ADGM digital asset companies 'healthy' despite global crypto market turmoil

A strict risk-based approach, stringent capital requirements and custody regulations protect businesses and investors, ADGM's regulatory authority chief says

ADGM has 18 more companies in the pipeline that are seeking licences to set up operations at the financial centre. Victor Besa / The National

Digital asset companies in Abu Dhabi Global Market, including cryptocurrency exchanges, are “healthy”, despite the continuing global crypto market crisis that caused the collapse of one of the world's biggest cryptocurrency exchanges by trade value, FTX.

A strict risk-based approach including stringent capital requirements and custody regulations governing digital asset companies in the financial hub protect businesses and investors, Emmanuel Givanakis, chief executive of ADGM’s Financial Services Regulatory Authority, told The National.

“I would say at this point in time, they [the companies] are healthy and I think our approach and our regulations are on the right path,” Mr Givanakis said.

“If anything, I think the recent events have only just confirmed to everyone that our approach is the correct approach.”

Other regulators are “looking at us” and are learning from regulations in one the region’s fastest-growing financial hubs.

The digital asset ecosystem of ADGM is growing rapidly and its regulations are evolving to maintain proper oversight.

“As a regulator, the message is that we are innovative, we are progressive, but we are also credible, we have integrity and we follow international standards,” Mr Givanakis said.

The global cryptocurrency market has been roiled by the shockwaves of FTX's multibillion-dollar meltdown.

The exchange's failure has eroded confidence in the industry and some investors are questioning regulations, transparency and the future of digital assets as a whole.

The collapse of FTX began with Binance signing a non-binding agreement on November 9 to buy FTX's non-US unit to help it cover from a “liquidity crunch” amid a consistent decline in cryptocurrency prices.

The deal between rivals Sam Bankman-Fried, co-founder and chief executive of FTX, and Binance founder Changpeng Zhao came as speculation about FTX's financial health grew, snowballing into $6 billion of withdrawals.

Binance, however, walked away from the deal, which led to FTX filing for bankruptcy protection in the US.

Mr Bankman-Fried, the 30-year-old co-founder of FTX, lost his multibillionaire status and his net worth plummeted 94 per cent from $16 billion to $991.5 million in what was described as the biggest one-day loss on the Bloomberg Billionaires Index.

Mr Bankman-Fried is now facing several regulatory investigations into the financial affairs of FTX and how clients' money was handled before its collapse.

The FTX meltdown has also sparked fears of a contagion across the industry. This week, digital assets broker Genesis, which is struggling to raise cash for its lending unit, warned potential investors that it may need to file for bankruptcy if its efforts failed.

Genesis has been trying to raise at least $1 billion in new capital. It halted redemptions shortly after revealing on November 10 that it had $175 million locked in an FTX trading account.

“The problem with that industry is that it has predominantly operated in a very opaque, non-transparent, non-regulated fashion, and a lot of the issues that have arisen appear to be based on the fact that there was no regulation,” Mr Givanakis said.

“There was no abiding by any standards or regulation either, so no self-imposed voluntary standards around client money.

"We've had different issues over the years … whether it's the funds industry [or] the banking industry, and now we have the crypto industry.”

ADGM, one of the fastest growing international financial centres in the Middle East and North Africa, is part of Abu Dhabi's efforts to diversify its economy and connect the emirate with markets in the Mena region and economies in South and East Asia.

The financial free zone is home to more than 5,400 companies, including global businesses, financial institutions, treasury centres, professional services companies, small and medium enterprises, start-ups, FinTechs, digital asset trading and advisory entities.

In the digital asset space, the regulatory authority has so far licensed two custodians, five exchanges, clearing and settlement companies, an adviser and an asset and wealth manager.

It has also given in-principal approvals to three brokers, an asset and wealth manager and a company involved in custody operations.

ADGM has 18 more companies in the pipeline that are seeking licences to set up operations at the financial centre, according to FSRA data.

It is managing these companies through its risk-based approach, which is aimed at minimising key risks across all asset classes including “the obvious risk” of money laundering.

“Another one is custody and safekeeping, and we put a lot of effort into that,” Mr Givanakis said.

“Investors’ money is an area that we take very seriously so we have imposed strict rules around that.”

The regulatory authority was criticised by “some people in the past” for those strict rules on some key risks, but “we stood by them”, he said. “I think now the justification of that is quite clear.”

Disclosure by companies is another focus area for the regulatory authority, which makes sure that “disclosure is appropriate and suitable to the audience that it is going to”, to protect investors.

“We have regulatory capital, which is really important [and it] is there to deal with issues that arise in the future and issues of orderly wind downs,” Mr Givanakis said.

“That's there to help creditors and investors protect their money.”

The regulatory authority has also set rules around technology governance, which link to security and traceability, including regulations that govern market operations, infrastructure and operational requirements.

“At ADGM, we are making sure that people understand regulation is a good thing, and we're sending that message out to the industry,” Mr Givanakis said.

“If you want to be regulated in an open, transparent way and you want to do business that way, then ADGM is the place for you.”