Joining me to dissect this further is Walu Kwok, senior executive director of authorization in FinTech at the ADGM's Financial Services Regulatory Authority.
Wailum, thanks so much for joining us today.
Thanks for having me.
Now, what is it exactly that differentiates ADGM's approach to FinTech and digital assets, particularly given the number of different regulatory frameworks that we have in the UAE?
Well, ADGM is the International Financial Center that is built on and establishing this common law, uh, legal and regulatory framework.
Our approach has always been to design our framework such that uh we can cater to technology advances, uh, new business models without compromising standards.
Uh, so when we first built our framework, uh, we recognized that the future of, uh, finance is probably going to be a convergence of, uh, digital assets and thread 5.
So we anchor a lot of our principles in the push around traditional finance.
Now, the technology may change, but the Underlying questions, supervisory questions remain very, very largely familiar.
For example, where does the activity and the risk sit, uh, how should uh clients be protected?
How should we hold those responsible accountable?
Uh, so, Those questions will guide us in terms of how we design our framework.
Um, I think the starting point, as I mentioned, is really activity and risks.
And based on those activities and risks, we then design our framework to address those.
And, and I, I suppose that has served us well so far.
Uh, whenever we don't know what to A push or take it forward, we always rely back to how we approach the threat fire space and it's interesting, you know, you talk about this, you believe that this convergence of finance will happening I mean it is happening and we're seeing this in a number of jurisdictions, particularly someone as forward thinking.
ADGM, but I'd like to know, how do you balance, like seeing that market development by having the appropriate regulatory guardrails in place, because it must be quite a fine balance at times.
Yes, and that balance sometimes boils down to judgment call, but my personal take is that innovation and standards should always reinforce each other because firms cannot truly scale sustainability if the clients, the counterparties, the investors do not trust the market.
And what do I mean by that?
Um.
You, you might have products that are able to Address a certain problem, right, but if the rules and regulations are not there to ensure the stability of the product, um, it's going to be very difficult to scale.
So I think at the end of the day when we design the frameworks, we always look to whether that innovation is at the expense of Creating risk for the clients, right?
It should never experimentation should never be at the expense of shifting the downward side risk to clients.
Fortunately for us, we have the FSI regulatory Laboratory that offers a controlled environment for innovative models to evolve and in those sandbox environments, we actually examine the transaction flows, the points of failure.
And to test policy positions before deciding whether rules and regulations are really needed.
And so I'd like to go a bit deeper into some of those use cases or specific regulations that you've had, maybe first starting with the tokenized securities.
What does ADGM's approach to tokenized securities tell us about your philosophy more generally?
I think I mentioned earlier, at the end of the day we.
Anchor a lot of our push to the traditional principles of our traditional finance.
Uh, so if it is a tokenized security, if it behaves like a security, it will be regulated like a security, um.
The technology might change the format and whether and how the security is issued, held, or transferred, but the underlying rights and obligations remain largely the same.
So that helps us in a way that we don't have to change our rulebook every time the technology evolves.
But at the same time we do need to be Engaging the industry very carefully to see whether the risk itself has been transformed.
And if the risk is transformed, we do need to tackle those risks directly.
For example, the technology, uh, uh, some technology developments like smart contract dependencies, um, including finance settlement finality, those are things that changes the nature of the risk at the fundamental level.
Uh, so we do need to, uh, address those risks directly, and I think we have done that before, uh, especially with the technology governance overlay that we introduced as part of the 2018 virtual asset framework that we introduced.
I like this balance that you've got there, like you do have the, You know, your philosophy approach, but then obviously looking at the details as well for some of those specific cases.
Now there's a lot of talk at the moment obviously about stablecoins.
In your view, what is it that will drive the wider adoption of stablecoins?
What are some of the things that happen before we see merely institutional adoption?
Yes, I, I think stablecoins is one of the most transformative products that I've seen in the last 2 or 3 years, uh, and.
Ultimately it depends.
The adoption of stablecoins depends on the confidence of the institutions, um, things like whether it is properly backed by reserves, uh, whether the reserves are of high quality, whether the governance is sound, whether the operations are resilient, and whether the product itself is treated with clarity across different jurisdictions.
So that's where regulation is key.
Um, but besides that, I think the use case, the actual application and business use case is just as important.
Uh, this thing called about the killer application, if you can't think of those property use cases, the regulations are just irrelevant.
Uh, so I can see the most impact in areas where silver coins or tokenize assets are solve a real market problem such as slow settlement, inefficient settlement.
Uh, the inability to move collateral and assets around quickly.
Um, so I can see the killer applications in a few cases such as cross-border payments, uh, digital trade.
And I think In ADS context, our office hours, settlement and movement of collateral.
Yeah, excellent.
And one final question from me, which do you think, you know, there's so many areas that you're looking at at the moment, which development do you think will require the most fundamental rethink of regulation?
Will it be tokenization?
Will it be decentralized finance?
AI?
Sorry, big question to finish on, right.
Again, go back to risk, uh, I think the activity or development that transformed the risk in the greatest manner is going to put the most pressure on our regulatory design.
So from that perspective, I think AI is likely to put the greatest pressure on our regulatory design, um, especially in terms of um You know, decisions and actions are taken on the fly at breakneck speed.
The key question is really, as the decisions and actions are being implemented, do the guardrails continue to keep them within the right context and the right permissions, and whether the controls put in place are able to respond quickly as the product deviates and shifts from the intended purposes.
Uh, tokenization, I think is slightly easier to deal with because, um, like I say, um, in the technology probably changes the way it is moved, but the underlying risk and activity and the questions are roughly the same.
Uh, Dey definitely a lot of market opportunities because you can use Asiante AIs to uh Execute trades, use tokenized securities, tokenize assets and stablecoins, and participate as an economic participant itself in the Defi markets because of the increasing use cases around DeFI, the FSRA expects to come up with DeFI risk management guidance later part of the year.
Incredible.
And I mean, I guess there's so much interconnectivity between all of these things as well, but thank you so much for coming on the show, Ellen.
It's always good to discuss what's happening in the fintech space at.
Thank you.
Thank you so much.
