Nouriel Roubini does not mince his words. Earning the nickname of ‘Dr Doom’ after correctly predicting the 2008 financial crisis, the chairman and CEO of Roubini Macro Associates has enjoyed courting controversy (and making headlines) with a series of dire pronouncements about threats to the global economy, not all of which came to pass.
Nonetheless his mid-November remarks about cryptocurrencies and those that promote them — made at the UAE government-sponsored Abu Dhabi Finance Week conference — raised eyebrows for their implicit criticism of the policies of the host country.
“This is an ecosystem that’s totally corrupt,” he said, referring to the nascent global industry in cryptocurrencies and digital assets, which is one that financial centres in the UAE and the wider Middle East have been looking to cultivate over the past five years.
Mr Roubini’s ire was focused especially at Binance, the world’s largest crypto exchange, which that very day had been awarded permission from Abu Dhabi Global Market (ADGM), the UAE capital’s financial freezone, to provide custodial services for virtual assets to professional clients.
“The lesson of the last few weeks is these people should be out of here … I can’t believe that CZ and Binance have a licence to operate in the UAE,” he said, referring to Binance’s founder Changpeng Zhao.
Mr Roubini’s comments — which were dismissed by Mr Zhao onstage at the same event the following day — came days after the dramatic collapse of fellow crypto exchange FTX, once valued at $32bn, resulting in potential losses for millions of creditors worldwide.
FTX’s collapse has been keenly felt in the UAE, which had rolled out the red carpet for the exchange. In July, it had become the first exchange to enter Dubai’s minimum viable product (MVP) programme, under the supervision of the emirate’s recently created Virtual Asset Regulatory Authority (VARA). The exchange was also one of the main sponsors of the F1 Abu Dhabi Grand Prix, held just days after the exchange began Chapter 11 bankruptcy proceedings in the US.
Court filings have subsequently revealed that 4% of FTX’s global customers are based in the UAE, making it one of the top 10 jurisdictions impacted by the fallout, according to Bloomberg.
The courting of FTX and Binance has been the most visible aspect of efforts by jurisdictions in the Arabian Gulf to position themselves as hubs for virtual assets, including cryptocurrencies such as bitcoin and ether, in a bid to cash in on the explosive growth seen since 2016.
Yet FTX’s collapse — together with the downfall this year of stablecoins TerraUSD and Luna, crypto hedge fund Three Arrows Capital and crypto lender Celsius — has cast an unforgiving light on the crypto boosterism of the UAE and others, leading to questions about the viability of such strategies going forward.
“At a certain point, you have to ask what value does the investment in this space actually create,” a senior regional banking executive, who asked not to be named, told The Banker. “Is this really where authorities want to be putting so much of their focus?”
Embracing the future
Authorities in the UAE were among the first in the world to seek to embrace and harness the rise of virtual assets and the technology behind them, following the growth in interest in blockchain technology, in particular from late 2015 onwards. Long-known as an early regional adopter, the emirate of Dubai was quick to seek to capitalise on the technology’s potential, with the announcement of its blockchain government initiative in late 2016.
Yet, it was the explosion in the price of bitcoin in 2017 — when its price rose from under $1000 to nearly $13,000 — that made authorities around the Arabian Gulf sit up and take notice.
“Much of what we’ve seen in the region in the past five years is a reaction to the momentum behind both fintech more generally and crypto specifically, and wanting to take a position in what appeared until recently to be a growth market,” the same banking executive told The Banker.
“For most of the people I talk to, there’s never any rationale for what’s been put in place other than people have been moving money into it.”
While Dubai made headlines with its early blockchain strategy, it was ADGM, formally established in 2013, that was the first mover in terms of wider crypto regulation in the UAE. The freezone’s Financial Services Regulatory Authority began publishing guidance on virtual currencies and initial coin offerings from October 2017, and has provided regulation for virtual assets since 2018.
Other bodies in the UAE have subsequently followed suit. Between 2020 and 2021, the Central Bank of the UAE issued regulations pertaining to various virtual assets, while in October 2021 the regulator of the Dubai International Financial Centre freezone issued a regulatory framework for investment tokens. The same year, a regulatory framework was established in fellow freezone the Dubai Multi Commodities Centre enabling the offering, issuing, listing and trading of crypto assets, in collaboration with the federal Securities and Commodities Authority.
Most recently, in March 2022 the emirate of Dubai passed a law to regulate virtual assets, establishing the Dubai VARA, an entity affiliated to yet another freezone, the Dubai World Trade Centre Authority.
Despite VARA making early headlines with its MVP licence award to FTX in July (with Binance awarded its own MVP licence in September), the body’s framework remains under development, with many areas of regulations still yet to be finalised.
“VARA’s approach has been to invite 20 to 30 virtual asset service providers across a broad range of activities via the MVP licensing process into a sandbox environment with guardrails to protect retail customers, and then building a regulatory framework around their experiences,” said a senior vice-president at a regional crypto exchange, who has also asked not to be named.
This approach stands in contrast to that of ADGM, which has developed a comprehensive body of regulations for exchanges and platforms built up over the past five years.
“When we were in initial discussions with ADGM, we were at first overwhelmed with the volume of regulations and the kind of supervision they were asking for,” says Arshad Khan, CEO at Venomex, an Abu Dhabi-based exchange.
“Since then, however, and particularly in light of what’s happened over the past year in the wider industry, we realised that they have a deep insight into some of the challenges that have come up. So, we’re happy working with their regulations, which go into a lot of detail on investor protection, how you can market your products and services, and what products you can and can’t list.”
While regulatory regimes in the UAE differ from jurisdiction to jurisdiction, Bahrain’s crypto ecosystem is regulated entirely by the Central Bank of Bahrain, which issued rules on crypto asset services and crypto asset exchanges in early 2019.
“The key selling point of the licensing regime in Bahrain is that it’s applicable for the entire country and carried out by the Central Bank of Bahrain (CBB), compared to the UAE, where there are different regulations to follow depending on where you’re established,” says Ali Jamal, CEO of Dubai-based Cryptos Consultancy, which helps guide crypto firms with the licensing process in the UAE and Bahrain.
The latter’s attractiveness as a crypto destination was underscored when Binance announced in December 2021 that it had received in-principle approval from the CBB to establish itself as a crypto asset service provider, ahead of similar licences in Dubai and Abu Dhabi.
Despite this early success, several exchanges have turned instead to jurisdictions based in the UAE, given the larger financial services sector in the country.
“In the UAE, you have multiple licences — including the ADGM’s which is highly regarded by UAE-based institutions, a big part of our target audience, and is also recognised globally,” says Stefan Kimmel, CEO of M2, an Abu Dhabi-based crypto trading and investment platform that is set to launch in the first quarter of 2023.
Saudi on the horizon
While other jurisdictions in the Arabian Gulf, such as Oman and Qatar, have made tentative progress regarding the regulation of virtual assets, Saudi Arabia’s plans for the sector are the most keenly anticipated in the region. In July, the Saudi Central Bank (SAMA) hired Mohsen Al Zahrani — previously the bank’s innovation centre director and a former managing director at Accenture — to head up the bank’s virtual assets and central bank digital currency programme.
Richard Teng, regional head of the Middle East and north Africa (MENA) for Binance, told The Banker that the exchange had held discussions with both SAMA and Saudi Arabia’s Capital Market Authority, but gave no indication as to when a formal virtual assets framework was likely to be published. Mr Al Zahrani and SAMA did not respond to requests for comment about the country’s plans.
SAMA’s plans for a formalised virtual assets programme come as little surprise; the central bank is widely seen as one of the region’s most progressive regulators, with a thriving regulatory sandbox, an advanced framework for payments that has facilitated the creation of giants including PayTabs and STC Pay, as well as frameworks for open banking and digital-only banking.
Saudi Arabia is also the second-ranked country in the Middle East for cryptocurrency value received in the 12 months to the end of June 2022, behind Lebanon, according to industry analysts Chainalysis. What is more, the value received in Saudi Arabia grew by 194.8% in the 12 months to June 2022, the highest increase in the Middle East and second only to Egypt in the wider MENA region.
While the popularity of cryptocurrencies in markets such as Lebanon and Egypt has surged in recent years due to the rapid depreciation of fiat currencies, the dynamic is very different in the Gulf Cooperation Council (GCC).
“When you look at markets in the GCC, we take the view that this adoption is driven by young, tech-savvy early adopters with relatively high disposable incomes, that are searching for investment options and have a conviction in crypto right now,” Akos Erzse, senior manager for public policy at the Dubai-based crypto exchange BitOasis, told Chainalysis.
Despite the absence of a formal virtual assets regime in Saudi Arabia, the country is by far the largest crypto market in the Arabian Gulf, accounting for half of the total value received in the 12 months to end-June.
The long winter
As elsewhere, however, appetites for cryptocurrencies in the Middle East have waned in recent months, with would-be investors put off by a slump in the value of bitcoin and other currencies, together with the collapse of one of the world’s most trusted crypto exchanges.
As The Banker went to press, the scale of the fallout from FTX’s collapse — with founder Sam Bankman-Fried arrested and charged by the US Department of Justice with eight counts including conspiracy to commit wire fraud on customers and lenders, money laundering and violation of campaign laws in mid-December — remains hard to quantify, both in the Arabian Gulf and around the world.
FTX’s fellow exchanges have taken a massive short-term hit globally; data from CryptoCompare showed that investors withdrew 91,363 bitcoin, worth around $1.5bn from centralised exchanges including Binance, Kraken and Coinbase in November, the largest monthly bitcoin outflow on record, according to the Financial Times.
Regional investors appear to be part of this overall pattern, going back over several weeks.
“People have been pulling their funds out of Binance and other exchanges, as they’re a lot more wary about storing their funds on centralised exchanges,” says Abdulla Alameri, a UAE-based crypto miner and investor in several local crypto ventures.
“There’s a lot of negative sentiment around cryptocurrencies and other virtual assets right now compared with a year ago. People are a lot more wary about it as an asset class and now think of even relatively solid crypto ventures as scams.”
Binance paused withdrawals of the USDC stablecoin on December 13, following a surge in user activity, with analytics firm Nansen reporting more than $3bn of net withdrawals from the platform in the previous seven days. Nansen CEO Alex Svanevik told CNBC, however, that the withdrawals were not on the scale of those witnessed by FTX the previous month.
“While we expect the next several months to be bumpy, we will get past this challenging period, and we’ll be stronger for having been through it,” Mr Zhao wrote in an internal memo to Binance employees on December 14, Bloomberg reported.
Reserved judgement
As regional investors lick their wounds, attention has turned to whether regulations around exchanges need revising to mitigate the risk of further collapses.
“My phone melted the day after FTX collapsed, with authorities stressing that this can never be allowed to happen again under our watch,” says Irina Heaver, a cryptocurrency and blockchain lawyer with Keystone Law in Dubai, who has helped draft crypto-related laws and regulations for several governments and regulators.
Discussions about tighter regulation for exchanges have so far focussed on proof of reserves, whereby exchanges are obliged to demonstrate sufficient cash balances to fund withdrawals. Yet while exchanges including Binance, Kraken and crypto.com have rushed to publish proof of reserve accounts since FTX’s fall, such reports are unlikely to satisfy regulators in the longer term.
“Proof of reserve is all very well, but you also need to be able to show information about your liabilities. Sometimes these are on the blockchain, but often they’re not. They can be very difficult to trace and exchanges have become very adept at covering their tracks,” says Ms Heaver.
FTX’s MVP licence was suspended by VARA on November 24. Advertising for the exchange — which had featured prominently along large stretches of the UAE’s Sheikh Zayed Road that links Dubai, Abu Dhabi and other emirates — was abruptly removed.
VARA and ADGM did not respond to requests for comment about plans for additional scrutiny. The CBB declined to be interviewed for this article.
After winter must come spring
Despite the calamities endured by the crypto sector in 2022, exchanges in the Middle East are, perhaps unsurprisingly, optimistic about the future, while remaining realistic about the sector’s likely travails in the coming months.
“In the short term, there’s going to be a lot of uncertainty; but the more we can work with regulators the better off everyone will be, so that in the medium term, confidence in the sector will return,” says Binance’s Mr Teng. “We’re still in the rebuilding phase, but if you look ahead a little, the industry outlook is still bright.”
While retail investor confidence has been hit, institutional interest in virtual assets is growing in the region, and not just as a simple asset class, according to Venonex’s Mr Khan. “We’re talking to a lot of institutions that are looking at how crypto assets can be used as an investment tool, as well as a method of payment, and how the underlying technology can be used as a payment enabler,” he says.
“There’s also interest from exchange houses that are looking to use it to make remittances more efficient and cheaper.”
As regulatory regimes covering virtual assets become increasingly comprehensive and advanced, exchanges will look to offer increasingly sophisticated structured products tailored towards institutional investors, according to M2’s Mr Kimmel.
“These are products that are not widely available at the moment and it’s something we’re looking to cater to,” he says.
