Crypto seeks regulatory freedom in the UAE

Major crypto companies are flocking to the UAE in hopes of tapping a potentially lucrative market, but a long road still lies before them, writes Sebastian Sinclair on Blockworks.

• A raft of exchanges hope to take advantage of United Arab Emirates’ digital asset ambitions
• But seemingly friendly jurisdictions have turned out to be regulatory nightmares in the past

The United Arab Emirates (UAE) has become a primary target for plucky crypto businesses seeking to tap a lucrative market – but questions remain as to whether the region will live up to the hype. 

Earlier this year, the Emirate of Dubai adopted a new law designed to clarify exactly how local regulators will police the nascent asset class, ushering in leading crypto exchanges including Binance, FTX and Crypto.com.

The law, part of the UAE’s ambitions to become a major crypto hub, proposes legal definitions for digital assets. It establishes a licensing regime and lays out penalties should firms be found operating out-of-bounds.

It also birthed the Virtual Assets Regulatory Authority (VARA), the primary crypto watchdog for Dubai responsible for stamping out money laundering and terrorism financing.

The law does, however, exclude activities within the Dubai International Finance Centre (DIFC), a sort of economic free zone with its own set of digital asset regulations policed by the Dubai Financial Services Authority.

Indeed, the UAE – technically one country – is legally complicated. Dubai is just one of four jurisdictional authorities, including a federal agency. 

Abu Dhabi, the capital, touts itself as the world’s first jurisdiction to introduce a “comprehensive and bespoke” regulatory framework for crypto, running parallel to Dubai’s licensing and policing measures.

The region has long had its own set of rules within the Abu Dhabi Global Market (ADGM) – another free zone – via guidance issued under a subsection of the Financial Services and Markets Regulations of 2015, which was later implemented in 2018.

A separate agency, the Financial Services Regulatory Authority, is charged with overseeing digital asset activity within the ADGM.

UAE pushes crypto clarity

Dubai and Abu Dhabi’s frameworks attempt to offer enough clarity for crypto firms to carve a foothold in the Middle East.

“I think the main lure is the perceived ease of getting licensed or regulatory approval to set up a crypto business there,” Adrian Tan, Matrix’s former chief risk officer, told Blockworks in an interview. Matrix became Abu Dhabi’s first regulated virtual asset trading platform almost a year ago.

“Personally, if I were to set up a business there, I would find the various systems and rules difficult and confusing to navigate,” Tan said.

Tan, who has migrated back to his home state of Singapore after spending some time in Abu Dhabi, said it was tricky for crypto businesses to find footing in the UAE, as banks are regulated under various central banking authorities, each with differing regulations.

Crypto-friendly jurisdictions do exist, including Singapore, which is home to numerous prominent crypto exchanges despite Binance’s pullout announced in December. But mostly, they’re exotic tax havens. The Bahamas – where FTX recently pitched a headquarters – as well as the Seychelles and the Cayman Islands are industry favorites.

Those regions all appear to offer friendlier crypto regulation, making for smoother sailing. Yet part of the UAE’s draw, according to crypto industry participants, is that the region offers a prestigious appeal based loosely on the promise of maintaining a clear working relationship with regulators.

When asked whether Dubai would fall short of expectations in years to come – similar to how the nation of Malta had promised much to crypto businesses applying for licenses in 2018 before relegating them to regulatory purgatory – Tan demurred.

“I think it’s still early days to make a call on that. They [Dubai] have announced their intentions just recently and are still in the midst of setting up VARA. So, regulations are less mature which also means less arduous than say Singapore at this time. That’s probably one of the attractions.”

San Francisco-headquartered Kraken, which became Abu Dhabi’s first crypto exchange to receive a Financial Services Permission (FSP) license from the ADGM in April, recently set up an office and team on the ground.

The decision was part of a three-year-long “deliberate choice” as it weighed up various factors, including the region’s regulatory framework and crypto adoption rate, Benjamin Ampen, Kraken’s managing director of MENA, told Blockworks in an interview.

“The Middle East is one of the fastest growing crypto regions in the world. There is clear interest. There is also proof of business,” Ampen said.

Ampen pointed to Emirati state-owned sovereign wealth fund Mubadala and its crypto endeavors in late 2021 as proof of a growing appetite for digital assets. Mubadala’s total assets under management stood at roughly a quarter of a billion dollars by the end of last year.

“We can’t control what a country or regulator does, but having a long-term relationship and years of trust will help,” Ampen said.

VARA isn’t exactly a light touch

Binance and Crypto.com also told Blockworks that conversations with the region’s regulators to date had been amicable and “progressive” as they both seek to fit into the framework initiated in February. 

“[The UAE] is looking to make business easier,” a Crypto.com spokesperson said. “It’s an attractive place to live, of course, you know apart from the few sticky months in the summer, but the weather, climate, economy, it’s all been reasonably positive.”

Provisional licenses to operate in Dubai have also been scored by the likes of OKX, Komainu, and Huobi. But the term “provisional” means they can’t offer any crypto services just yet.

Tim Buyn, global government relations officer at OKX’s parent firm, said even though VARA has been accessible and open to questions, it doesn’t have a light regulatory touch. “The due diligence process has easily over 100 data items or documents that we need to turn in,” he said, explaining there are steps to the process.

“It means that the regulator is confident enough to proceed, whereas other regulators do not use this framework. They simply wait until they give you the full license,” Buyn, who has held multiple regulatory roles himself for 16 years, added. OKX has about 10 employees in Dubai so far, but it expects to increase that number markedly. 

VARA is currently in the process of drafting its full suite of digital asset regulations. These will enable the Dubai World Trade Centre (DWTCA), which aims to become a hub for crypto companies, to issue crypto licenses. 

Full licensing is planned to begin at the end of this year, the Centre told Blockworks. So, any exchange that has received provisional approval is effectively stuck until then.

“DWTCA will aim to issue licenses to a wide range of VAs (virtual assets) and VASPs (virtual asset service providers) including digital assets, products, operators, and exchanges. The final list of licenses shall be released once the new regulations for VAs and VASPs are finalized,” a spokesperson said.

UAE boasts wealthy investors, Dubai has no crypto taxation

The UAE is among the top 10 richest countries in the world and is estimated to have 92,600 US-dollar millionaires – another lure for crypto firms.

David Maria, head of regulatory affairs at Bittrex, said Dubai’s wealthy customer base is attractive to companies looking for investors or people to utilize their services. “You have a willing customer base that has money to spend and is interested in [crypto] assets, so that’s a very good starting point,” Maria said. 

Under policies in the city, investors are also fully exempt from paying taxes on cryptocurrency profits.

But the question of how strict the UAE will be in terms of securities laws still permeates. In the US, a tug-of-war has broken out between the Securities and Exchange Commission and the Commodity and Futures Trading Commission over who gets to regulate cryptoassets. 

The issue is less complicated in Dubai, where VARA is the only dedicated regulator overseeing virtual assets. It defines virtual assets broadly – implying that cryptocurrencies, tokens, and NFTs come under its ambit.

“It’s a great benefit to have a single regulator and to have explicit regulation,” Maria said, adding that the agency still has a lot more work to do in terms of guidance.

Henri Arslanian, formerly PwC’s global crypto leader, agreed that creation of a crypto-specialized regulator is a huge advantage. Arslanian recently left his role at PwC to set up a Dubai-based digital assets fund called Nine Blocks Capital, which has been granted provisional approval. 

“That matters because crypto is so unique as an asset class that you want to deal with regulators who understand it,” Arslanian said, adding that crypto companies have felt welcomed in Dubai unlike in many other locations.

No doubt, with regulatory headwinds persisting elsewhere, the crypto industry writ large is banking on those warm welcomes converting to the freedom of which they’ve sought for years, with few jurisdictions left to explore.