Investors in the UAE realised capital gains totalling $204 million from their crypto investments in 2023, according to Chainalysis, a blockchain analysis firm. With the crypto community in Saudi Arabia cashing out gains of $351 million, the UAE placed second in the GCC in terms of absolute gains realised by crypto investors.

Regulation is playing a fundamental role in increasing consumer confidence and institutional investment, which in turn accelerates the maturity of the crypto industry, Arushi Goel, policy lead for Middle East & Africa at Chainalysis, told Khaleej Times in an interview. “The UAE government has recognised this, and its bid to be a global crypto hub is backed by clear and focused regulatory efforts,” she added.

 

Excerpts:

Can you explain the role that regulation has to play in driving institutional investment?

 

By setting up specialised regulatory regimes, such as by the Financial Services Regulatory Authority of Abu Dhabi Global Market and more recently, the establishment of a bespoke regulator in Dubai, Virtual Assets Regulatory Authority (VARA), the country has showcased a forward-thinking approach to harnessing and regulating the crypto sector. Few countries in the region now boast crypto regulation that is as comprehensive as that of the UAE. For example, VARA with its more than 12 rulebooks clearly outlines everything from market conduct and marketing guidelines to information management procedures and anti-money laundering laws.

Consequently, this clarity has enabled Virtual Asset Service Providers (VASPs) to know exactly where the UAE government stands and thus map out their long-term business roadmaps with confidence. It’s no surprise then that many large crypto businesses are setting up in the country.

The positive impact for forward-focused regulations is also evident in market dynamics. The outsized share of institutional-size investors in the UAE is indication of growing confidence and the consequent eagerness from entities and high-net-worth individuals to add cryptocurrency to their investment portfolios. The growing popularity of DeFi — which represents the cutting edge of blockchain-based applications in many ways — further validates the success the country has had in attracting more sophisticated market participants.

What is the current state of crypto regulation in the UAE and how this compares to other markets?

The UAE regulatory environment is characterized by clarity and a proactive stance, with a clear willingness to engage with the industry. This is exemplified through the comprehensive regime of FSRA (ADGM) and establishment of a bespoke regulator in Dubai (VARA). As an example, the 12+ rulebooks of VARA cover a wide range of critical areas ranging from anti money laundering, market conduct to consumer protection, as well as foray into specialized areas such as stablecoins. In comparison to some of the markets with reactive approaches, UAE stands out as a progressive regulatory environment, with a focus on providing stability to the businesses and users.

Where does the UAE lead, and where can it look to emulate other markets, when it comes to regulation?

The UAE has been at the forefront in embracing emerging technologies, particularly within the crypto sector. Its proactive approach involves close collaboration with the industry players to establish clear regulatory standards and provide avenues for responsible innovation, like regulatory sandboxes. This foresight has been critical in attracting businesses, institutional investors and innovative use cases such as those relating to DeFi.

Each regulatory authority operates within its own mandate. There exists a unique opportunity to make it seamless for businesses to operates across different Emirates as well as the broader region, by also focussing on issues such as passportability and cross-border collaboration.

Can you elaborate on the evolving focus of global and regional/local crypto regulations on other areas such as market integrity, consumer protection, cybersecurity?

As the industry continues to mature and new use cases emerge, we are seeing a broadening of focus for policymakers and regulators beyond anti-money laundering concerns, which continue to remain significant. Addressing risks relating to financial resilience, technology, market integrity, and consumer protection are also becoming important.

Within the UAE, for example, the FSRA (ADGM) maintains high regulatory standards for market abuse, similar to traditional financial instruments. Likewise, VARA in Dubai specifically highlights market offences such as insider dealing and market manipulation, among others, with the objective of ensuring market integrity and protecting investors.

With the broadening policy agenda, there is also a need to enhance monitoring mechanisms. Blockchain analytics emerges as a valuable tool enabling central banks and regulators to monitor on-chain activity transparently and mitigate risks effectively.

Can you elaborate on the utilisation of on-chain data for supervision and as a part of compliance architecture by private sector (using on-chain data to understand ecosystem risks)?

The inherent transparency of blockchains offers industry players capabilities that simply aren’t possible in traditional finance. Virtually all cryptocurrencies operate on transparent blockchains that record every single transaction, as well as the exact balances and aggregated activity of all participants. An important caveat of course is that raw on-chain data would simply show a list of transactions between different crypto addresses, with no indication of what real world entities those addresses represent. But with the use of specialised tools, such as those provided by Chainalysis, a treasure trove of insight is unlocked. When suspicious transactions are detected — such as especially large deposits, or transfer of funds to and from questionable services or known crypto criminal wallets — institutions using our technologies can carry out detailed investigations that then arm them with the information they need to freeze funds and approach law enforcement agencies.

Likewise, policymakers and regulators are able to leverage this on-chain data to assess the ecosystem landscape, aiding in shaping their policy positions as well as overseeing licensed and unlicensed markets alike.

Closely tied into this is the potential to also leverage the transparency of blockchains to extract invaluable market intelligence that drives better decision making. For example, by looking at distribution, liquidity, and market composition of tokens, investors can make informed decisions about which digital assets to invest in.

Ultimately, as institutions learn more about the practical applications of on-chain data and adopt the tools they need to understand it better, we’ll see more and more institutions and retail investors adopt crypto assets successfully.

 

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