The Wall Street of the crypto market

The Middle East’s crypto footprint is relatively small in global terms but the initiatives that are being implemented by the authorities underscore how digital assets are making inroads into the region

The Middle East is one of the fastest-growing cryptocurrency markets in the world, making up 7% of global trading volumes. Research suggests that investors in the region have turned to cryptocurrency to preserve their savings against currency devaluation, a trend that is common in other emerging markets like Africa and Latin America.

This phenomenon is more prevalent in countries such as Turkey and Lebanon where the currency’s dramatic slump is fuelling a surge in crypto mining and trading activities—with investors hoping to shield their savings against inflation.

Though the region’s crypto footprint is relatively small in global terms, it grew by about 1,500% from the prior year, between July 2020 to June 2021. Considering the growing interest in digital assets from institutional and individual investors alike, the Middle East’s openness and willingness to build a regulatory environment for virtual assets make the region “the Wall Street of the crypto market”.

Meanwhile, the global cryptocurrency market value has plunged below $1 trillion as the world’s largest digital currencies, Bitcoin and Ethereum, remain under pressure from macroeconomic concerns as well as a liquidity crisis among highprofile crypto companies.

The current operating environment has exposed the highly leveraged nature of the crypto industry and caused a liquidity issue across companies except for Binance, which opened 2,000 positions for hiring in June in sharp contrast to a slew of job cuts in the crypto ecosystem.

REGULATION IS A STUMBLING BLOCK, BUT REGULATORS HAVE SHOWN THAT THEY SEE THE VALUE OF BLOCKCHAIN AND CRYPTOCURRENCIES, AND ARE WORKING TO SUPPORT THESE TECHNOLOGIES, WHICH BODES WELL FOR FUTURE ADOPTION

– Accenture

Cryptocurrency users leverage blockchain technology, a decentralised ledger system of all transactions across a peer-to-peer network that enables participants to confirm transactions without a need for a central clearing authority.

Unlike the traditional financial systems which use a centralised database with a single point of authority, blockchain technology allows for a distributed database that holds a growing number of records, said KPMG.

Middle East crypto market

Crypto is growing fast with total global transaction volumes soaring by over 500% to $15.8 trillion in 2021 although the majority of Western and Asian regulators detest the decentralised digital money creating an opportunity for ambitious Middle East— where governments are building regulatory architecture around the sector.

The region has emerged as a crypto hub as consultancy firm Knight Frank’s latest wealth report showed that around 25% of millionaires in the region already invest in some kind of crypto.

The UAE is the Middle East’s third-largest crypto market, trailing Turkey and Lebanon, with a transaction volume of about $26 billion between June 2020 and June 2021, according to data compiled by Chainalysis. A global YouGov survey that was released in March also showed that trust in cryptocurrencies was highest among adults in the UAE. Dubai and Abu Dhabi are making a play for the cryptocurrency crown.

Over the few months, Dubai and Abu Dhabi, have issued more than 30 licences and passed a raft of laws for crypto exchanges to operate in their respective financial centres. Meanwhile, the UAE’s Securities and Commodities Authority is reportedly considering legislation to allow virtual asset service providers (VASPs). A federal licensing system will likely put the UAE on equal footing with rival financial centers such as Singapore and Hong Kong.

“Regulation is a stumbling block, but regulators have shown that they see the value of blockchain and cryptocurrencies, and are working to support these technologies, which bodes well for future adoption,” said Accenture.

Binance, the world’s largest crypto exchange by trading volume, received licenses to operate in Dubai, Abu Dhabi and Bahrain earlier this year as the company deepened its presence in the Middle East. The exchange’s CEO Changpeng Zhao has since relocated to Dubai from Singapore.

Dubai adopted its first law governing virtual assets and established a regulator, Virtual Assets Regulatory Authority (VARA), to oversee the sector in March as the Middle East’s tourism and commercial hub aims to position itself and the UAE as a regional and global destination for the virtual assets sector.

Other exchanges that answered the UAE’s call include Kraken and FTX, who received full license to operate regulated

trading platforms in the country while BitOasis, Rain as well as Bybit and Crypto.com secured provisional approval from regulators.

Though the UAE is positioning itself as a hub for digital assets, Bahrain has banking regulation for cryptocurrencies in place. The small Gulf state joined the crypto frenzy in August 2019 when the central bank granted Rain a license that allows the exchange to buy, sell and store digital assets.

Moreover, the Central Bank of Bahrain (CBB) recognise cryptocurrencies as an official method of payment allowing banks to work with exchanges so that customers can withdraw and deposit their money easily. CBB’s approach contrasts with other regional central banks, the Central Bank of the United Arab Emirates included, which have not recognised crypto as a means of payment.

Shariah-compliant

Rain, which secured its Shariahcompliance certification from Shariyah Review Bureau in December 2019, is not alone in Bahrain. CoinMENA, a Shariahcompliant digital asset exchange company licensed by CBB, obtained a provisional virtual assets licence from Dubai’s VARA in June allowing the firm to continue its operations while it applies for a full licence. However, the Indonesian Ulema Council, a top body of Islamic scholars, said last November that cryptocurrencies do not follow Shariah principles and they are haram as the clerical body challenged

the future of digital coins in the country that is home to the world’s largest Muslim population.

THE MIDDLE EAST IS THE SECONDSMALLEST CRYPTOCURRENCY ECONOMY, HAVING RECEIVED $272 BILLION WORTH OF CRYPTOCURRENCY BETWEEN JULY 2020 AND JUNE 2021, WHICH REPRESENTS 6.6% OF GLOBAL ACTIVITY

– Chainalysis

Regulatory hurdles

Though Turkey has by far the highest transaction volume in the Middle East region with $132.4 billion between July 2020 and June 2021, according to Chainalysis, regulators in the country have sounded alarm bells saying trading in digital coins exposes individuals to digital breaches, cyberattacks and it is unsustainable.

The Central Bank of Kuwait also cautioned financial institutions operating in the Gulf state against dealing or trading in bitcoin, ethereum, or other crypto assets

in May 2021. The apex lender said dealing in digital coins leaves room for illegal uses of funds, unauthorised transactions and money laundering given that the assets are not regulated by any central authority in the country. Accenture said that some countries in the Middle East region view cryptocurrencies with caution due to their lack of a central authority and are beyond the control of monetary policy.

Meanwhile, Turkish authorities included cryptocurrency exchange firms operating in the country on a list of organisations that are regulated by its anti-money laundering and counterterrorist financing rules after the closure of two crypto exchange platforms, Vebitcoin and Thodex last year.

Speaking at Bloomberg’s Qatar Economic Forum in June 2022, Qatar Investment Authority (QIA) chief Mansoor Bin Ebrahim Al Mahmoud cautioned that cryptocurrencies “need a bit of maturity before we make our view about investing” though the fund believes in the underlying blockchain technology.

On a global scale, China has been particularly strong in cracking down on financial institutions trading in digital assets and cryptocurrency mining. Earlier this year, the world’s second-biggest economy expanded its criminal law to encompass fundraising with digital tokens, giving authorities additional firepower to stamp out a sector they declared illegal last year by using heavy sentences.

China’s supreme court released its latest interpretation of the criminal law on illegal fundraising in February and the amended legislation lists cryptocurrency sales among illegal ways to raise money from the public.

Last year, the State Council’s Financial Stability and Development Committee vowed to clamp down on cryptocurrency mining and trading activities to fend off financial risks. Since then, several regions in China including Inner Mongolia, Sichuan, Yunnan and Yunnan have declared war on crypto mining and trading activities.

In the Western hemisphere, crypto companies are increasingly turning to friendlier and less bureaucratic jurisdictions including Bermuda to grow their businesses and test new products amid growing scrutiny from policymakers in the US.

US lawmakers introduced the Responsible Financial Innovation Act, dubbed the Lummis-Gillibrand bill, in June that would redefine the government’s relationship with bitcoin and other cryptocurrencies. Lawmakers in New York also passed a bill that bans some types of cryptocurrency mining that rely on carbon-based fuel in the same month as part of the state’s broader strategies to

address the growing concerns about the environmental impact of energy-intensive blockchain operations.

THE UAE GOVERNMENT’S RECENT ENACTMENT OF THE COUNTRY’S FIRST LAW GOVERNING VIRTUAL ASSETS MAY HAVE PLAYED A ROLE IN INSTALLING DEEPER TRUST AMONG PEOPLE IN THIS ASSET CLASS

– YouGov

SOME COUNTRIES IN THE MIDDLE EAST REGION VIEW CRYPTOCURRENCIES WITH CAUTION DUE TO THEIR LACK OF A CENTRAL AUTHORITY AND ARE BEYOND THE CONTROL OF MONETARY POLICY

– Accenture

Crypto mayhem

Once a potential rival of gold as a safehaven store of value, cryptocurrencies have largely lost their lustre among institutional investors after a volatile plunge from record-highs as global central banks are tightening monetary policy to combat surging global inflation. Since the beginning of the year, major cryptocurrencies including bitcoin, which soared to an all-time high of more than $63,000 in April 2021, have plunged to record lows due to macroeconomic pressures, the collapse of the algorithmic stablecoin terraUSD and sister token luna, the pausing of withdrawals by crypto lender Celsius and the liquidation of cryptofocused hedge fund Three Arrows Capital. Bitcoin just had its worst quarter since 2011 and its worst month plunging by around 58% to $19,048 as of July 3,

2022, according to crypto-data website CoinGecko.com.

Regulators in the UAE are trying to strike a delicate balance as they promote the business-friendly environment that made the region an attractive base for some of the world’s biggest financial firms and tech companies while also seeking to navigate volatility, financial crime and environmental concerns that keep dogging the crypto industry.