State of the Capital Market Authority FinTech Lab & Digital Assets Landscape in GCC

Through the Financial leadership Program (2019-2021), the CMA seeks to position the Saudi capital market as main market in the Middle East and one of the leaders financial markets in the world, and to be an advanced market and attractive to domestic and foreign investment, enabling it to play a pivotal role in developing the economy and diversifying its sources of income.

The program consists of four main pillars as follows: Facilitating Funding, Encouraging Investment, Promoting Confidence and Building Capacities

FinTech Lab

On 11 December 2017, CMA announced the establishment of the Financial Technology Experimental Permit (#FinTech #ExPermit) .

The FinTech Lab works under the umbrella of the Capital Market Law issued by Royal Decree number (M/30) dated 2/6/1424H corresponding to 31 July 2003, and the Financial Technology Experimental Permit Instructions published on 23/04/1439H corresponding to 10 January 2018, which aims to provide a regulatory framework that is conducive for the innovation of Financial Technology (FinTech) in the capital market within the Kingdom.

• 1st batch applications were opened in Feb 2018
• 2nd batch applications were received from 15 October 2018 to 15 December 2018
• 3rd batch applications were received from 1 December 2019 to 30 January 2020
• 4th batch applications were received from 1 October 2020 to 30 November 2020

Business Models in the CMA FinTech Lab

As of January 2021, some of the Permitted Business Model in The FinTech Lab are as follows:

1) Equity Crowd Funding

Equity Crowd Funding platform allows investors to participate in funding small and medium size enterprises (SMEs) in exchange for shares in such enterprises. The service is provided through an electronic platform owned and monitored by the permitted company. 

2) Robo-Advisory

Robo-Advisory is a platform which allows clients to get advice on securities or investment scheme through direct access to automated online platform (or application). Additionally, the platform is able to offer automated online discretionary investment management, where the clients can automatically make investments through the platform or the application by giving the management of the company the responsibility to invest on the client’s behalf, within parameters and mandates agreed with the client, on an ongoing basis. The service is provided through an electronic online platform (or application) owned and monitored by the management of the company. 

3) Offering and Investment in Debt Instruments

Offering and Investment in Debt Instruments is a platform which enables SMEs to obtain the required funding by arranging the offering of Sukuk to finance projects, and offering them to the collective investors registered in the platform.

4) Use of Distributed Ledger Technology (DLT) to arrange the Offering of Securities and Custody Services

It is a platform that uses Distributed Ledger Technology (DLT) to arrange the offering of securities (Sukuk as a preliminary stage) to investors, in coordination with the Issuer and the Authorized Person (AP) assigned by the Issuer as an Offering Advisor.

5) Social Trading

Social Trading platform allows a group of clients (followers’ clients) to access the investment portfolios of other clients (followed clients) and the executed transaction in their portfolios, in order to seek guidance from their investment strategies.

Scope of the FinTech ExPermit

The FinTech ExPermit enables applicants to participate in the FinTech Lab to deploy and test their innovative FinTech products related to capital market with specified parameters and time frames.

CMA’s FinTech ExPermit provides a maximum of two years for the testing permit. Upon the completion of the testing, the applicant can choose to either: execute the exit strategy, or proceed to deploy the FinTech product on a wider scale based on a proposed strategy. To accomplish this both the authority and the applicant must be satisfied with the achievement of the intended test outcomes of the FinTech ExPermit. Moreover, the applicant must be able and willing to fully comply with the Capital Market Law and its Implementing Regulations. 

The proposed FinTech product or service should meet the following criteria in order to enter the FinTech Lab:

1. It must involve securities activity.
2. It promotes FinTech innovation.
3. It is at a sufficiently advanced stage of development to mount a live test FinTech.
4. It promotes significant growth, efficiency or competition in the capital market.

FinTech ExPermit Companies

Based on the business model type, CMA has classified FinTechs into the following five categories with a total of 16 permitted companies as of 19 January 2021:

1. Equity Crowd Funding (8): #Afaq Company, #Buthoor #Solidarity for Financing Company, #Crowdfunding Limited Company (Scopeer), Emkan Alarabiya Company, FALCOM Financial Services Company (a Capital Market Institution authorized by CMA), Manafa Capital Company, Mekyal Financial Technologies Company, and Osool & Bakheet Investment Company (a Capital Market Institution Authorized by CMA)
2. Offering and Investment in Debt Instruments (2): #Mudaraba #Capital Company, Sukuk Capital Company
3. Robo-Advisory (4): #DFN #Road Company, Haseed Investment Company, Sarwa Company, Wahed Capital
4. Social Trading (1): #Maysan #Financial #Technology Company
5. Use Distributed Ledger Technology (DLT) to Arrange and Offer of Securities and Custody Services (1): Wethaq Capital Markets Platform Company

Financial Technology Experimental Permit Instructions

If the applicant is suitable to participate for the FinTech ExPermit framework (set out in Section 3) and meets the authorization requirements (set out in Section 4) of Financial Technology Experimental Permit Instructions, it can proceed to complete and submit the FinTech ExPermit Application Form. A copy of the application form is attached in Appendix B and can be submitted to the CMA at FinTech.ExPermit@cma.org.sa

A few key things to remember:

1. The FinTech ExPermit validity period (or testing period) shall not exceed two years from the date of approval by the Authority.
2. Upon the completion of the testing, the applicant can choose to either: (a) execute the exit strategy; or (b) proceed to deploy the FinTech product on a wider scale, provided that:

• both the Authority and the applicant are satisfied that the FinTech ExPermit has achieved its intended test outcomes;
• a strategy is in-place for the deployment of the product on a wider scale; and
• the applicant can and willing to fully comply with the Capital Market Law and its Implementing Regulations.____________________________________________________

Digital Assets Landscape in the GCC

On 25 June 2018, ADGM Abu Dhabi Global Market‘s Financial Services Regulatory Authority issued the Crypto Asset Regulatory Framework that provided a set of rules governing spot trading of crypto assets by exchanges, custodians and other intermediaries based within ADGM…It granted in-principal approval to a number of crypto asset exchanges in 2019 including BitOasis, Digital Assets Exchange, Matrix Exchange, and MidChains, among others.

Other key players are DEX Exchange – a Multilateral Trading Facility (MTF) and Custodian using #Virtual #Assets which is regulated by the Financial Services Regulatory Authority (FSRA) in the Abu Dhabi Global Market (ADGM) and Bitex UAE – a Cryptocurrency Wallet and Trading Platform (Spot, Margin, Futures, Lend) which supports spot trading in Bitcoin (BTC), Bitcoin Cash (BCH), Dash (DSH), Ethereum (ETH), Litecoin (LTC), Ripple (XRP), Stellar Lumens (XLM), Bitcoin SV (BSV), and Zcash (ZEC).

On 21 February 2019, the Central Bank of Bahrain also launched rules governing the provision of Crypto Asset Services by defining Crypto-Asset as virtual or digital assets or tokens (payment, utility, asset, hybrid) operating on a blockchain platform and protected by cryptography.

Here’s an overview of a few key digital assets exchanges with headquarters in the GCC highlighting key differentiation parameters in the markets they serve, the fiat-crypto currencies pairs, deposit methods, and regulatory bodies.

BitOasis

BitOasis is the Middle East & North Africa’s (MENA) largest digital asset trading exchange and platform based out of UAE. Established in 2015, BitOasis currently aims its services at individuals, professional traders and investors in UAE, KSA, Kuwait, Bahrain, Oman, Jordan, Egypt and Morocco.

The services currently offered by BitOasis are as follows:

• A Bitcoin (BTC) wallet with multi-signature technology for storage of Bitcoin (BTC).
• A platform for basic buying/selling of digital currencies (“BitOasis Core”).
• A platform for trading in digital currencies (“BitOasis Pro”).
• A platform that facilitates sending and receiving digital currencies.
• A platform that facilitates online and offline storage of clients’ digital assets.

The only services available for the public API are:

• Trading in digital currencies (“BitOasis Pro”).
• Sending and receiving digital currencies.

BitOasis supports the following currencies for deposits and withdrawals:

Fiat Currencies

United Arab Emirates Dirham (AED)

Digital Currencies

Algorand (ALGO), Basic Attention Token (BAT), Bitcoin (BTC), Bitcoin Cash (BCH), Ether (ETH), Ethereum Classic (ETC), EOS (EOS), Stellar Lumen (XLM), Litecoin (LTC), Omisego (OMG), 0x (ZRX), NEO (NEO), Ripple (XRP), Tezos (XTZ) and Tether (USDT)

Palmex

Founded in 2017, Palmex, a digital assets exchange regulated by ADGM, announced its launch in UAE on 15 January 2018. It is a product of Arabian Chain Technology which is also the founder of the first public and decentralized blockchain in the region as well as DubaiCoin DBIX, the first decentralized minable and tradable Crypto Currency in Arabia.

Users can trade several coins through several pairs such as DBIX, Bitcoin, Ethereum, Ripple and many other currencies in the platform…There is a fees for deposit, withdrawal and trading.

Rain

Rain acquired the Crypto-Asset Module (CRA) license from the Central Bank of Bahrain on 31 July 2019 and offers products and services to users in Bahrain, Saudi Arabia, United Arab Emirates, Kuwait, and Oman. It supports supports the buying, selling, and storage of Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) as well as deposits, withdrawals, and trading in Bahraini Dinar (BHD), Saudi Riyal (SAR), Emirati Dirham (AED), Kuwaiti Dinar (KWD), Omani Riyal (OMR), US Dollar (USD), and Euro.

Rain investors include Coinbase CMT Digital #JIMCO #DIFCFinTechFund Vision Ventures 500 Startups MENA TaibahValley BitMEX 100x Group DRW BRD #Blockwater and Middle East Venture Partners (MEVP).

On 17 January 2020, Rain raised $6 million Series A from MEVP & Coinbase to grow its footprint in the MENA Region.

On 19 January 2021, Dubai Financial Services Authority, the regulator of the emirate’s financial free zone, announced that it is drawing up a framework for regulating digital assets, such as cryptocurrencies. The move was revealed in the DFSA’s 2021/22 Business Plan released on 18 January 2021. The DFSA will publish two consultation papers seeking views on its proposed rules – one in Q1 of 2021 and the other in the Q2.

What’s Next?

CMA will continue on its journey year over year to execute the strategic themes and goals:

Facilitating Funding

• Deepening the Capital Market and Promoting its Role in Raising Capital
• Developing Sukuk and Debt Instrument Markets
• Enhancing the Role of Funds in Financing the National Economy

Encouraging Investment

• Supporting the growth of asset management and promoting institutional investment
• Increasing Market Attractiveness to Foreign Investors
• Diversifying Investment Products and mechanisms available in the capital market

Promoting Confidence

• Reinforcing the Capital Market’s Regulatory Structure
• Promoting Capital Market Stability
• Raising the Governance Level in the Capital Market
• Raising the level of transparency and disclosure in the Capital Market.

Building Capacities

• Supporting the development of Authorized Persons
• Raising awareness of Authority role and the investment financial literacy in capital market
• Building the Capabilities of Capital Market Participants   
• At the same time, there is a need for collaboration with international digital exchanges with deep expertise in alternative investments and incumbent stakeholders engagement in Saudi to pursue regulatory changes to maintain the right balance between fostering financial innovation and protecting investors – retail, trading firms and institutions including the development of a new regime by CMA to leverage the opportunities for a range of products such as Digital Securities, Utility Token, Fiat Tokens, Options and Derivatives with a total global market capitalization of approx. USD 1.0 Trillion in 2021.