Gulf Business INVEST NOV 2023 by Motivate Media Group

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P.28 COMMITTED TO COMPLIANCE: The UAE has taken solid steps to enhance the financial industry’s regulatory frameworks P.33 BIG ON BLOCKCHAIN: Why key players are moving toward blockchain-based financial services

P.20 A ROBUST OUTLOOK: THE FUNDAMENTALS DRIVING THE LONGTERM GROWTH OF THE GCC'S ISLAMIC FINANCE SECTOR REMAIN STRONG

STAYING AHEAD

OF THE CURVE NOR T HL A R K'S E SH A N A DE SILVA SH A R E S HOW NE W R E G T E CH T OOL S C A N HE L P UA E-BA SE D E N T I T IE S E NH A NCE COMPL I A NCE A ND SE CUR I T Y

CELEBRATING THE VERY BEST PEOPLE, TEAMS AND AGENCIES ACROSS THE REGION

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Eshana De Silva, chairman of regtech firm NorthLark, shares how banks and other companies in the UAE can benefit from its AI-driven software and tools

Troubling times The impending stagflation could pave the way for an overdue economic reset

CONTENTS

Bridging the financing gap

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THE FUNDAMENTALS FOR THE CONTINUING GROWTH OF ISLAMIC FINANCE REMAIN STRONG. THE MIDDLE EAST HAS SEVERAL INVESTORS (RETAIL AND INSTITUTIONAL) THAT EITHER CAN, OR CHOOSE, ONLY TO INVEST IN A SHARIAHCOMPLIANT MANNER.”

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Climate-related development financing is falling short of projected needs

Leveraging open banking

QUDEER LATIF

Author and Islamic finance expert Getty Images

Photo: Ahmed Abdelwahab

The rise of regtech

We explore how open banking can unlock financial security for millions and drive economic growth

Editor-in-chief Obaid Humaid Al Tayer Getty Images

Managing partner and group editor Ian Fairservice

Committed to compliance A solid financial sector relies on a robust regulatory framework. We look at the progress that the UAE has made in this area

Chief commercial officer Anthony Milne anthony@motivate.ae

Publisher Manish Chopra manish.chopra@motivate.ae

EDITORIAL Editor Neesha Salian neesha@motivate.ae

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Building on blockchain

From real-world asset tokenisation to crossborder payments, blockchain technology is bringing in a transformation

Digital editor Marisha Singh marisha.singh@motivate.ae

Senior feature writer Kudakwashe Muzoriwa Kudakwashe.Muzoriwa@motivate.ae

Senior art director Freddie N. Colinares freddie@motivate.ae

PRODUCTION

HEAD OFFICE: Media One Tower, Dubai Media City, PO Box 2331, Dubai, UAE, Tel: +971 4 427 3000, Fax: +971 4 428 2260, motivate@motivate.ae DUBAI MEDIA CITY: SD 2-94, 2nd Floor, Building 2, Dubai, UAE, Tel: +971 4 390 3550, Fax: +971 4 390 4845 ABU DHABI: PO Box 43072, UAE, Tel: +971 2 677 2005, Fax: +971 2 677 0124, motivate-adh@motivate.ae SAUDI ARABIA: Regus Offices No. 455 - 456, 4th Floor, Hamad Tower, King Fahad Road, Al Olaya, Riyadh, KSA, Tel: +966 11 834 3595 / +966 11 834 3596, motivate@motivate.ae LONDON: Acre House, 11/15 William Road, London NW1 3ER, UK, motivateuk@motivate.ae Cover: Freddie N. Colinares

General manager – production S Sunil Kumar Production manager Binu Purandaran Production supervisor Venita Pinto

SALES & MARKETING Senior sales manager Sangeetha J S Sangeetha.js@motivate.ae

Follow us on social media: Linkedin: Gulf Business/GBTechTalk Facebook: GulfBusiness/ GBTechTalk; Twitter: @GulfBusiness; Instagram: @GulfBusiness

Group marketing manager Joelle AlBeaino

A GULF BUSINESS INITIATIVE

joelle.albeaino@motivate.ae

C HIEF IN V E S T MEN T OF F IC ER

S A XO B A NK

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S T E E N JA KOBSE N

A BREWING STORM POLICYMAKERS HAVE BEEN DELIVERED A WAKE-UP CALL AS THE CLOCK STRIKES ON ECONOMIC COMPLACENCY

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he world has changed since we first made our optimistic ‘no recession’ call in early 2022 and maintained it through 2023. The winds have shifted, forcing a recalibration of our outlook for both yields and the stock market. We recognise the ‘flooding of the market’ by the US Treasury, raising the risk of a terminal rate of 500-515 basis points (bps) in the 10-year US yield. However, we do expect the economy finally to feel an impact of 525 bps total hikes in yield.

Our analysis suggests a 1/3 probability of the European Central Bank and US Federal Reserve (Fed) cutting rates in November/December and 2/3 in Q1/Q2-2024, hinting at a brewing storm. Emerging markets, once the harbingers of restrictive monetary policy, are already cutting rates – a sign of what may lie ahead. THE LOOMING CORPORATE SQUEEZE

For businesses, Q4 promises to be gruelling. We predict diminished top-line growth while input costs (especially

wages and energy) remain stubbornly high. As this reality becomes evident with Q3 reports in Q4, we see the S&P 500 possibly dropping to around 4,200 and maybe even 4025/50. THE MIRAGE OF MODERN MONETARY THEORY (MMT)

Today’s economic and political platform seems conceptually driven by MMT– the notion that debt doesn’t inherently yield economic downsides. Yet, the reality is stark; MMT demands negative real rates due to its symbiotic relationship with negative productivity. Recent developments have pushed the market into ‘debt indigestion.’ As the US

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TODAY’S ECONOMIC AND POLITICAL PLATFORM SEEMS CONCEPTUALLY DRIVEN BY MMT – THE NOTION THAT DEBT DOESN’T INHERENTLY YIELD ECONOMIC DOWNSIDES. YET, THE REALITY IS STARK; MMT DEMANDS NEGATIVE REAL RATES DUE TO ITS SYMBIOTIC RELATIONSHIP WITH NEGATIVE PRODUCTIVITY.” Treasury announces aggressive funding schemes, the market is resisting the low rates enforced by the FOMC, with Chair Powell’s stance appearing increasingly political rather than pragmatic. A TROUBLING FISCAL OUTLOOK

Meanwhile, US Congress, seemingly unfazed by rising debt levels, has effectively turned US politics into an ‘Entitlement Game’. As legendary investor Stanley Druckenmiller has long argued, the unwillingness to confront spending today jeopardises the future of programmes such as social security and Medicare. THE REAL COST OF DEBT

Debt is nothing but tomorrow’s consumption, brought to today. With the US adding $5bn of debt daily and interest payments soaring, the gap between savings and debt makes the country highly sensitive to overseas funding. QUASI-YCC AND THE TICKING TIME BOMB

We are under a quasi-yield curve control (YCC) policy in the US. The Fed is in a bind, politically and economically unable to let rates rise significantly. A tight

labour market compounds these issues. HARBINGERS OF STAGFLATION

Economic data signals are worsening. The expiration of the student loan forgiveness programmes in October will strip purchasing power from 40 million Americans, just as the Fed’s 5.25 per cent rate hikes

$5BN

WITH THE US ADDING $5BN OF DEBT DAILY AND INTEREST PAYMENTS SOARING, THE GAP BETWEEN SAVINGS AND DEBT MAKES THE COUNTRY HIGHLY SENSITIVE TO OVERSEAS FUNDING

begin to bite. US imports are declining significantly, private savings are turning negative, and the labour market is cooling off – all ominous signs for future growth. CONCLUSION: TIME TO FACE THE MUSIC

The clock has run out for the current economic model. We are witnessing a rolling recession since the exit from stimulus programmes, gradually shifting from global manufacturing to consumer spending while inflation remains sticky. The infatuation with MMTlike programmes must end for the economy to refocus on productivity. Positive real rates, a potentially harsh but necessary medicine, could begin this process by attracting higher-quality capital investment. We predict a significant chance of ‘stagflation lite’, where the US grapples with high inflation amidst sluggish growth. It’s a painful forecast but perhaps a necessary evil to force an economic reset. Policymakers must now face the uncomfortable truth: Debt is not free; economies don’t prosper without productivity, and no government can indefinitely ignore the welfare of its voters and economic agents. The impending stagflation could pave the way for an overdue economic reset, catalysing a focus on cleaner energy, a larger real economy, and vastly improved education and social policies. It’s high time we stop avoiding hard questions and start preparing for the challenging answers they demand. Let the policymakers now fear the answers, for the time to face them is upon us.

The clock has run out for the current economic model. The global economy is witnessing a rolling recession since the exit from stimulus programmes, gradually shifting from global manufacturing to consumer spending while inﬂation remains sticky

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BU SINE S S DE V EL OPMEN T M A N A GER , PAY MEN T S

E A S T NE T S

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M A R IE-CHR IS T INE DI A Z

THE FUTURE OF DIGITAL PAYMENTS THE PAYMENTS INDUSTRY IS CONTINUOUSLY REINVENTING ITSELF TO MEET EVER-CHANGING EXPECTATIONS AND A CONFLUENCE OF GEOPOLITICAL EVENTS AND RESETS

igital payments are becoming the go-to choice for transactions worldwide, including the UAE where more than half of all residents now use digital wallets. Here are the top trends shaping global payments and what this means for the region’s financial sector. INTERNATIONAL STANDARDS

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The financial industry around the world is adopting the ISO 20022 standard for several domestic payment systems, including the US, EU and UK, and crossborder payments on SWIFT. While domestic payment systems adopt a fully-fledged approach where all participants migrate on the same day, the migration of SWIFT cross-border

payments offers a coexistence period until November 2025. In the Middle East, after Kuwait and Jordan, countries such as the UAE, Saudi Arabia and Oman are pursuing migration projects until 2025. While some early adopters are using the wealth of remittance data provided by these new systems to develop innovative online services, including financing, most financial institutions will opt for a like-for-like service in the early stages and gradually enhance compliance and fraud detection with the new structured information. DIGITAL WALLETS

Insights on customer purchase behaviour also explain why

marketplaces, such as Apple, Amazon and Alibaba, who benefit from reach (network effect) and intelligence (data effect), are well positioned to offer attractive wallets with competitive products such as fee-free accounts, realtime loans, no interchange fee and lower interest rates. This explains why WeChat Pay in China holds the largest money market fund in the world. For the same reason, banks are enriching their e/mapplications to offer access to a diversity of partners with a single click. They are using digital wallets to attract mobile-first users who are eager to adopt the most convenient platform. In the Gulf region, which has a high youth demographic, UAE consumers and SMEs are expected to adopt digital wallets faster than in other countries.

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QR CODE PAYMENTS

Dynamic QR code-based mobile payments, using an expiration time, are becoming the norm in Europe and Asia, as they remove the risk of mistyping beneficiary information and reduce significantly the risks of social engineering and invoice fraud. With the tamper-proof dynamic linking or WYSIWYS (What you See is What you Sign) ensuring transparency, QR code payments are a viable alternative to the validation of beneficiary details in instant payment use cases and a more secure method than contactless NFC payments. In the UAE, QR code payments are becoming more ubiquitous in point-of-sale (PoS) machines, electronic cash registers and merchant mobile phones, especially with new digital wallets including Payit. CENTRAL BANK DIGITAL CURRENCY

Central banks across the world are developing regulatory frameworks for digital currencies that can help the transition to a cashless society. For jurisdictions where alternative instruments exist, the business case remains uncertain, as shown by the lack of alignment in the Nordic P27 initiative. The choice of distributed ledger technology (DLT) designed to store ledger history in each network node is also questionable: while the US, UK and Canada agree that a central ledger is better suited when

there is a central authority, most countries, including China, envisages a hybrid architecture. The UAE Central Bank has successfully tested DLT for cross-border payments and plans to launch its CBDC later this year, using legal Identifiers with artificial intelligence and machine learning to enhance supervision. INSTANT PAYMENTS

Instant payments, an immediate and irrevocable transfer of money between bank accounts at any time, are meant to become the norm, replacing traditional schemes in many countries over time. India, China, Thailand, Brazil, and South Korea lead the way with global transactions reaching 100 billion per year. While the convenience value is obvious, the revenue and operational impact on the financial industry is not to be underestimated. Financial institutions seek new revenue models as instant payments are expected to be free, while substantial funding to re-engineer the entire processes, including compliance and fraud management, is essential to transfer funds within hundreds of milliseconds. The UAE Central Bank is also set to introduce its instant payment system by the end of 2023. CLOUD TECHNOLOGY

With continuous pressure on revenues and increasing

THE UAE CENTRAL BANK IS ALSO SET TO INTRODUCE ITS INSTANT PAYMENT SYSTEM BY THE END OF 2023.”

regulatory costs, financial institutions are concentrating on core banking services while outsourcing their operations to cloud partners. Some countries, prompting Switzerland and Luxembourg, have raised concerns around security and resilience and restricted the outsourcing of critical financial services, while others, including the UK and Netherlands, support cloud operations to leverage efficiencies. The UAE Central Bank’s Financial Infrastructure Transformation (FGIT) programme, launched earlier this year, aims to develop a secure financial cloud. As with other jurisdictions, balancing cost efficiency and operational security, for the trust, stability and reputation of the financial industry, is their priority. OPEN BANKING OR BANKING-AS-ASERVICE (BAAS)

Pioneering open banking frameworks such as Europe’s PSD2 and the UK’s open banking standard allow customers to initiate payments from authorised payment services providers (PSPs) onto their bank accounts. PSPs often lack banking expertise to combat increasing fraud and struggle to find the right balance between business continuity and compliance, with the risk of being suspended if they do not comply. Given these issues, both the EU (via recent PSD3 proposals) and the UK are enforcing beneficiary account validation and tighter registration criteria, among other measures. Alternatively, countries including the US have adopted bankingas-a-service (BaaS) market-led approach where non-bank players integrate banks’ products into their services. The US market is in a ‘wait-and-see’ phase mainly due to the lack of clarity on the liabilities in case of fraud or loss. In the Middle East, financial institutions and regulators plan to introduce open banking and seek to learn lessons from these initiatives.

The UAE Central Bank’s Financial FIT programme, launched earlier this year, aims to develop a secure ﬁnancial cloud

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F E R A S JA R A M A NI

M A N A GING DIREC T OR A ND HE A D OF P UBL IC SEC T OR A ND ENERG Y

M A SHREQ

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Al Jaber, COP28 President-designate, UAE Minister of Industry and Advanced Technology, managing director and group CEO of the ADNOC and chairman of Masdar, the global stage is set to develop a clear ‘science-based and action-oriented’ plan with a focus on fast-tracking the energy transition, deploying climate finance, and focusing on people and inclusivity. In this context, the energy transition in developing countries becomes one of the key aspects of the COP28 agenda, underscoring the pressing need for financing decarbonising infrastructure and mobilising resources to accelerate sustainable development worldwide. ADVANCING ENERGY TRANSITION

CLOSING THE FINANCING GAP THE CURRENT LEVEL OF CLIMATE-RELATED DEVELOPMENT FINANCING FALLS FAR SHORT OF THE PROJECTED NEEDS

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he urgency of addressing climate change and achieving a sustainable future necessitates robust financing of decarbonising infrastructure across the globe, and particularly in developing countries. Developing nations face significant challenges due to their high levels of carbon

emissions and limited access to clean technologies. To tackle this issue, banks globally must take proactive measures to mobilise capital flows towards decarbonising infrastructure, in turn playing a crucial role in driving this transformation. According to the key pillars for COP28 announced by Dr Sultan

The financing gap for infrastructure development in developing countries is staggering. According to the World Bank, these nations need to invest approximately 4.5 per cent of GDP to achieve infrastructure-related sustainable development goals (SDGs) and limit climate change to no more than 2 degrees Celsius. However, studies from the G20’s Global Infrastructure Hub, the United Nations, and McKinsey & Company indicate that the infrastructure financing gap amounts to trillions of dollars per year. In addition, developing countries are confronted with the challenging task of balancing energy security, energy equity, and environmental sustainability, known as the energy trilemma. With an estimated triple increase in electricity demand by 2050, coupled with the need to achieve environmental goals, annual investments of approximately $1.5tn in energy supply and production are required by 2035. The situation becomes even more pressing as 600

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DEVELOPING NATIONS FACE SIGNIFICANT CHALLENGES DUE TO THEIR HIGH LEVELS OF CARBON EMISSIONS AND LIMITED ACCESS TO CLEAN TECHNOLOGIES.”

million people in Africa alone lack access to electricity. The current level of climate-related development financing falls far short of the projected needs. The combined contributions from bilateral sources, multilateral development banks, and development finance institutions represent less than 1.5 per cent of the required funds. While the $93bn replenishment of the World Bank’s fund for the world’s poorest countries (IDA) back in 2021 is a significant step, there is an urgent need for banks to utilise their expertise and resources to deploy financing for renewable energy projects where collaboration and innovative financing solutions will be prioritised. THE ROLE OF BANKS IN THE UAE

In response to this pressing need, banks across the globe are actively addressing the challenge of financing decarbonising infrastructure to facilitate the transition to renewable energy sources. In October 2022, the US and the UAE announced the Partnership for Accelerating Clean Energy (PACE), committing to catalysing $100bn in financing and investment to deploy 100GW of clean energy in the US, the UAE, and emerging economies by 2035. This partnership demonstrates the

leadership role played by the UAE on the global stage. Between now and 2035 there is much work to be done, and the role of banks and financiers in facilitating the development and escalation of these solutions cannot be understated. As we look to deploy our expertise and capital, we are examining how the regional and global energy sector will transform in the years to come.

$1.5TN REQUIRED INVESTMENTS WITH AN ESTIMATED TRIPLE INCREASE IN ELECTRICITY DEMAND BY 2050, COUPLED WITH THE NEED TO ACHIEVE ENVIRONMENTAL GOALS, ANNUAL INVESTMENTS OF APPROXIMATELY $1.5TN IN ENERGY SUPPLY AND PRODUCTION ARE REQUIRED BY 2035

In line with the region’s vision to achieve carbon neutrality, Bahrain has been focusing on converting its energy extraction from fossil fuels to low-carbon sources. nogaholding, the energy investment and development arm of Bahrain, hired Mashreq to lead development for its sustainabilitylinked loan (SLL). The initial target of the SLL was to raise $1.6bn, however, the deal was two times oversubscribed and ended up raising $2.2bn, becoming the largest SLL in the region’s history. As part of Mashreq’s goal to finance and facilitate $30bn in sustainable financing by 2030, the bank has already facilitated $1.3bn in water-related projects to help developing countries build resilience to resource scarcity and adapt to climate-impacted changes. There are a few challenges in this area that, as an industry, financial institutions must address. The first is that, given the rapid pace of technological advancements and their limited track record, there is limited authoritative commentary or guidelines on what should be the way forward. There is also a lack of clear and detailed international standards, which hampers the bankability of, for example, storage solutions and other related new technologies. Project finance is essential to moving this sector forward, but regulatory and policy improvements must keep pace if project finance benefits are to be fully realised. As COP28 approaches, the focus turns to developing actionable plans to deploy financing for the energy transition in developing countries. The international community must unite to support inclusive financing strategies, ensuring no country is left behind. With decisive action, world leaders and the banking community can accelerate progress toward a sustainable future and unlock the transformative potential of decarbonising infrastructure.

In line with the region’s vision to achieve carbon neutrality, Bahrain has been focusing on converting its energy extraction from fossil fuels to low-carbon sources

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FO UNDER A ND C EO OF TA R A BU T G AT E WAY

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A BDUL L A A L MOAY E D

STRIKING THE BALANCE

REGULATORS SHOULD IDEALLY ESTABLISH OFFICIAL INNOVATION SANDBOXES AND PATHWAYS WHERE STARTUPS AND FINTECHS CAN TEST NEW IDEAS AND PRODUCTS

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he importance of developing a fully functioning and robust open banking ecosystem across the MENA region holds unparalleled promise. Why? Its transformative power cannot be overstated. Open banking is the key that can unlock financial security for millions, enabling them to realise their own and their families’ ambitions, secure quality healthcare and education, and lead the lifestyle they dream of. It’s about ensuring that no one is excluded from the realm of financial services and the opportunities they can provide. Naturally, when technological

breakthroughs are made, there is a risk that the rush to innovate and spread their benefits results in a sub-optimal ecosystem. This presents the risk that bad actors can exploit weak infrastructures for their gain. REDUCING RISKS

To minimise these risks, it is important to strike a balance between encouraging innovation and providing customer reliability and security. While there are a range of approaches being taken across the region, the differences are of nuance and pace rather than a stark choice of over-regulation or a complete free-for-all.

We must prize the results of open banking innovation as these will drive economic growth that spreads prosperity generally but especially for the underbanked and underserved. The resulting new customers and improved customer experiences will bring new demands and drive new ideas – a virtuous circle that will bring further financial sector improvements. Innovation is an unpredictable dance of minds – this is why regulations must have innate flexibility, be adaptable to changing business models, learn lessons from recent experiences, and correct or support developments unforeseen by regulators. Open banking innovations are greatly improving productivity – releasing people to do more, be it completing other work or helping our families

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and communities. This loops into furthering economic growth and is another reason we need to ensure productivity gains are encouraged rather than stifled. Open banking’s innovation isn’t only about convenience; it’s about freedom from traditional brick-and-mortar constraints. It’s the ability to access financial prowess via devices that fit in our hands or on our wrists. It is about democratising loans and finance and erasing historical credit biases. It’s around-the-clock services, unconfined by geography. Millions of people be they existing bank customers or those outside of the banked population stand to benefit. From the expanding market of more customers will come greater competition which, together with the productivity gains, will drive down the costs of financial services – making the various products more affordable. NEW SERVICES

New payment and banking services such as those across the MENA are now appearing around the world be it Paga in Nigeria, Ubank in Australia, or Mach in Chile. Without open banking, it would not have been possible for these to launch and develop – providing more services, becoming accepted internationally and building partnerships with the likes of Visa and Mastercard. Conversely, some countries’ stringent data privacy regulations cast shadows on the potential of personal finance management apps, limiting the free flow of financial data. Additionally, regulatory complexities in certain jurisdictions hinder the growth of peer-to-peer lending platforms empowered by open banking APIs. Payment initiation services, while thriving in some regions, face obstacles due to diverse

start-ups and fintechs can test new ideas and products. DIALOGUE IS KEY

WE MUST PRIZE THE RESULTS OF OPEN BANKING INNOVATION AS THESE WILL DRIVE ECONOMIC GROWTH THAT SPREADS PROSPERITY GENERALLY BUT ESPECIALLY FOR THE UNDERBANKED AND UNDERSERVED financial technology regulations in others. International parallels tell the tale – less regulated US, well-regulated UK, meticulously regulated European Union. Middle East and Africa, embracing a nuanced path, finds affinity with the UK model. It’s a lesson in balance, steering away from the excesses of rigidity. The challenge with a highly regulated model lies in its demand for additional resources and time, increasing costs and potentially endangering innovation. A balanced approach is for regulators to establish official innovation sandboxes and pathways where

How then do we weave this balance between regulation and innovation? Constant dialogue is the key, tech developers and innovators need to be able to meet regulators and discuss opportunities, obstacles, and the relative risks they hold. Political leaders need to be involved so they can be aware of the opportunities and not just hear of the risks. To perfect this requires establishing regular conversations and open events, discussing new ideas and if they need regulatory reviews. The real debate is needed so prevailing attitudes might be tested to prove their worth – do regulations fit the market dynamics, are there gaps or blockages, are fintech innovations and start-ups easy or difficult? Successful dialogue thrives when all sides comprehend different perspectives. Regulators must fathom the entrepreneur’s pulse, the artist’s vision, and the investor’s need for flexible regulations. And vice versa – regulators’ concerns for compliance, security, and fairness need acknowledgment too. Common ground exists – financial institutions understand their lifeline rests on data security, building trust through data encryption, verification processes, and transaction monitoring. MENA regulators can enhance such reputations by fostering trust in the open banking environment for data sharing. In the symphony of open banking, the code is simple: welcome innovation and its discourse for an ecosystem in balance – where innovation harmonises with compliance.

New payment and banking services such as those across the MENA are now appearing around the world be it Paga in Nigeria, Ubank in Australia, or Mach in Chile

OPEN BANKING’S INNOVATION ISN’T ONLY ABOUT CONVENIENCE; IT’S ABOUT FREEDOM FROM TRADITIONAL BRICK-AND-MORTAR CONSTRAINTS”

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M A R K BIL L ING T ON ( F C A )

M A N A GING DIREC T OR , IN T ERN AT ION A L

IC A E W

COULD AI ANSWER THE CALL FOR INCREASED FINANCIAL DISCIPLINE? AUDIT FIRMS ARE LEVERAGING EMERGING TECHNOLOGIES TO IMPROVE EFFICIENCIES AND STREAMLINE WORKFLOWS WHILE IMPROVING QUALITY AND ACCURACY

he call for financial discipline is more relevant than ever before. A lack of diversification and careless investments contributed to the high-profile failure of Silicon Valley Bank. Investment banking giant Credit Suisse collapsed following scandals involving non-compliant practices, money laundering and corruption. Closer to home, tech conglomerate Sea also only managed a tight turnaround to profit after instating strict costcutting measures. These are sobering reminders that solid accounting systems and internal controls are non-negotiables for sound businesses and in building credibility and confidence among investors, creditors and customers. However, with more stringent regulatory requirements comes more work for accountants. Could artificial

intelligence (AI), with its ability to process and ‘digest’ large amounts of data in an instant, help answer the call for more stringent financial discipline? FIRST, LET’S DEFINE ‘GOOD CORPORATE GOVERNANCE’

Good corporate governance seeks to improve transparency and accountability within existing systems while driving innovation to keep up with the ever-changing times. This includes financial reporting, which is the communication of financial performance, position and prospects to investors and other stakeholders. Leaders must also attend to trends placing significant pressure on the organisation, such as climate change, geopolitical and economic changes, technological advancements, and more.These factors can disrupt

IN TODAY’S INCREASINGLY DATA-DRIVEN ENVIRONMENT, AI HAS VAST POTENTIAL FOR APPLICATION IN THIS SECTOR. AUDIT FIRMS ARE LEVERAGING EMERGING TECHNOLOGIES TO IMPROVE EFFICIENCIES

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AND STREAMLINE WORKFLOWS WHILE IMPROVING QUALITY AND ACCURACY.”

growth, throwing organisations off their roadmaps. Ultimately, the key is to adapt and remain future-proof, finding the best from each scenario. THE VAST POTENTIAL OF AI IN AUDITING AND ACCOUNTING

In today’s increasingly datadriven environment, AI has vast potential for application in this sector. Audit firms are leveraging emerging technologies to improve efficiencies and streamline workflows while improving quality and accuracy. By leveraging AI and smart data analytics tools, auditors can gather key organisational insights and make more informed decisions. Artificial intelligence’s capability in automatically pulling out information from the haystack – information that often previously was not accessible– makes it highly suitable for identifying possible hazards and areas of concern. Auditors can thus focus their testing efforts on areas with a higher risk of material misstatement. Furthermore, industry watchdogs will continually re-evaluate regulatory frameworks to keep up with the ever-changing landscape. With the growing complexities in many jurisdictions, AI will serve as a vital tool to help businesses stay in step with these changes to keep up Singapore’s high standards of financial discipline. Of course, a caveat applies. AI ultimately acts as a ‘tool or assistant. One should not rely on it fully as human intervention, professional scepticism and judgement still form a vital part of the equation.

COMMENT / AUDITING

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FREEING UP ACCOUNTANTS TO TAKE ON MORE STRATEGIC ROLES

Artificial intelligence will continue to push the boundaries of innovation, leading to concerns about the possibility of AI replacing the accountancy profession. But I beg to differ – in fact, I welcome this change. Yes, bookkeeping and processdriven tasks will be automated. However, this will free up highly skilled professional accountants to take on more strategic roles. Increasingly, the roles of accountants will lean towards advising, as they help management develop and implement the right strategies and invest in the right technologies. Altogether, these will pave a smoother path towards innovative growth while maintaining high standards of financial discipline. Accountants should therefore build up soft skills such as emotional intelligence, negotiation, judgement and persuasion and keep in mind ethical considerations as their roles evolve

to become more interactive and increasingly more focused on being trusted business advisors and getting leaders’ buy-in. The future also spells a rise in hybrid and synergistic roles in this sector. More roles will focus on ‘tech-enablement’, such as training machine-learning models, or on data governance. As advisory and consultancy skills interweave, accountants may also find themselves acting as brokers between technical experts and clients, again highlighting the need for soft skills. These are all exciting evolutions for the accounting profession – one that is increasingly plagued with a growing talent gap, particularly in Singapore. Recently, Finance Minister Lawrence Wong highlighted that those pursuing accounting degrees have dropped over 10 per cent over the past five years, and fewer accounting graduates go on to take up careers in the profession.

The shift towards strategic and hybrid roles in accountancy could be just what we need to entice fresh blood, retain talent and advance financial discipline. DIFFERENT APPROACHES NEEDED TO DRIVE FINANCIAL DISCIPLINE

The importance of corporate governance simply cannot be underestimated. It guides a company and its employees to do good business safely and ethically. The accountant’s role is becoming more complex, with sustainability and non-financial reporting growing in importance, alongside increasing regulatory requirements and challenges of economic crime. Technology can help deal with the numbers and data so that we can focus on the insights and tell the stories behind the data to protect stakeholders, ensure sustainable economies, and drive transformations. Using these tools will refresh our approach to the role of accountants in building stronger financial discipline in organisations.

More roles will focus on ‘techenablement’, such as training machine-learning models, or on data governance

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OME R M A HDI

HE A D OF T R A NS A C T ION S OL U T IONS, MIDDL E E A S T

A ON

ENHANCING M&A STRATEGIES IN THE MIDDLE EAST DEALMAKERS AND THEIR ADVISERS ARE INCLUDING INSURANCE ON THEIR M&A AGENDA JUST AS MUCH AS THE TRADITIONAL CORPORATE RISK MANAGER

n a world gripped by economic turbulence and uncertainty, the GCC has managed to defy the global trend of reduced merger and acquisition (M&A) activity over the last two years. The GCC region’s outlook for the next 12 months remains cautiously optimistic, driven by a confluence of factors that make it an attractive hub for deal-making.

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A key driver of this cautious optimism is the growing appetite for expansion among government-linked groups in the region. These entities are not only looking to diversify their portfolios but are also actively seeking inbound investment partnerships, and promoting private sector participation, which, in turn, is boosting investor confidence. While the pace of M&A activity may have slowed down in 2023 compared to the rapid growth of 2022, the GCC remains resilient, thanks in part to higher oil prices. This financial stability provides the means for cross-border M&A deals, enabling businesses to explore both domestic and crossborder opportunities in and from the region. Another driver is the push for economic diversification which remains a strategic priority, with digital enablement and the technology sector playing a central role. The UAE is leading this charge, benefiting from strong demographics, competitive GDP per capita, and a culture of entrepreneurship,

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GROWTH SENTIMENT: CAUTIOUSLY OPTIMISTIC

particularly in the SME sector. One significant factor contributing to the UAE’s resilience is the leadership’s commitment to a long-term strategy which, unlike many of its counterparts in the West, is not influenced by short-term political cycles. This sentiment of longevity has allowed the UAE to respond proactively to global economic challenges and focus on building a stable economic and regulatory framework, positioning itself as a stable and reliable partner for investors and businesses. Coinciding with this era of economic resilience has been the maturity of the region’s M&A playbook. Below are a handful of tools that are being used more regularly on M&A transactions in and from the region.

M&A INSURANCE: A CAPITAL EFFICIENCY TOOL

Dealmakers in the region are increasingly transposing insurance and related instruments into an M&A context to enable transactions that would otherwise falter and to facilitate corporate restructurings, often creating shareholder value in the process. Dealmakers and their advisers, particularly in the UAE and increasingly in Saudi Arabia, now routinely include insurance on their agenda just as much as the traditional corporate risk manager, albeit with a different goal in mind. The most common of these tools is warranty & indemnity (W&I) insurance, which has been available in the region for nearly a decade. In its infancy, W&I

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insurance was viewed as a solution for the M&A seller, allowing it to insure its liabilities relating to the warranties and tax indemnity provided to the buyer in the sale and purchase agreement. For much of the last decade, only a handful of dealmakers in the Middle East were aware of the product’s existence and the majority of those who were found it to be clunky in its application and often commercially unviable given the cost. Much has changed over the past two years and there has been a steady uptick in the use of W&I insurance on transactions in and from the Middle East. We are seeing the start of a snowball effect that is primarily a result of three elements finally fusing. Firstly, the increased supply of specialist insurance capital flooding into the region has resulted in a drop in cost. Secondly, there’s been a noticeable change in perception within the Middle East M&A community with dealmakers now beginning to appreciate that the value of the product can be realised immediately if it’s used effectively as a tool in deal negotiations (unlike traditional insurance products which typically only pay off if and when things go wrong). Finally, the process has become more streamlined as a result of increased awareness and familiarity. Sovereign, private equity and corporate dealmakers, together with their advisers, are routinely seeing the benefits of structuring a W&I solution on transactions both within and outbound from the region. From a seller’s perspective, the ability to limit the liability to a nominal amount can be particularly relevant for an exit as well as structuring deals where the seller retains an interest in the business following completion, to ringfence the relationship between the parties following completion of the deal. From a buyer’s perspective, bridging

the gap and having comfort in the knowledge that there is protection from a credit-worthy institution is often a key driver. W&I insurance may not cover known matters, such as items identified in due diligence or disclosure processes. In these cases, tax liability insurance comes to the rescue, reducing or eliminating exposure to risks related to a tax authority’s challenge of expected tax treatment in transactions. This solution has witnessed increased adoption and flexibility, particularly on outbound transactions from the region, making it a particularly useful tool for managing known tax risks in both M&A transactions and corporate reorganisations. With the introduction of value-added tax and corporate tax in the UAE and Saudi Arabia in recent years, I expect that the use and relevance of tax liability insurance will become more prevalent in domestic transactions and restructurings in the coming year. A FOCUS ON CYBER AND INTELLECTUAL PROPERTY: AN INCREASINGLY DIGITAL WORLD.

In 1985, 30 per cent of S&P 500 value was intangible assets whereas today that figure has grown to nearly 90 per cent. The Middle East is embracing the digital revolution with large parts of the region increasingly focused on economic diversification strategies to reduce its reliance on oil and gas. As a result, technological advancements in the Middle East are taking place at record speeds. Even sectors such as manufacturing that traditionally lagged in implementing the latest technology have embraced the digital revolution. But with that, comes both increased risk and opportunity. The region is particularly vulnerable to cyberattacks on critical infrastructure, such as oil and gas fields, power plants,

ports and airports and the data shows that the cost of a cyber incident across the Middle East is significantly greater than the global average. As a result, a comprehensive assessment of an M&A target’s cybersecurity readiness has become increasingly important. Analysing a target’s footprint within the hacking community, investment in security defences, and inherent exposure to cyber threats can provide valuable insights. These cybersecurity assessments have often allowed investors to factor in cyber risk in their valuation and financial modelling, supporting deal certainty and post-close risk management through insurance. Separately, in an era that is dominated by intangible assets, IP management and protection have gained prominence. For investors and acquirers in the region, IP analytics can play a vital role in assessing the quality, uniqueness, and potential revenue generation of a target’s IP. An in-depth analysis assists in evaluating the target’s competitive position and overall IP management maturity, offering a distinct perspective beyond traditional legal IP due diligence. We expect there to be an increased focus on cyber and IP aspects of M&A transactions over the next 12 months. M&A in the GCC region remains resilient and insurance capital is increasingly being used as a value-boosting tool. The region’s M&A activity has defied global trends, and the outlook for the next 12 months remains cautiously optimistic. The region’s commitment to diversification, and technological transformation coupled with resilience to global economic headwinds and a focus on long-term strategy over shortterm politics, continues to attract investors and drive deal-making. As businesses in the GCC navigate economic uncertainty and volatile financial markets, M&A insurance tools and specialist due diligence are becoming increasingly adopted to enhance M&A strategies.

The region is particularly vulnerable to cyberattacks on critical infrastructure, such as oil and gas fields, power plants, ports and airports and the data shows that the cost of a cyber incident across the Middle East is significantly greater than the global average

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PA R T NER

REED SMI T H

S OH A M PA N C H A MI YA

A S S O C I AT E

REED SMI T H

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A DE L A MUE S

FOCUSED ON COMPLIANCE RAPID FINANCIAL SERVICES REGULATORY DEVELOPMENTS OVER THE LAST FIVE YEARS REFLECT WHY THE UAE’S HIGHLY ENTREPRENEURIAL AND TECHNOLOGY-FOCUSED ENVIRONMENT IS ATTRACTING VIRTUAL ASSETS BUSINESSES

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he UAE has positioned itself at the forefront of the regulation of virtual assets business and has become a preferred jurisdiction for Web3 businesses looking to operate in a businessfriendly ecosystem, while benefitting from the UAE’s strong regulatory environment. The UAE’s virtual assets strategy is not new – it is clear that, early on, the UAE’s leaders have seen both the potential as well as the challenges that virtual assets-related businesses present. Rapid financial services regulatory developments over the last five years show how the UAE’s highly entrepreneurial and technology-focused environment

attracts cutting edge companies (including virtual assets businesses) and that the longterm health of this environment greatly depends on ensuring that regulation offers business participants a safe, but flexible home to thrive in. The federal Emirates Blockchain Strategy 2021, with its declared objective to create an environment where blockchain technology will thrive, followed by the Dubai Blockchain Strategy, which intended to establish a Dubai roadmap for the introduction of blockchain technology and the creation of an open platform to share the technology globally, set the tone for what was to come.

ABU DHABI GLOBAL MARKET (ADGM)

ADGM’s financial services regulator, the Financial Services Regulatory Authority (FSRA) was the first UAE regulator to introduce a bespoke framework for the regulation of crypto business and virtual asset activities, including those undertaken by multilateral trading facilities, brokers, custodians, asset managers, and other intermediaries. The FSRA also introduced a specialised set of rules governing ICOs (initial coin offerings). The framework included risk management rules related to market abuse and financial crime, consumer protection, technology governance, custody and exchange operations. The FSRA is expected to also introduce new regulations on decentralised finance (DeFi) and decentralised autonomous organisations (DAOs).

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DUBAI INTERNATIONAL FINANCIAL CENTRE (DIFC)

While the ADGM positioned itself as a pioneer in the crypto space, the DIFC took a more cautious approach. As a first step, in October 2021, DIFC’s regulator, the Dubai Financial Services Authority (DFSA), issued regulations relating to investment tokens, which was followed in November 2022 by crypto token regulations. The DFSA’s crypto token regulations took a conservative approach to what is permitted in the DIFC. Generally, the DFSA has opted to adapt its existing framework so traditional financial institutions are empowered to create a virtual asset division or subset to their existing services. In September, the DFSA put out a draft Digital Assets Law for consultation, which proposes to treat all virtual assets as a type of intangible property and clarifies the rights and obligations of different holders of such assets.

SECURITIES AND COMMODITIES AUTHORITY (SCA)

The SCA is tasked with regulating crypto assets that are deemed to be a product or security. That said, its jurisdiction on virtual assets is currently fairly narrow, particularly in Dubai, as the SCA has signed a formal partnership with VARA wherein all its authority for any Dubaibased VASPs has been officially delegated to VARA. At present, the only SCA regulations relevant to virtual assets relate to the regulation of exchanges. It is expected that the SCA will issue further regulations applicable to virtual assets regulated business outside Dubai, DIFC and ADGM. CENTRAL BANK OF THE UAE (CBUAE)

CBUAE regulations are primarily relevant to payment services providers (that is on-rampers and off-rampers) who utilise

VIRTUAL ASSET REGULATORY AUTHORITY (VARA)

In one bold move in 2021, Dubai set up the first dedicated regulator for virtual assets in the world. In January 2023, VARA introduced a comprehensive suite of rulebooks that are designed to serve, regulate and oversee the activities of virtual assets providers (VASPs). The interest that this move has generated in the crypto world is made obvious by the tremendous amount of interest generated in the industry, and the top-tier roster of businesses that have applied to be regulated by VARA. It is no doubt that being regulated by VARA has become a must for major industry players. Undoubtedly, VARA will play a key role in cementing the UAE, and Dubai specifically, as one of the main crypto hubs in the world.

IN THE UAE, THE FRAMEWORK

HAS BEEN DESIGNED TO ACCOMMODATE ALL PLAYERS – EXCHANGES, DEALERS, CUSTODIANS, ADVISORS, NFT MARKETPLACES, WEB3 GAMING COMPANIES, CRYPTO DERIVATIVES, AND OTHERS – WITH PROVISION ACTIVELY BEING MADE FOR DEFI AND DAOS

cryptocurrency and blockchain technology to revolutionise payments and remittances. Notably, the CBUAE may authorise and license UAE entities providing stored value facilities (which may involve or utilise virtual assets). In addition, the CBUAE’s retail payment services and card schemes’ regulations regulate the use of what it calls ‘payment tokens’ (for example tokens backed on a one-to-one basis by fiat currency such as stablecoins). RAS AL KHAIMAH DIGITAL ASSETS OASIS

Ras Al Khaimah has also announced the creation of a new free zone entitled RAK DAO whose purpose is to be a centre for digital assets companies. Once formally in place, it is expected to be another player in the Web3 ecosystem in the UAE. LOOKING AHEAD

Most jurisdictions in the world have accommodated regulations for Web3 players in fits and starts and in small pockets. Some regulate exchanges and the OTC desks; others have picked up on the use of tokens as a concept and payment services. In the UAE, the framework has been designed to accommodate all players – exchanges, dealers, custodians, advisors, NFT marketplaces, Web3 gaming companies, crypto derivatives, and others – with provision actively being made for DeFi and DAOs. This presents a unique proposition to the industry – positive, dynamic regulation, designed to provide a great environment to grow. The regulatory frameworks that the UAE has put in place and continuously develops will be an invaluable tool for businesses – and it will ensure that the UAE is at the centre of the digital economy of the future.

Ras Al Khaimah has announced the creation of a new free zone entitled RAK DAO whose purpose is to be a centre for digital assets companies. Once formally in place, it is expected to be another player in the Web3 ecosystem in the UAE

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SPOTLIGHT ON ISLAMIC FINANCE QUDEER LATIF, AUTHOR AND EXPERT IN ISLAMIC FINANCE, TELLS KUDAWASHE MUZORIWA ABOUT OPPORTUNITIES IN THE GLOBAL ISLAMIC FINANCE SECTOR, AND KEY MARKET DYNAMICS AND DRIVERS

WHAT INSPIRED YOU TO WRITE A BOOK ABOUT ISLAMIC CAPITAL MARKETS? When Covid-19 first started in early 2020, it became impossible to train and mentor the junior lawyers and trainees in the office. I was therefore looking for material to help support their remote growth and development and quite quickly realised that there was a ‘gap’ in the market as there were no practical or introductory guides. I decided to write what was originally supposed to be a short guide to support these junior practitioners. The guide, with the support of many people around me including family and colleagues at work, then developed into a book. The entire exercise from start to publication took nearly two years as I was writing it in my spare time on weekends. GLOBAL SUKUK ISSUANCE IS PROJECTED TO DROP TO $160-$170BN THIS YEAR. WHAT ARE THE CHALLENGES CONFRONTING THE GLOBAL SUKUK MARKET? The global sukuk market is embedded into overall global capital markets. Global capital market volumes for 2023 are likely to decrease due to macroeconomic factors, including as a result of the rise in interest rates over the last 12 months. However, given the Islamic liquidity available in geographical areas such as the Middle East, the proportion of sukuk issued in the Middle East relative to aggregate regional capital market issuances is likely to increase.

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HOW DO YOU EXPECT REGULATORY DEVELOPMENTS SUCH AS AAOIFI SHARIAH STANDARDS TO BOOST THE GLOBAL APPEAL OF ISLAMIC FINANCE? The global Islamic finance market is fragmented. Global standards, such as Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah standards are intended to harmonise and standardise Sharia standards, which ultimately will lead to greater

consistency, lower risk, more time efficient and cost-effective transactions. The introduction of the Higher Shariah Authority (HAS) in the UAE has been a very positive development in that drive to standardisation. The HSA is responsible for the interpretation and application of AAOIFI Shariah Standards for UAE-regulated financial institutions. Whilst there were inevitably some teething issues in 2020 and 2021, these have now largely been addressed. With a stronger Shariah compliance framework now in the UAE, I am very excited about the next phase of growth and development. WHERE DO YOU SEE GROWTH OPPORTUNITIES AND WHAT ARE THE KEY DRIVERS FOR THE SEGMENT? The fundamentals for the continuing growth of Islamic finance remain strong. The Middle East has several investors (retail and institutional) that either can, or choose, only to invest in a Shariah-compliant manner. Therefore, these investors will continue to drive the demand side of the market. In addition, with the growth of government and private sector spending in nearly all of the countries in the region, there is a continuing need for capital. The supply side of the market therefore continues to grow. The demand however is still greater than the supply which highlights the growth opportunities. HOW DO YOU ENVISION ISLAMIC CAPITAL MARKETS IN THE MEDIUM TERM IN LIGHT OF HIGH INFLATION AND SOARING INTEREST RATES? As mentioned earlier, the sukuk market is not immune from global macroeconomic factors. However, I remain confident that the proportion of sukuk transactions will increase and the region is well hedged and protected

INTERVIEW / ISLAMIC FINANCE

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for continuing growth, particularly when interest rates start to decrease.

“AS THE DRIVE FOR EFFICIENCY AND DIGITISATION

HOW IS TECHNOLOGY BEING LEVERAGED IN THE ISLAMIC CAPITAL MARKETS? Various parts of a sukuk transaction, for example, the manner of distribution of an offering circular to potential investors, how investor roadshow meetings are conducted and how a high-net-worth investor can buy/ hold their sukuk certificates with their local bank have changed and simplified through technology. As the drive for efficiency and digitisation continues, I would fully expect there to be further developments including the potential to use blockchain technology in facilitating sukuk issuances.

BE FURTHER DEVELOPMENTS INCLUDING THE

THE VOLUME OF SUSTAINABILITY-LINKED SUKUK SOARED BY AROUND 50 PER CENT GLOBALLY IN 2023. TO WHAT EXTENT WILL COP28 IN THE UAE SPOTLIGHT THE IMPORTANCE OF ISLAMIC FINANCE AND SUKUK IN ADDRESSING THE CHALLENGES OF CLIMATE TRANSITION? This is a hugely important area. Whilst the region remains a traditional oil and gas market, there is a significant move to energy transition. Many of the regional governments have also made public commitments to the reduction of carbon footprints. Achieving these goals will not only require the increased use of established technology such as wind and solar energy but also a growth of the use of new technology such as hydrogen. From an investor perspective, there is also a growing demand for sukuk issuances either to be linked directly

CONTINUES, I WOULD FULLY EXPECT THERE TO POTENTIAL TO USE BLOCKCHAIN TECHNOLOGY IN FACILITATING SUKUK ISSUANCES.” to the development of new sustainable/green projects or for the use of proceeds to be linked to sustainability. We have seen an acceleration of this over the last 9-12 months in the UAE, partly as a result of COP28. HOW DO ISLAMIC MARKETS IN THE GCC REGION COMPARE TO MORE MATURE MARKETS SUCH AS MALAYSIA? The GCC markets are much more active in the international sukuk space to attract overseas capital whilst the Malaysian market has a much deeper domestic market. There is a recognition that the domestic sukuk markets in the GCC need to grow and we are now seeing this in countries such as the UAE, Saudi Arabia and Bahrain where central banks are now regular issuers of local currency denominated sukuk paper. This will allow local liquidity to stay in the region and ultimately the development of local currency yield curves will allow domestic private enterprises to also issue local currency sukuk.

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NORTHLARK

ALIGNING TECHNOLOGY WITH COMPLIANCE ESHANA DE SILVA, CHAIRMAN OF NORTHLARK, REVEALS HOW THE REGTECH PLATFORM, WHICH OFFERS REAL-TIME MONITORING OF GLOBAL REGULATORY CHANGES, IDENTITY AND BUSINESS VERIFICATION TOOLS, AND COMPLIANCE MONITORING SERVICES, CAN EFFICIENTLY SUPPORT BANKS AND OTHER INSTITUTIONS IN THE UAE

WORDS KUDAKWASHE MUZORIWA | PHOTOS AHMED ABDELWAHAB

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that financial regulators collected $1.6bn in fines from violations across Europe, the Middle East, and Africa (EMEA), North America and Asia Pacific in the first half of 2023. Faced with severe consequences for non-compliance, financial institutions are incurring additional costs to stay up to date on the latest regulatory changes and to implement the controls necessary to satisfy those requirements.

Redefining compliance As GCC countries have made huge strides in digitising their economies, the proliferation

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s the backbone of national and global financial systems, banks are held to the highest standards of accountability, financial stability and fairness,” says Eshana De Silva, who is the chairman of Singapore-based regtech firm Northlark. However, the consequences can be harsh and far-reaching when these standards are not met. Reflecting on the crisis that ripped through the global banking industry earlier this year, De Silva notes that the collapse of four regional US banks and the collapse of Credit Suisse was a serious test of the banking regulation reforms that were introduced between 2007-09. Together with the disruptive events of 2023, such as high inflation and soaring interest rates, the implosion of Credit Suisse – a financial juggernaut deemed ‘too big to fail’ – accelerated changes in banking regulatory perspectives and will likely impact the direction of regulations going forward. Regulation and compliance are some of the major headaches confronting banking executives due to the sizable increase in penalties as a direct result of breaches that range from money laundering to terrorism financing to sanctions violations. The latest data from compliance firm Fenergo shows

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of innovative technologies and products in the financial services sector is a major challenge for regulators, who are finding supervision and oversight more and more difficult. On the other hand, banks operating in the region are faced with a growing number of regulatory and compliance requirements as industry watchdogs have increased scrutiny of financial institutions, and levying fines when necessary. “Regulation in the financial services sector has expanded at an astounding rate over the years and, consequently, so has the cost and time to ensure compliance,” observes De Silva, who has served as chairman of two banks in Sri Lanka. With more and more banks turning to intelligent solutions that use modern technologies, De Silva says NorthLark’s offering meets the need of the hour. The regulatory technology (regtech) platform promises not only to help banks cut the cost of compliance processes but also to advance effectiveness to make them quicker and more reliable while lessening the risk of costly compliance failures. “NorthLark stands as a cutting-edge platform tailored for banking compliance, leveraging AI and ML to offer real-time monitoring of global regulatory changes, ensuring banks remain well-informed,” says De Silva. The identity and business verification tool helps organisations to comply with changing regulations. “NorthLark offers a single application programming interface (API) integration to meet cross-border anti-money laundering (AML), know your customer (KYC), and customer due diligence (CDD) requirements, including know your business (KYB), risk mitigation and fraud prevention,” explains De Silva. To meet the new business entity verification requirements, the platform’s verification solution eliminates manipulated documentation and offers transparency of beneficial ownership to prevent fraud, corruption, tax evasion, and money laundering. De Silva says the platform’s suite includes Sentinel, Consular, Guardian and Transaction Monitoring. NorthLark Sentinel offers risk assessment forms and built-in risk scoring, streamlining risk assessment, policy management, and compliance monitoring. Similarly, the company’s consular service validates identity documents with facial biometrics and machine learning

NORTHLARK GOES BEYOND MONITORING AND ASSESSMENT, CONDUCTING BOTH INTERNAL AND EXTERNAL AUDITS FOR THE BANKING SECTOR TO GUARANTEE FULL REGULATORY COMPLIANCE.”

THE LATEST DATA FROM COMPLIANCE FIRM FENERGO SHOWS THAT FINANCIAL REGULATORS COLLECTED

NORTHLARK ENABLES INSTANT VERIFICATION OF OVER FIVE BILLION CUSTOMERS AND 330 MILLION BUSINESSES WITH ONE API. IT LEVERAGES ‘KERNER AI’, A PROPRIETARY SOFTWARE THAT WAS BUILT USING AI AND CAN IDENTIFY MORE THAN 2,500 DIFFERENT DOCUMENT TYPES FROM 195 COUNTRIES – INCLUDING GCC COUNTRIES

$1.6BN

IN FINES FROM VIOLATIONS ACROSS EUROPE, THE MIDDLE EAST, AND AFRICA (EMEA), NORTH AMERICA AND ASIA PACIFIC IN H1 2023

technology while transaction delivers case management and alert disposition for allinclusive oversight. “NorthLark goes beyond monitoring and assessment, conducting both internal and external audits for the banking sector to guarantee full regulatory compliance,” says De Silva. “It provides complete regulatory compliance frameworks and standard operating procedures (SoPs) that can be customised down to jurisdictional requirements.” The platform, which enables instant verification of over five billion customers and 330 million businesses with one API, leverages ‘Kerner AI’, a proprietary software that was built using AI and can identify more than 2,500 different document types from 195 countries, including GCC countries. “Our solutions are designed with a strong focus on automation, with the majority operating fully autonomously and others requiring minimal human intervention, achieving up to 70 per cent automation,” explains De Silva. The company seeks to obtain the necessary regulatory approval and certifications in all jurisdictions where it operates in line with the mandated guidelines. De Silva says the company will tailor its solutions to meet domestic regulatory and financial intelligence unit standards while ensuring full compliance with requirements.

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Regtech to the rescue The wave of digitalisation in the GCC financial services sector is a prime example of how financial institutions are leveraging customer data, analytics and segmentation to augment services, and products while future-proofing customer experience. Banks and other financial institutions manage a large volume of sensitive information about their customers that ranges from online card transactions to customer service interactions and ATM transactions. However, the breach of such data can have dire consequences. Data privacy has become a hot topic over the years due to colossal failures in security amid mounting concerns about how banks use the personal data they collect from customers or users. De Silva emphasises that data is almost a religion for technology companies and regtech platforms are often better at data mastery than traditional banks. “Data has become a cornerstone for modern risk management, influencing the way risks are identified, managed, and mitigated.” Regtech, often considered a subset of fintech, is being touted as the solution to data security concerns, the rising cost of compliance, risk and reporting duties at banks. De Silva explains that the principle of deploying innovative tech solutions such as regtech, to significant business challenges is nothing new. However, he says what’s new is that regtech promises to marry the new landscape of post-financial crisis regulation to the new landscape of digital technologies. GCC region banks are therefore keen to collaborate with regtech startups to learn how to leverage customer data better within their organisations, expose it more

THERE IS A GROWING EMPHASIS ON AML REGULATIONS AND KYC STANDARDS TO PREVENT MONEY LAUNDERING AND TERRORIST FINANCING, WHICH IS ACCELERATING INVESTMENTS IN SOPHISTICATED COMPLIANCE SYSTEMS

REGTECH SOLUTIONS ARE BECOMING IMPERATIVE FOR GCC INSTITUTIONS WITH CROSS-BORDER OPERATIONS, AS THEY OFFER THE MEANS TO REDUCE COSTLY MANUAL EFFORTS AND ENSURE COMPLIANCE.” 26 GB INVEST

cheaply for regulatory reporting reasons, or get simultaneous business benefits such as improved loan decisions, or better liquidity pricing. “The GCC region is witnessing a surge in collaboration between financial institutions and regtech solution providers,” De Silva explains while noting that the collaboration is fostering the creation of tailored compliance solutions and innovative responses to the increased regulatory scrutiny. “Regtech solutions are becoming imperative for GCC institutions with crossborder operations, as they offer the means to reduce costly manual efforts and ensure compliance.” Furthermore, because many regtechs are deploying innovative technologies such as cloud computing, artificial intelligence (AI), and blockchain, they can offer an advanced infrastructure or backbone, he says. To date, the most common regtech applications provide tools to manage five areas of governance, risk and compliance including KYC, reporting and risk management, consumer protection, market conduct, and advanced regulatory requirements management services. “The adoption of cutting-edge technologies in the GCC region’s financial service sector is paving the way for regtech innovations, making compliance more costeffective and efficient,” De Silva observes. He underscores that regtech solutions leverage AI and ML technologies to streamline processes, making compliance more efficient and effective.

An evolving landscape The regulatory and compliance landscape in the banking sector has been continually evolving in response to changing economic conditions, advancement in innovative technologies and the need to maintain financial stability. From Basel III’s capital and liquidity requirements to the Fourth Anti-Money Laundering Directive, and new regimes such as the Markets in Crypto-Assets Regulation and the Corporate Sustainability Reporting Directive, regulation keeps evolving and banks must ensure compliance and that processes keep up. Regulation is a creature of legislation, and by its nature, legislation follows wider societal and geopolitical concerns. De Silva says post the 2008 global financial crisis,

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regulation keeps evolving and compliance must ensure that systems and processes will keep up. While financial crime has always been a major part of the regulatory and compliance agenda, geopolitical tensions, sanctions and events in the crypto market have given it new impetus. The AML and CTF landscape rapidly changed, as central banks are actively strengthening regulatory frameworks and bolstering oversight activities. “NorthLark will play a pivotal role in helping financial institutions effectively address AML and CFT concerns,” says De Silva. “This involves guiding banks, maintaining the security and confidentiality of their data, and ensuring full regulatory compliance in alignment with global regulatory bodies such as FAFT, the United Nations, and the Dubai Financial Services Authority (DFSA), depending on the jurisdiction of operation.” There is a growing emphasis on AML regulations and KYC standards to prevent money laundering and terrorist financing, which is accelerating investments in sophisticated compliance systems. The UAE has gone further than most countries in financial crime regulation and the country is leveraging innovative technologies to support compliance. Meanwhile, digitalisation in the financial services sector is revolutionising banking, with the pace and scale of change only likely to increase driven by innovative technologies such as AI, the cloud and new entrants that are offering banking services. “Regulators recognise the importance of digital innovation in the banking sector and are working closely with industry stakeholders to introduce regulatory frameworks that foster innovation while ensuring risks and financial crime are kept at bay,” remarks De Silva. Financial institutions are a prime target for cyberattacks due not only to the money they have but also the data their systems house. Not a week passes without a new revelation of a massive cyber breach somewhere in the world. “Cyber resilience continues to be a top priority for the financial services industry and a key area of attention for financial authorities,” says de Silva, adding that compliance with cybersecurity standards and regulations is critical to safeguarding sensitive financial data. Banks are the

primary target for cybercriminals, and effective cybersecurity risk management is critical to protect banking institutions and minimise data theft, breaches, or misuse.De Silva notes that NorthLark developed security compliance and data leakage threat identification applications to safeguard data, adding, “We provide quarterly penetration and vulnerability reports to clients.” Thus, fears of a major cyberattack on banks have been rising since hackers got away with $81m from Bangladesh Bank in February 2016. While the law requires banks to refund money lost through cyberattacks, a bank’s reputation may be impacted by a data breach. Based on the growing demand for security in a global digital economy De Silva expects heightened supervisory global financial regulators to accelerate the adoption of regtech solutions. “This is where NorthLark can help and make a difference,” adds De Silva.

Broader scope De Silva adds: “NorthLark is a perfect tool as a screening software. While it’s prudent for any industry, dealers particularly in the special metals and stones, jewellery and real estate businesses can also use the software to stay compliant. The verification can be done simply in a matter of minutes.

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STRENGTHENING COMPLIANCE IN THE FINANCIAL INDUSTRY A SOLID FINANCIAL SECTOR RELIES ON A ROBUST REGULATORY FRAMEWORK, AND THE UAE HAS MADE PROGRESS IN THIS AREA

he UAE is a global trade and finance hub known for its strategic location and robust infrastructure. In recent years, it has prioritised compliance and regulatory frameworks to ensure financial sector stability while ensuring it has committed itself to international standards as we highlight key areas of regulatory bodies, focusing on the steps the UAE has undertaken to better the financial industry’s compliance landscape.

Regulatory framework

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A solid financial industry relies on a robust regulatory framework, and the UAE has made significant progress in this regard. They’ve improved the regulation of virtual assets, conducted extensive operational analysis, enhanced the reporting of suspicious transactions, and increased their monitoring of high-risk jurisdictions. On the supervisory front, anti-money laundering departments in organisations like the Central Bank of the UAE have invested in their people and capabilities to broaden their oversight.

Furthermore, UAE has established a dedicated AML department at the Ministry of Economy to mitigate risks associated with businesses that fall under the category of designated non-financial businesses and professions (For example, precious metals). In the UAE, various entities regulate the financial sector. The Central Bank oversees banks and financial institutions, ensuring stability and consumer protection through stringent regulations. Etihad Bureau, a credit bureau, improves compliance by providing timely credit data to enhance lending decisions and risk management. It also aids compliance by offering borrower credit history to assess creditworthiness, reducing non-performing loans and safeguarding the financial system. Even amid an incredibly challenging period for global economies, both Abu Dhabi Global Market (ADGM) and Dubai Financial Services Authority (DFSA) have demonstrated an extraordinary ability to adapt and innovate. The ADGM has implemented a broad set of regulations covering financial services, particularly in fintech and crypto assets, in response to the changing financial landscape.

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BY VIJAY VALECHA

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Earlier this year, proposed improvements to the ADGM’s capital markets framework were presented which included a novel regulatory system for spot commodity trading, making ADGM the first international financial center in the Middle East and North Africa to regulate spot commodities and emission allowances. These enhancements are part of their ongoing efforts to bolster ADGM’s comprehensive regulatory framework and foster a dynamic financial ecosystem.

Anti-money laundering (AML) and counter-terrorism financing (CFT) The UAE has taken proactive steps to combat AML/ CFT issues that pose serious threats to the global financial system. Financial institutions are required to implement robust due diligence processes, customer identification, and reporting mechanisms to detect and prevent illicit financial activities. The UAE has established mechanisms for financial institutions to report suspicious transactions and engage in cross-border cooperation. Collaborative efforts with other nations and international organisations have been instrumental in identifying and apprehending criminals involved in money laundering and terrorism financing. The UAE conducts regular risk assessments to identify vulnerabilities and emerging risks in its financial sector. This information guides regulatory bodies in crafting effective policies and ensuring that financial institutions are adequately prepared to mitigate AML and CFT risks. The UAE is a member of international organisations such as the Financial Action Task Force (FATF) and the Egmont Group, which focus on AML and CFT standards. These memberships provide the UAE with opportunities to align its regulatory framework with global best practices. The UAE has signed several bilateral agreements with other nations to exchange information and cooperate in fighting financial crime.

Financial technology (Fintech) As the financial industry evolves, the UAE is keen to embrace innovation while ensuring that the regulatory environment keeps pace. Key technologies such as fintech, IoT, e-wallets, robo advisors, blockchain, 5G, AI, and chatbots are driving industry evolution. One of the underlying challenges for increased reliance on digital banking is the negative consequence of cybercrime requiring banks to implement stateof-the-art security controls to protect consumers and ensure their ongoing comfort in using a bank’s digital platform. Abu Dhabi Global Market currently oversees virtual assets through the Financial Services and Markets Regulation, while the DFSA has recently issued its first consultation paper regarding the regulation of digital assets like cryptocurrencies. Onshore regulations are also evolving with the Securities and Commodities Authority introducing crypto asset regulations

Collaborative efforts with other nations and international organisations have been instrumental in identifying and apprehending criminals involved in money laundering and terrorism financing.” concerning securities, and the DMCC offering new crypto asset licenses. In the UAE, alternative finance options are expanding as an alternative to collective investment funds. Capital raising via bonds and sukuk remains robust, and the sector is growing with securitisations, supply chain finance, credit funds, captive offerings, finance leasing and crowdfunding (with the UAE recently introducing its first crowdfunding regulations outside of financial free zones). Domiciling investment funds within the UAE, instead of offshore locations such as the Caribbean or the Channel Islands, is gaining popularity. This trend can be attributed to the UAE regulators’ global reputation as IOSCO members, regional liquidity, and investor preference for local investment, making the formation of domestic investment funds likely to continue growing. Both the ADGM and Dubai International Financial Centre have introduced regulatory sandboxes, providing a controlled environment for fintech startups to test their innovations. This approach allows new technologies to flourish while regulators maintain oversight.

The writer is the chief investment officer, Century Financial

Compliance education and training A critical element in enhancing compliance within the financial industry is educating and training professionals in the field. Regulatory bodies, universities and financial institutions in the UAE offer training programmes that cover various compliance aspects. These programmes ensure that financial professionals are well-versed in the latest regulatory developments. Many professionals in the UAE seek certifications such as certified anti-money laundering specialist (CAMS) and certified compliance officer (CCO) to enhance their compliance skills and knowledge.

Significant progress The UAE has made significant strides in strengthening compliance within its financial industry. The commitment to a robust regulatory framework, addressing AML and CFT challenges, embracing financial technology, prioritising data protection, fostering international collaboration, and investing in education and training are all contributing to the UAE’s reputation as a financial hub with a strong emphasis on compliance and integrity.

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WHY THE GCC BANKING SECTOR IS CAUTIOUSLY OPTIMISTIC BANKS IN THE GCC REGION HAVE ALWAYS OPERATED WITH COMFORTABLE CAPITAL BUFFERS, AND WE DO NOT EXPECT THAT TO CHANGE

BY MOHAMED DAMAK

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hroughout 2023, economic growth within the Gulf Cooperation Council (GCC) is expected to slow due to lower oil production volumes, and slower non-oil growth because of higher interest rates. Saudi Arabia, Kuwait, the UAE, and Qatar are likely to experience the most pronounced overall slowdown this year, while Oman and Bahrain will see a milder slowdown. Within our sample of the top 45 banks in the region, Saudi banks accounted for 35 per cent of total lending and 59 per cent of total lending growth in the first half of 2023, followed by the UAE with a 28 per cent contribution to lending and 36 per cent contribution to growth. Lending growth in Saudi has slowed down as compared to last year but mortgages, and to an increasing

extent, corporate lending, have helped the banks to maintain their strong regional performance. In the UAE, growth was almost evenly split between the corporate and the retail sectors and helped by the strong performance of the non-oil economy. In other countries, lending growth was fairly muted and even negative for Qatar, where a new investment cycle is yet to start. In Kuwait, trade, construction, and non-bank financial institutions have helped the banking system to show some growth.

Slight drop in asset quality indicators In the first half of 2023, we saw a slight deterioration of asset quality indicators with non-performing loans (NPLs) and coverage ratios reaching 3.4 per cent and 163.9 per cent on June 30, 2023, compared with 3.3 per cent and 168.1 per cent by the end of 2022,

FEATURE / BANKING REVIEW 11 | 202 3

respectively. We expect the deterioration to continue in the second half of the year as corporates begin to feel the negative impact of higher interest rates and economic slowdown. However, we still believe that the deterioration will be limited thanks to the good lending and underwriting standards of the banks, and a stable amount of Stage 2 loans – at 10.6 per cent for banks that reported this number. Depending on the system, the banks’ cost of risk reached a cyclical low point of 0.7 per cent in the first half of the year, but we expect to see an uptick in the second half as banks reclassify problem loans of some of the corporates within financial margins. Overall, we expect NPLs’ ratio to remain below 5 per cent, coverage to exceed 100 per cent comfortably and cost of risk to hover around 100 bps, which we see as a normalised level for the top 45 GCC banks. Profitability soared with an average return on assets of 1.7 per cent in the first half of 2023, which is close to the cyclical highs of 2013-2015. However, not all the systems benefited from it, as some had to cope with higher costs of funding due to the replacement of external funding sources or migration of instruments. Therefore, margin improvement was less pronounced, and banks did not reap the full benefit of higher rates. Banks have also refrained from pushing their customers to the edge of default and adopted a pragmatic approach in reflecting higher rates to their weaker clients. Banks continued to benefit from a strong efficiency despite high inflation.

Strong profitability for the year Limited taxes and other social contributions, activity restructuring and leveraging opportunities offered by digitalisation explain to some extent this resilience. We believe that GCC banks will continue to display strong profitability for the remainder of the year. The trajectory for next year will depend on if and when the central banks decide to back-pedal on rate increases. Funding risk was also a prominent topic in the region particularly for Saudi Arabia and Qatar. For the latter, the story was about the change in the structure of external funding and the replacement of a portion by local sources. We note that the structure of external funding has somewhat weakened over the past 18 months as the contribution of potentially more volatile interbank funding has increased. At the same time, the system relinquished more than $18bn in external funding fully replaced by local sources. In Saudi Arabia, the government continued to inject deposits into the system helping the banks to finance their growth. The slowdown of the latter was positive news for the liquidity of the system. However, because of lower oil prices, we saw a drop in government deposits with the central bank and it remains to be seen if, at some stage, the government

or the government-related entities (GREs) will start to withdraw their deposits with the banks, potentially causing a re-emergence of some of the pressure we saw last year. The other interesting trend for Saudi Arabia is that several banks have established their sukuk programmes and started to tap international capital markets. While the system overall is still in a net external asset position, a build-up of external debt could signal an increased vulnerability to global liquidity conditions going forward. We are not there yet, and it may take a bit of time to eventually reach that point. In the UAE as well as Kuwait, we see the authorities as highly supportive of their banking systems and expect support to be forthcoming whenever needed. This is a positive rating factor for these systems. We, however, have our doubts about the capacity of Oman and Bahrain to do so.

Enhanced capitalisation The other positive rating factor is capitalisation. At the end of June 2023, the average Tier 1 ratio for the top 45 banks reached 17.1 per cent and ranged from 12.7 per cent to 26 per cent. GCC banks have always operated with comfortable capital buffers, and we don’t expect that to change. We may see more challenging access to the hybrid market for banks in need of raising or replacing

We may see more challenging access to the hybrid market for banks in need of raising or replacing instruments coming to their call dates, although this market seems to have restarted to some extent in the developed world.” instruments coming to their call dates, although this market seems to have restarted to some extent in the developed world. We also observed a higher contribution of hybrids in the capital composition of Oman’s largest bank as it paid its dividend in additional tier 1 instrument form. We see that as a one-off operation. However, what is going to be a recurring theme for the banks is the expected increase in dividends as banks show stronger profitability metrics.

The writer is the senior director and head of Islamic Finance at S&P Global Ratings

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FEATURE / TOKENISATION

BUILDING ON BLOCKCHAIN TECHNOLOGY

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FROM REAL-WORLD ASSET TOKENISATION TO CROSS-BORDER PAYMENTS, WE LOOK AT THE IMPACT OF BLOCKCHAIN TECHNOLOGY BY VASSEH AHMED

inance has established itself as the industry with the most use cases for blockchainbased solutions. From real-world asset tokenisation to cross-border payments, enough experimentation has been done to prove just how impactful blockchain can be. What follows is an overview of the state of blockchain’s impact on global finance.

Central bank digital currencies Central bank digital currencies (CBDCs) have generated a lot of interest over the past few years. Proponents suggest that they can provide a big boost to e-commerce, facilitate cross-border trade, and provide greater economic insights. Critics, in turn, point to the fact that CBDCs, despite technically being cryptocurrencies, actually decrease financial privacy and increase government control over economic activity. And there are a variety of security concerns similar to those associated with cryptocurrencies and other digital assets. In terms of global interest, on one side of the spectrum, we have countries such as China, Kazakhstan, Saudi

Arabia, and UAE already in the pilot phase of CBDC implementation. On the other side, we have seen countries with strong cryptocurrency adoption, such as Nigeria, which have launched a CBDC but have had a difficult time getting citizens to use it. Other countries, such as Senegal and Ecuador, have decided to cancel development work due to infeasibility. Regardless of which side of the debate you stand on, there is no denying the impact that CBDCs could have on the global financial system. Exchange services could, in theory, be opened up, allowing anyone to provide liquidity for activities such as cross-border trade and remittances. The decreased cost and increased speed alone make CBDCs an attractive prospect.

Trends, innovation, and collaboration There are a couple of notable trends in blockchain and finance. The first is some of the big financial players making significant forays into blockchain-based financial services.

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Exchange services could, in theory, be opened up, allowing anyone to provide liquidity for activities such as cross-border trade and remittances.” The writer is the managing director of Enjinstarter MENA

We have seen PayPal launch its stablecoin, the Swift network’s experiment with tokenisation, and Visa moving millions of USDC through its payment network. The other is smart contract security. It has become crystal clear that fund security is non-negotiable if blockchain-based financial services are going to reach mainstream adoption. In terms of innovation, we should be on the lookout for the proliferation of tokenised real-world assets and their integration into decentralised financial services. This includes things like bonds being issued natively on-chain and automated fund management with smart contracts. Collaboration is a big part of the equation for successful blockchain-based financial solutions. A lot of progress has been made in the capability and security of these solutions, so traditional finance institutions are finding it easier to collaborate than try to build the solutions themselves. Swift, for example, partnered with Web3 service Chainlink to test transferring tokenised value across a variety of private and public blockchains.

Cross-border payments

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Blockchain is made for cross-border payments. It has all the necessary underlying components, inherent transparency, and overall efficiency to wrestle control away from the corporations that dominate the industry and reduce costs and transaction times significantly. There is no reason why cross-border payments need to be as expensive as they are. Estimates suggest that the average fee is around 6.5 per cent of the total transaction amount, and in some cases as high as 20 per cent. We expect to see a new generation of apps being built that leverage blockchain and cryptocurrencies on the back end but are fully integrated with banking systems and other financial services to ensure the transaction process is as simple as making a bank transfer. Even more interesting, as mentioned above, is the opportunity for anyone to provide liquidity for exchange pairs. The primary remaining hurdle, ignoring government restrictions, is the ‘last-mile’ problem. We are not yet in a position where people on the receiving end of crossborder transactions either want or know what to do with the cryptocurrency they receive. What they want is the cold, hard fiat that they would get through traditional payment channels. But as the

understanding of the technology grows, so too will the desire to take advantage of decentralised financial services as an alternative to traditional banks. This will provide a big boost to the goal of financial inclusion on a global scale.

Regulation Regulation is critical to the success of blockchain-based financial services. End users need to know that the service providers have had to meet a minimum standard before going to market and will be held to account in case things go wrong. Regulations also help businesses to understand their users while reducing illicit activity and bad actors. The UAE has demonstrated a progressive approach to virtual asset regulations. Dubai’s Virtual Assets Regulatory Authority (VARA), in particular, has taken the lead and has attracted both startups and industry heavyweights to the emirate as a result. The European Union, with its markets in cryptoassets regulation (MiCA), has laid a solid foundation for supporting innovation while at the same time ensuring a standard of accountability. The US, on the other hand, has shown a desire to restrict virtual asset activity involving its citizens. And while perhaps helpful in the wake of FTX, the longterm outlook of this approach is uncertain at best. We’ve already seen companies move out of the US, investors shy away from investing in US startups, and founders avoid the jurisdiction entirely.

Real-world asset tokenisation Tokenised real-world assets (RWA) are considered by some to be the single best use case for blockchain. This assertion is grounded in the belief that the transparency, immutability, and decentralisation native to distributed ledgers are exactly what is needed to evolve the very concept of an asset. What does RWA tokenisation mean, exactly? It means that a token is issued on a blockchain that represents ownership of a real-world asset (RWA). Company shares, for example, can be represented by tokens. Whoever holds the tokens owns the shares. With the right legislation in place guaranteeing the legal connection between a token and its corresponding RWA, the thinking is that we’ll be able to democratise access for retail investors and unlock trillions of dollars of liquidity for asset owners. Along with the potential of direct ownership transfer without intermediaries, these two outcomes can revolutionise the way we think about and utilise assets. All in all, the future of blockchain in the finance industry remains bright. Provided regulation continues to progress, institutions will continue to look for ways to implement blockchain solutions that lower costs, increase efficiency, and create new opportunities; blockchain startups will continue to build solutions for those left out of the current financial system; and users will continue to demand a greater degree of financial control.

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