How to make the rules as technology quickly advances

Minimising risk to investors while fostering innovation is the delicate balance sought by good regulators

Richard Teng writes that ADGM's FinTech sandbox is the second most active in the world, bringing financial market expertise together to provide invaluable insight to innovators as well as regulators. Show more

A current recurring theme in the court of public opinion is the role and scope regulation should play in the technology sector. Indeed, it is of one of the most pressing issues facing the sector with opinion split on the best approach.

In recent months, Uber CEO Dara Khosrowshahi has noted that new regulations limiting the power of giant technology companies shouldn’t apply to smaller start-ups and tough regulation could restrict innovation, perhaps even stifling the birth of the next wave of technology companies.

In contrast, Jim Balsillie, the former co-CEO of Research in Motion - the company that produced the BlackBerry - said that the recent conduct and ethical values of big technology companies is proof that the sector needs to be more tightly regulated. As he put it, "I'm not against tech. I'm for tech, and I'm for entrepreneurship and I'm for capitalism, all the way. But ultimately the job of government is to regulate for the public good."

Clearly then, a balance needs to be struck between ensuring companies operate the right way whilst not stifling innovation and entrepreneurship; particularly as technology - and FinTech especially - can have a positive transformative effect when harnessed properly. Encouraging and fostering financial inclusion is an obvious example. In the Mena region alone, 80 per cent of the population is financially under-serviced and under-banked and new start-ups such as the Abu Dhabi-based 'Now Money' have been extremely active and successful in providing much-needed solutions, especially for those who haven't even been able to open their first bank account.

So, what is the ideal balance? The answer lies right in front of us. From East to West, there are examples of regulators who have got it just right.

A couple of jurisdictions have made significant and impactful transformations such as Singapore and London in the growth of FinTech. The UK was the first country to establish a regulatory sandbox – an environment which permits the testing and analysis of disruptive technology and innovations without causing any systemic risk.

Here in Abu Dhabi at ADGM, one of our first acts was to introduce our own regulatory sandbox, known as ADGM RegLab, the first of its kind in the region and now considered the second most active, after London. Companies can work alongside the financial services regulator to fine tune their products, to understand rules and regulations and to prepare products for the market. In turn, regulators (like us at ADGM) can work alongside innovative firms and understand new business models that are evolving, while having an early warning system on risks that could enter the marketplace.

The next step is to create a fully bespoke regulatory framework catering for new technologies and developing market areas including robot advisory, digital securities guidance, a crypto asset regulatory framework and digital banking licences.

A relevant case study is the differing regulatory approach to crypto assets across various jurisdictions. Some regulators fully prohibit crypto assets whilst others regulate them very lightly. ADGM sits in a unique group which believes that sustainable growth for such assets is best achieved by proper regulation.
If you regulate too lightly, you don't mitigate the risk. This year alone, the amount of lost or stolen coins globally adds up to as much as $1 billion (Dh3.67bn). Every time this occurs, it impacts investor confidence.

We presented a scenario to institutional investors and asked if they would be willing to explore crypto assets if the regulatory regime addressed all possible risks. Their answer was affirmative. As a result, our Financial Services regulatory team has started work on this, resulting in one of the most comprehensive crypto asset frameworks introduced globally.
To date, we have rejected 90 per cent of applicants for a crypto-asset licence, as required standards were not met. Only nine approvals, in principle, have been granted to crypto-asset exchanges who accept and have shown the willingness to work under a regulatory framework allowing for the traceability of crypto assets. By addressing this risk appropriately, we hope to create an ecosystem that will support the sustained growth of this space.

Opinions will always differ on how to best balance risk management and innovation. However, a robust but open-minded regulatory framework and sandbox to support innovation is an exciting template to harness the transformative energy of FinTech solutions and broader technological developments.

Richard Teng is chief executive of the Financial Services Regulatory Authority of Abu Dhabi Global Market