The Middle Eastern nation of Dubai is heavily recruiting crypto companies to establish themselves there, but it is not yet ready for them. The regulations are not yet clear, and even getting a bank account is not a smooth process - at least not at the moment.
The Virtual Assets Regulatory Authority (VARA), a dedicated regulator for the industry, has not yet released a comprehensive regulatory framework for companies to create or launch products. However, officials have assured local companies that it will be available by the end of the year, two people told a crypto website analyst. The regulator, which was established just seven months ago, has already issued some guidelines regarding the marketing and advertising of virtual assets.
An increasing number of wealth funds in the wider region of the United Arab Emirates are investing in cryptocurrency. VARA is expected to be a more friendly jurisdiction for companies than other jurisdictions where licensing can be a lengthy process. It should be noted that the city is already a center for business and tourism. Low tax rates, proximity to talent hubs like India and Pakistan, and the ease of obtaining visas for employees have all contributed to its popularity.
The crypto industry is being welcomed by the city. It plans to become a leading metaverse economy and create 40,000 virtual jobs. Meanwhile, the UAE is working to remove itself from the gray list of the Paris-based financial watchdog, the Financial Action Task Force. As it bolsters its anti-money laundering regime, it is being closely monitored.
Lawyers are cautious during the pre-regulation period.
“How can you be optimistic about something you haven’t read?” asked Irina Heaver, Partner at Keystone Law Dubai. Her intention is to set up clients elsewhere before she sees the VARA's rules and its applications.
A lack of regulation has resulted in less savory elements of the crypto industry moving to the city. This includes YouTubers shilling altcoins and other projects that conduct scams or rug pulls. According to Heaver, the UAE has many free zones, making it "easy to navigate and hide, unfortunately." She would like to see the industry cleaned up.
Several of the largest crypto exchanges have already received MVP (minimum viable product) licenses from VARA. Binance received an MVP license in September, despite withdrawing its applications in other jurisdictions.
The license permits exchanges to offer a full range of services, including spot, leverage, and futures trading. There are some services that are excluded, such as crypto loans offered by exchanges.
Regulators are actively courting companies. According to James Bernard, founder of consultancy JBLV and founding member of the Dubai Global Blockchain Council, VARA is seeking some of the world's top companies to participate in its MVP. These include exchanges, decentralized finance (DeFi) projects, and non-fungible token (NFT) projects. “VARA will start discussion groups that will look to develop best practices in regulations of oversight for each of those verticals,” Bernard said.
Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum, established VARA by law.
An industry representative emphasized the importance of creating a specialized regulatory authority for virtual assets.
“It’s the first government to regulate crypto under a new regulatory body solely for crypto,” Talal Tabbaa, CEO of CoinMENA said, adding that he was “super bullish” on the regulator.
Mohammad Hans Dastmaltchi, chairman of FTX MENA, stated that many other regulators have attempted to incorporate virtual assets into traditional regulatory frameworks.
“[VARA] understands the business, but they’re also extremely tough,” he said.
Tim Byun, OKX's global government relations officer, agrees.
“They really want to hear what the issues are and how they can be solved,” Byun said. For him, “the big elephant in the room for the entire crypto exchange industry is the FATF travel rule.”
The current discussion focuses on issues such as the compatibility of technologies.
Byun stated that not all virtual asset service providers are the same. According to him, centralized exchanges should be cautious about who they send information to. His opinion is that regulators could take a more proactive approach by starting locally and facilitating information exchange between exchanges.
Banks have not yet joined the program
It may take longer for crypto companies to gain acceptance among traditional players than they do from the regulatory authorities. There have been difficulties in opening bank accounts.
“Some exchanges have obtained non-objection letters saying that they can operate bank accounts, but they have insane restrictions,” Tabbaa said.
You may find that applicants can only open accounts in the local currency of the UAE dirham and cannot accept any other currency. Alternatively, they may only be able to serve professional investors and not retail customers.
Tabbaa believes that banks are waiting for the central bank to confirm that the crypto industry is legal.
The crypto industry is aware that it is viewed as a high-risk venture.
“It is a new industry coming into the region,” said Balsam Danhach, head of operations for FTX MENA. “It’s not regulated. The appetite of a bank to take on that risk is very low.”
As Tabbaa pointed out, the cost-benefit analysis for banks may not be helpful considering the potential revenues that banks can generate compared to the liabilities associated with serving crypto companies.
According to industry critics, the banking infrastructure in the region is not friendly to entrepreneurs.
“Any entrepreneur in the region will comment that banking here is bad,” Heaver said. In her explanation, she explained that the banking system in Dubai is designed to serve multinational corporations. It is a for-profit organization. In terms of letters of credit or trade financing arrangements, they are not making billions of dollars.
Heaver is aware of a few banks in the region that are considering selling crypto to their existing clients.
“So why would I facilitate my competitors?” she asked in reference to banks' reluctance to provide services to crypto companies.
The situation is changing, however. A crypto website reported that Heaver is working with jurisdiction within the region and its main bank to provide bank accounts to crypto companies. Companies that meet the criteria set may be able to open bank accounts quickly if they meet the criteria.
According to Danhach, the central bank in the UAE is in communication with other banks in the country.
“If I look at the past nine months, and then I take the past two months, it has been a lot easier to communicate with banks,” he said. He describes it as a work in progress.
