Last Updated on March 1, 2024 by Ameer Hamza
Last week, Bloomberg reported that the United Arab Emirates had initiated plans to launch a federal cryptocurrency licence for Virtual Asset Service Providers (VASPs). This move has been tagged as a calculated decision. The aim is to establish the UAE as a preferred financial hub for the world’s biggest cryptocurrency and digital asset companies. Under this licensing regime, the Securities and Commodities Authority (SCA) will undertake regulation. Also, it will give local financial centres the liberty to govern the daily procedures under the licences. However, the move to regulate cryptocurrency goes as far back as four years ago.
Where it all Began
The specific constituents of the UAE are indeed following the footsteps of countries like Singapore. They have made moves to establish crypto-friendly financial hubs through their respective local regulators. For example, in December 2021, the Dubai World Trade Centre (DWTC) was declared a comprehensive zone and regulator for cryptocurrencies.
In the same month, the world’s largest cryptocurrency exchange (in terms of volume), Binance, signed a Memorandum of Understanding with the DWTC to ease the access of cryptocurrency exchanges in the UAE market.
Three years before this milestone announcement by the DWTC, the Abu Dhabi Global Market (ADGM) established regulations and guidelines governing digital assets within the region. Other financial hubs like the Dubai International Financial Centre have equally introduced tokenizing securities like bonds and stocks.
These policies have shown that the UAE has actively positioned itself as a global hotspot for digital innovation and an investment destination for cryptocurrency companies over the past few years. The move to establish a country-wide cryptocurrency licence seems to consolidate these policies.
What This Means for the Cryptocurrency Space in the UAE and the Middle East
Creating a country-wide cryptocurrency licence will likely increase cryptocurrency-driven investment in the UAE and encourage more cryptocurrency adoption, as government backing may eliminate the fears that potential users have previously held. Since the announcement of the policy, exchanges like Kraken and CoinMENA BSC have reportedly started looking to expand their presence in the UAE market.
Notably, the UAE currently stands as the third-largest cryptocurrency market in the Middle East, with an approximately $26 billion trading volume from July 2020 to June 2021 alone. This figure represents a 1,200% increase from the trading volume in the previous year. Furthermore, it is expected that this volume will experience a further increase over the next financial year.
The primary challenge that the UAE may be set to experience is the probability of illicit financial flows through virtual assets. There are risks that these assets’ untraceable nature fuels illegal financial transactions. However, the UAE seems to have adequately prepared for such an outcome. There are reports that the UAE is considering adopting the Financial Task Force Guidelines to reduce illegal financial streams within the context of the new licensing regime.
Like the United States of America and the United Kingdom, the UAE has taken a significant step towards positioning its financial sector for the impending digital explosion. The success of this policy could set the tone for an increased acceptance of digital assets across more Asian and Middle East countries.