By Nick Coombs, Managing Director of BitGo MENA.
As governments gradually come around to the potential of digital assets, regulations have been falling into place worldwide. The shift in the U.S. to a government more open to digital assets should accelerate the push. As that happens, governments that want to support growth and innovation should look to the United Arab Emirates (UAE) as a blueprint. The UAE government’s proactive support has turned the country into a global leader in digital assets.
My experience working in digital assets in the EU and MENA vividly illustrates what’s possible with such support, which strongly contrasts with the effects of indecision and overregulation. I shifted from TradFi to digital assets during the 2022 bear market. Many firms, including some very prominent ones, had gone under. Those who survived were treading water.
MiCA, the EU’s groundbreaking digital asset regulation, had not yet been written. Germany and Switzerland had some rules and licensing in place. Portugal was becoming a crypto haven, but the rules were unclear. For the most part, innovation was at a standstill. Companies didn’t know what products or processes to invest in. Confidence was very low.
Engaged regulators
During that time, I traveled to a conference in the UAE. There was optimism and excitement about moving forward. The government had embraced digital assets. Regulators were constructively and intelligently engaged with the industry.
The government’s 2071 Centennial Plan calls for the UAE to be the best country in the world by that time and sets forth long-term goals to get there. Diversifying the economy is a major aim. While digital assets are not called out specifically in the plan, the government’s actions make clear that it aims to be a global leader in that realm.
Every financial regulator in the Emirates is engaged with digital assets. Each has a well-defined role. The Securities and Commodities Authority (SCA) is the primary federal regulator for virtual assets and cryptocurrencies outside the financial free zones.
There are 45 of these free zones throughout the country. They serve as public-private incubators to encourage innovation by clustering startups and providing them with hands-on support and guidance.
The SCA issued a Crypto Asset Regulation in 2020, setting rules for trading, issuance and custody of digital assets, and it oversees exchanges, token offerings and the licensing of digital asset service providers, although most of the licenses are actually issued by the regional regulators. The Central Bank of the UAE oversees stablecoins, which play a prominent role in MENA.
In 2022, the UAE established VARA, the Virtual Assets Regulatory Authority, which is exclusive to Dubai’s mainland (outside of free zones) and started operating in 2023. As the world’s first regulatory agency dedicated solely to digital assets, it regulates exchanges, wallets, and tokenized assets. It sets licensing requirements and enforces anti-money laundering and consumer protection measures and has attracted some of the world’s largest global exchanges and custodians.
Two of the most prominent financial free zones, the Abu Dhabi Global Market (ADGM), and the Dubai International Financial Center (DIFC), embraced crypto early on, both of which have attracted institutional clients. These have their own regulators. ADGM is overseen by the Financial Services Regulatory Authority, one of the first UAE regulators to develop a comprehensive framework for digital assets back in 2018. The Dubai Financial Services Authority oversees the DIFC.
The Emirate of Ras al Khaimah has the RAK DAO (Digital Assets Oasis), an ecosystem for DAOs and early-stage Web3 projects, which the RAK DAO Authority governs.
This multi-regulator approach allows different zones to adopt tailored rules, but it also means firms must choose the right jurisdiction for their business. It’s a complex landscape, but the authorities are proactive about helping companies navigate it. They knock on your door when you incorporate a business to see how they can help you. They want to hear about ideas or challenges you’ve seen in other regions and collaboratively explore solutions.
These efforts have paid off with rapid growth in all industry sectors, from Web3 startups to institutions, making the country of 10 million MENA’s third-largest digital asset economy as of June 2024.
The biggest challenge is the crush of VARA license applications. Just 24 companies have achieved full licensing, while hundreds more applications are under review. That is a reflection of the diligence that is being applied. They’ve got some brilliant people with a lot of TradFi and digital asset expertise working on this and want to get it right. Meeting their licensing standards should inspire a high degree of trust.
We’ve seen other regulators try to apply traditional financial rules to the industry, which doesn’t quite work. The U.S. is probably the best example of that. It isn’t entirely clear who regulates what, yet we’ve seen a lot of enforcement actions from various regulatory bodies based on their existing TradFi rules. With Trump now in charge however it looks like that is set to change for the better.
The most valuable resource
But regulatory clarity alone isn’t enough. You need active government support. In the EU, MiCA has gone a long way toward providing the clarity firms need to move forward (although some considerable gaps around decentralized finance will have to be addressed in future phases). However, MiCA is essentially a regulatory layer for all 27 member states. It is supposed to be a “passport,” meaning that approval in one state transfers to another.
What’s becoming clear, though, is that individual member states differ in how they implement it. For example, to do business in Spain, you also need approval from the central bank. There are nuances like this all around the region, which make it more difficult and costly for early-stage projects to do business. Many of them choose to set up shop in the UAE instead.
To be fair, the UAE government is more straightforward. The royal family doesn’t have to try to get 27 countries or two houses of Congress on the same page. The ability to set goals from the top, create long-term plans, and ensure follow-through has led to rapid development of the country.
The country is also centrally located between Europe, Asia, and North Africa. Investment capital is plentiful, and there are government incentives to attract talent. These are all enviable resources, but they wouldn’t be much help to the digital asset industry without the full-throated support of the government. That is the most critical resource, and it is available to any country.
About BitGo
BitGo is the leading infrastructure provider of digital asset solutions, offering custody, wallets, staking, trading, financing, and settlement out of regulated cold storage. Founded in 2013, BitGo is the first digital asset company to focus exclusively on serving institutional clients. BitGo is dedicated to advancing a digital financial services economy that is borderless and accessible 24/7. With multiple Trust companies around the world, BitGo is the preferred security and operational backbone for more than 1,500 institutional clients in 50 countries, including many of the world’s top brands, cryptocurrency exchanges, and platforms. BitGo also secures approximately 20% of all on-chain Bitcoin transactions by value and is the largest independent digital asset custodian.