coindesk.com
Dubai is heavily recruiting crypto companies to establish themselves there, but the Middle Eastern nation isn’t quite ready for them. Regulations aren’t clear yet, and getting something as basic as a bank account isn’t a smooth process – at least for now.
Dubai's Virtual Assets Regulatory Authority (VARA), a dedicated regulator for the industry, hasn't yet released a comprehensive regulatory framework that companies can use to create or launch products, but officials have assured local companies that it will come by the end of the year, two people told CoinDesk. The regulator, established just seven months ago, has previously issued some guidelines on marketing and advertising for virtual assets.
Wealth funds in the wider region, the greater United Arab Emirates, are investing in crypto, and a large number of funds already reside in Dubai. Companies are hopeful that VARA will be friendlier to them than other jurisdictions where licensing can be slow. After all, the city is already a center for business tourism. It’s often praised for its low tax rate, its location near talent hubs like India and Pakistan, and the ease of obtaining visas for staff.
The city’s making a play to welcome the crypto industry. It stated its intentions to become a top metaverse economy and create 40,000 virtual jobs. At the same time, the UAE is working to get off the gray list of the Paris-based financial watchdog, the Financial Action Task Force. While it beefs up its anti-money laundering regime, it’s under increased monitoring.
Pre-regulation periods make lawyers wary.
“How can you be optimistic about something you haven’t read?” Irina Heaver, Partner of Blockchain and Digital Assets at Keystone Law Dubai said. Before she sees VARA’s regulation and its applications, she’s establishing her clients elsewhere, she said.
Without regulation, less savory elements of the crypto industry have moved to the city, including YouTubers shilling altcoins to their audiences and other projects carrying out scams or rug pulls. The UAE has numerous free zones, which Heaver said makes it “easy to navigate and hide, unfortunately.” She’d like to see the industry cleaned up.
VARA has already handed out MVP (minimum viable product) licenses to some of crypto’s biggest exchanges. Notably, Binance, which has withdrawn applications in other jurisdictions, received an MVP license in September.
The license allows exchanges to offer a "full suite" of services, including spot, leverage and futures. There are some excluded services, such as crypto loans offered by exchanges.
The regulator is actively courting companies. James Bernard, founding partner of consultancy JBLV and founding member of the Dubai Global Blockchain Council told CoinDesk that VARA is “inviting some of the top companies around the world to be part of its MVP,” he said, whether that be exchanges, decentralized finance (DeFi) or non-fungible token (NFT) projects. “VARA will start discussion groups that will look to create the best practice in regulations of oversight for each of those verticals,” Bernard said.
VARA was established in a law issued by Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s ruler.
Industry representatives pointed to the significance of creating a regulatory authority just 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.
According to Mohammad Hans Dastmaltchi, chairman of FTX MENA, many other regulators have tried to fit virtual assets into traditional regulatory models.
“[VARA] understands the business, but they’re also extremely tough,” he said.
OKX global government relations officer Tim Byun 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 exchanges industry is the FATF travel rule.”
Discussions currently revolve around issues like whether technologies are compatible.
“Not all [virtual asset service providers] are equal,” Byun said. He said that centralized exchanges need to be careful about who they are sending information to. In his view, regulators could take a more proactive stance by starting locally and having exchanges send information between each other.
Banks not on board yet
Crypto companies may find support from the regulator, but it’s taking longer for them to find acceptance with traditional players. Opening bank accounts has proven difficult.
“Some exchanges have obtained non-objection letters saying that they can operate bank accounts, but they have insane restrictions,” Tabbaa said.
Applicants may find they can only open accounts in the local currency of UAE dirham and cannot accept other currencies. That, or they can only serve professional investors and not retail customers.
Banks may be waiting for the central bank to clearly signal that the crypto industry is above-board, Tabbaa said.
Crypto companies know that they are seen as high-risk.
“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.”
Tabbaa said the cost-benefit analysis for banks may not help, pointing to the possible revenues banks can generate compared to the liabilities of serving crypto companies.
Banking infrastructure in the region hasn’t been designed to be friendly for entrepreneurs, according to common industry criticism.
“Any entrepreneur in the region will comment that banking here is bad,” Heaver said. She explained that banking in Dubai is set up for multinationals. The banks are for-profit. They’re not making billions on letters of credit or trade financing arrangements from entrepreneurs.
Heaver knows of a few banks in the region who are looking into selling crypto to their existing clients.
“So why would I facilitate my competitors?” she said of the reticence of banks to service crypto companies.
But change is afoot. Heaver told CoinDesk she is working with a jurisdiction within the region and its main bank to offer bank accounts to crypto companies. If crypto companies meet the criteria set, they may be able to open bank accounts speedily.
Danhach said the central bank in the UAE was in communication with the other banks there.
“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.