In late 2022, Salmaan Jaffery, the chief business development officer at the Dubai International Finance Centre (DIFC), sat down with Investment Monitor to discuss the business centre’s future of finance strategy.
The conversation explored Dubai’s global ambitions, its approach to regulating fintech and crypto, and the work the DIFC is doing to prepare for COP28, which the UAE will host in November and December 2023.
Below is an abridged version of that conversation.
What is the the DIFC’s strategy for future growth?
It is empirically unarguable that the scale of [Dubai’s] financial services depth has given us an incredible position among regional economies. Once you have a necessary base of quality, depth and, having come through the financial crisis, governance too, the question becomes, what are the new avenues for growth?
The Dubai model had been built on real estate services and has been very successful. What the DIFC has done is add weight to that story by bringing this amazingly deep financial system into the 21st century. You do this by digitising it and disrupting it, both systemically and at the individual institutional level, and we are five years into a very successful experiment.
How have you responded to increased regional competition?
Over the past seven years, there has been this insane race by others to catch up with Dubai and gain relevance in the region. So you have had Saudi Arabia be very bold and ambitious, saying companies must have their regional headquarters there – and to be clear, Saudi must succeed. It is the biggest market in the region, and so despite competitive pressures, the pie must increase, which is a good thing.
What we have said is, you guys talk regional, we are going global. So we have been thinking about our future in global terms for several years and now it is coming to fruition. That is where there is separation from the pack.
Do you see cities such as Riyadh and Abu Dhabi as rival financial services hubs or complementary to your offer?
It is a bit of both. It would be disingenuous to say that there is no competition, but also false to say that it wouldn’t benefit us to have increased economic activity in the region – but we are playing a different game. Regional relevance is critical and necessary but its not sufficient for us. Of course, we want our top clients to stay here and we do that by showing value, but we are moving on and looking globally.
I visited Singapore recently. I had never viewed Singapore as source market for us, in the sense that it is this incredible, vital, sophisticated hub for the Association of South-east Asian Nations [Asean], and there are parallels with Singapore and China in what Saudi Arabia could be to us, with its large economic and population base – but I think things have moved on.
Singapore continues to be a spectacular market for Asean and will continue to benefit from the shift away from Hong Kong, but east of Singapore is essentially a huge ocean and then San Francisco. To grow it needs to move westwards, and everything outside of Asean is really far away.
Thanks to an accident of geography, we have clients here in Dubai that cover Asean, Europe and North America all in one day. We are starting to see technology and financial services companies think about global expansion from here, or global businesses coming here and expanding north and south into Europe and Africa.
There is growing international focus on fintech regulation. What has been the approach of the DIFC to regulating disruptive technologies and services in the financial sector?
Our foray into fintech stared with a non-regulatory exercise, which was to open the first fintech accelerator in the region. This gave a reason for those companies to come here and for us to learn. That was 2016 and after that we worked very closely with the regulator to say, fintech is real and we need to get into this game.
The first regulations from the Dubai Financial Services Authority in that space were around crowdfunding. That led to a recognition that fintech is really about payments and that we couldn’t have fintech without new regulations on payments and money services. This led to this incredible pipeline of companies, including [Israeli payment processing company] Rapyd.
We then watched the first wave of crypto, with the initial coin offering markets. We engaged a lot of crypto companies and realised there was a lot of froth and a lot of cowboys, but knew we had to have a perspective on that. We decided to break up crypto into two pieces: digital assets, or security tokens, and then crypto.
Digital assets regulation came out in November 2021, followed by crypto regs [in November 2022]. The difference is that the crypto regs refer to native digital assets, as opposed to things that can be digitised or securitised.
So now we have the full spectrum of regulations needed to thrive in fintech, with the optionality that digital assets give you for a basic Web3. The first part was classic fintech, the last two give us a foothold into a still-to-be-determined future.
Given the implosion of FTX and other crypto businesses, what do you think the future holds for this nascent sector?
There are at least three ways to view crypto. The first is accepting distributed ledger technology as a foundational technology that has immense value in financial services. The market spent three or four years obsessing about one use case for Bitcoin, obsessing with it as a medium of exchange. I think that is irrelevant, but we accept that blockchain is a transformative and permanent part of financial services.
The second view is, as a financial centre, we are much more interested in crypto, whether tokens or native crypto assets, in terms of their utility, them solving specific issues, and as an asset class. We are a wholesale financial services jurisdiction, our financial intermediaries, principles and brokers obtain global scale through all kinds of financial instruments, whether equities, fixed income, all kinds of derivatives, Islamic finance. Why shouldn’t there be another bona fide asset class?
It is not like any other asset. It has inherent risks that require controls that are unique, but why can’t asset managers trade or hold it in a fund? Or if you are an exchange, why can’t you be a market maker?
The third view is that it needs to be regulated. We have been saying that for years. Its an obvious point exacerbated by recent events. It has got to be regulated the right way. It has to be brought out of the shadows and into traditional financial services.
I think the way to do that is on the institutional side and not via the retail side. To be clear, our regs allow for crypto to be done by crypto players for retail business. There is no prohibition, but my view is the way forward [for the DIFC] is going to be via the institutional side, as we have the world’s largest asset managers here.
One of the big failings in the crypto market has been the absence of quality counterparties. We now have the largest inflow of hedge funds ever in the history of the UAE into the DIFC. Those hedge funds are bringing incredible liquidity, sophistication and risk appetite, as they love taking positions. Hopefully what you will see is the confluence of hedge funds coming here as the crypto firms come here, and this be a positive development.
Does that broadening of counterparties potentially create greater systemic risk?
There is systemic risk, for sure, but that is why you have the regulations. You have runs on banks too. What happened to FTX happened to Lehman Brothers, but the purpose of regulations is to look to eliminate systemic risk, or at least mitigate and manage it. What you are seeing now is the reason why it gets painful because a lot of individual retail investors have lost money and that causes political and regulatory concern, and rightly so.
You manage systemic risk through regulations and you manage it by engaging with quality institutions. In the past two-and-a-half years, you have had the top 20–30 crypto firms buzzing around Dubai, but I feel as though our regulatory regime self-selects for firms that are compliance-oriented, very liquid, well-managed and regulated in other jurisdictions.
The UAE hosting COP28 will attract global attention to the country’s green policies. What sustainability initiatives has the DIFC been working on?
We established the DIFC sustainable finance working group, in partnership with Dubai Financial Market [the local stock exchange], over two years ago. This is the region’s first non-regulatory working committee. It is a bottom-up approach with participants looking at what should be done. One of the outcomes there is the development of a sustainability assessment tool.
Our regulator is also working on a white paper, that we expect in first quarter of 2023, on how sustainable finance will be regulated. No regional regulator has a formal view on this yet. There is a lot of talk globally in financial services about sustainable finance, whether the UN’s Sustainable Development goals or ESG [environmental, social and governance]. A lot of governments and regulators are trying to catch up because talk hasn’t matched the aspirations.
Then there are smaller things, like ensuring our 110 acres of buildings are LEED-certified. We are also supporting start-ups in the innovation space. We have 650 or so companies in our tech ecosystem and we are looking at how to further support ESG start-ups.
Do you anticipate greater scrutiny because of COP28?
The expectation is there, but we put that on ourselves. The title of our strategy is ‘the future of finance’, which means we must embrace innovation, including ESG as a key piece of it. People will expect us to have a view before next November and a lot of work is under way, here and elsewhere.
But we shouldn’t forget what we have already done. We licensed the region’s first green investment bank. We have also partnered with the global ethical finance initiative for their COP28 programme through a series of roundtables, events and whitepapers.
Our specialisation as a financial centre is to ensure that the rules and regulations cover the E, S and G as much as possible. The good news is that our constituents are global institutions already very active in doing this. We conducted a readiness survey and I think more than 90% of our institutions felt that sustainability was a priority for them.
We will support the national agenda and our primary focus will be the financing piece. That said, we have been doing very interesting things on the governance side, which have been flying under the radar. Hawkamah is an independent body, but a DIFC entity, that has been working on corporate governance for 13–14 years. It focuses on things like increasing the number of women on boards, improving transparency, family plans and succession planning. It was the first to do an ESG index over ten years ago, even before these things became in vogue.