market evolves.”

The DIFC regulator has yet to engage with the UAE Central bank on its digital currency strategy, Digital Dirham, which is aimed at preparing the country's infrastructure for the future of finance.

“There are so many central banks around the world that are now looking at it. It's a logical development and I think it's a sensible development,” Mr Johnston said.

“I think the UAE is doing exactly the right thing.”

The DFSA also has a strong pipeline of global hedge funds and other investment funds seeking to set up within the DIFC.

“Some are already licensed elsewhere and want to set up something else here but others … want to move here. There is a strong pipeline [and] we're working with quite a number of firms who are doing that,” Mr Johnston said.

“There's quite a number who are coming from Hong Kong … coming in from London. In some cases, they're adding to their business and in many cases, they are relocating [to Dubai].”

The DIFC, one of the fastest growing financial centres in the Middle East, Africa and South Asia region, has a pipeline of more than 50 hedge funds, with more than $1 trillion in assets under management that are waiting to be licensed, DIFC Governor Essa Kazim said in February.

The financial centre grew at a record pace last year, with the number of active registered companies climbing by 20 per cent while its annual revenue exceeded Dh1 billion ($288 million) for the first time, amid the emirate's strong economic momentum.

The centre is home to 17 of the world’s top 20 banks, 25 of the world’s top 30 “systemically important” global financial institutions and five of the world's top 10 global insurance companies.

Total banking assets booked in the DIFC hit $199 billion at the end of 2022, while wealth and asset management portfolio managers in DIFC invested $164 billion last year.

The number of active registered companies in the DIFC rose to 4,377, almost doubling from the 2019 pre-pandemic level of 2,431.

The number of new companies registered with the centre last year was more than 1,000 for the first time since its inception.

Last year was also the busiest year for the DFSA in terms of new licences, surpassing the 2007 and 2008 period when the DIFC grew at a rapid pace, Mr Johnston said.

“Last year was our biggest year in terms of licensing activity and this year is looking the same,” he said. “We have hedge funds and other funds coming into the DIFC at a rate that we haven't seen before.”

Of the 89 new licences issued last year, 58 were in financial services, he said.

In March last year, the DIFC published its framework covering the regulation security tokens for public consultation. It included clauses to tackle investor protection issues and misconduct risks, measures to address market integrity, financial stability, and steps to thwart money laundering and terrorism financing threats.

It is further tuning regulations to counter money laundering to support the UAE's efforts in developing its anti-money laundering (AML) policies, he said.

Other regulations being reviewed include a crowdfunding framework, which has been in place for about five years, and 2014 rules governing auditors in the DIFC.

“As the main international finance hub, in the region and for the region, it's critical, that the DIFC keeps up with international standards. So, that means that we are constantly looking at the regime and where it needs to evolve,” Mr Johnston said.

As is the case with it global peers, who review major regulatory events including the collapse of financial institutions, the DFSA looked at Abraaj Capital’s failure thoroughly and took appropriate steps, he said.

The financial centre has continued to grow, despite Abraaj’s failure, which is evident from the licensing activity and new businesses establishing their presence within the centre.

“I don't think there's a hangover from that type of event. I think people realise this [region] is still part of the world that they want to be in. They want to be in a place that's well regulated,” Mr Johnston said.

“The DIFC is a centre of choice … though the name [Abraaj] is still there and talked about, I think, people have largely moved on.”

The Abraaj Group was founded in 2002 and claimed to manage about $14 billion of assets at its peak.

It was forced into liquidation in 2018 after investors, including the Bill & Melinda Gates Foundation, commissioned an audit to investigate alleged mismanagement of money in its $1 billion healthcare fund.

The DFSA found that Abraaj founder Arif Naqvi was knowingly involved in misleading and deceiving investors over the misuse of their funds.

It fined Mr Naqvi more than $135 million in January 2022 and banned him from conducting business in the DIFC.

In January this year, an independent appeals tribunal upheld DFSA's decisions.

“One thing that I would say, generally, is that it's always very difficult to regulate against or mitigate against fraud,” Mr Johnston said.

“One relies on auditors, one relies on other things that are in place in terms of reporting being accurate.”

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