Following a long bear-market cycle, digital assets are (once) again gaining momentum, driven by increased institutional participation, regulatory clarity, and a challenging macroeconomic environment.
One region has catapulted onto center stage and is now poised to take advantage of a new wave of digital asset investment driven by institutional investors searching for regulatory clarity and a favorable market environment. According to the 2023 Crypto Oasis Ecosystem report, there are already more than 1,800 organizations employing 8,650 people across the digital asset industry in the Middle East and North Africa.
Whilst historically buoyed by oil reserves, in recent years the United Arab Emirates has gone through a strategic shift towards diversification, with technology and finance at the forefront. Recognizing the potential of digital assets, the UAE government has been proactive in creating a regulatory environment that is both robust and flexible. Over the past two years the region, and individual Emirates - with Abu Dhabi and Dubai driving most change - has supercharged its regulatory efforts to attract a global set of businesses focusing on digital assets, bringing significant talent, investment, and positive exposure to the region.
The UAE’s journey in regulating digital assets reflects its broader ambitions to become a global innovation and technology hub, and the region has emerged as a thought-leader in the digital asset space, adapting swiftly to the challenges and opportunities presented by this new paradigm.
I will highlight key efforts spearheaded by the UAE to demonstrate how the combined efforts of individual Emirates have allowed the UAE to emerge as a leader in the digital asset ecosystem — creating a set of regulatory frameworks that are both robust and flexible, aiming to attract global businesses while ensuring consumer protection and financial stability.
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Abu Dhabi – TradFi’s Future
Abu Dhabi Global Markets, via its Financial Services Regulatory Authority was among the first to introduce guidelines on cryptocurrencies and digital assets with its initial guidance for regulation of crypto asset activities being published in 2018 (and dynamically updated several times since then) setting a regulatory benchmark.
In many areas, the FSRA has extended existing regulatory frameworks for traditional financial products to include digital assets. One example is custody, whereby the FSRA has taken a similar approach to that of other custodial activities permitted within ADGM to ensure the same protection offered to “traditional” custodians. The regulator has thus widened the scope of definitions for providing custody, client assets and client investments to include a definition for digital assets, which includes virtual assets, digital securities, stablecoins and derivatives/funds, as per a recently published brochure.
Another area ADGM is innovating is in the regulation of digital asset exchanges through its regulation for multi-lateral trading facilities, granting licenses to MidChains, M2, Matrix and others operating in the region.
Recently, ADGM has also focused on digital asset native activities, introducing the world’s first DLT Foundations Regime, providing a framework in collaboration with industry participants to create a legal structure for blockchain foundations and decentralized autonomous organizations, allowing entities to set-up without bylaws, enabling a variety of governance methods, including token voting and the use of smart contracts.
Dubai – Innovation In Motion
Dubai stands out for its dynamic and forward-thinking approach to digital assets. The establishment of the Dubai International Financial Centre as a tax- free zone with 100% foreign ownership has been a financial services magnet for more than a decade, and digital asset businesses have followed. DIFC's independent regulatory authority, the Dubai Financial Services Authority, has been proactive in developing a regulatory framework that balances risk with innovation. As Jaques Visser, Chief Legal Officer at the DIFC noted in September, DIFC has proposed to enact a new Digital Assets Law and new Law of Security regime, working closely with industry participants “to set out legal characteristics of digital assets, its proprietary nature, how it may be controlled, transferred, and dealt with by interested parties”. Recently, DIFC approved Toncoin
Outside of DIFC, Dubai has also created a new regulatory authority focused exclusively on digital assets with the launch of the Virtual Asset Regulatory Authority in 2022, which is responsible for regulating and overseeing the provision, use, and exchange of virtual assets. Over the past year, VARA has published a set of rule books setting out a comprehensive framework for digital asset activities, designed to specifically cater for the provision of permissible activities and services to customers and investors, including for the provision of custody services, advisory services, broker-dealer services and exchange services among others. By pioneering the world’s first independent regulator for virtual assets, VARA has attracted a wide range of established and new businesses to the region, creating a vibrant ecosystem of digital asset firms, which is continuing to grow. To date there are already several firms regulated by VARA, ranging from exchange service providers like Binance (MVP Operational license), to firms providing management and investment services, including Laser Digital, as well as custodians, including Komainu (my employer). VARA is expected to regulate more than 100 new entities in the coming quarters, further strengthening the expanding digital asset ecosystem in Dubai.
Other Emirates - Emerging Contributions
While Dubai and Abu Dhabi lead the charge, other Emirates like Sharjah and Ras Al Khaimah have also started to embrace digital assets. Sharjah, for example, has been exploring various blockchain applications, while Ras Al Khaimah is positioning itself as an attractive destination aiming to attract blockchain businesses, creating the UAE’s first Web3-focused free zone, dubbed RAK DAO.
Finally, at the federal level, the UAE Cabinet has issued a decision which brings into force a new regulation for virtual assets and virtual asset service providers, adding another layer of oversight to its virtual asset sector. The new regulation came into effect on January 15 and is forming the UAE’s primary supervisory regime for virtual assets designed to both protect investors and supervise the industry.
A golden opportunity now awaits UAE regulatory authorities to now establish a harmonized layer across all the Emirates, ensuring consistency, collaboration and passporting among local authorities and the federal regulatory body — the UAE’s Securities and Commodities Authority. This will lead to its long-term competitive edge and place further daylight between its offering and others aspiring to truly build the financial hub of the future.
It has become clear that the UAE is in a leading position to benefit from the next phase of growth of the digital asset industry.
