Dubai presses for crypto companies to set up their facilities there

Key points: 

• The Dubai Virtual Assets Regulatory Authority issued guidelines on the marketing and advertising of virtual assets.
• Dubai announced its intention to become the top virtual world economy and create 40,000 virtual jobs.
• This is the first government to regulate cryptocurrencies under a new crypto-only regulator
• Banks are not so friendly yet, so opening a bank account for crypto companies has proven difficult for now. 

Dubai is heavily recruiting cryptocurrency companies to set up facilities there, but the Middle Eastern countries are not ready for them. The rules aren't clear, and getting something as simple as a bank account isn't a smooth process -- at least for now.

The Dubai Virtual Assets Regulatory Authority (VARA), the industry’s specialized regulator, has yet to release a comprehensive regulatory framework that companies can use to develop or launch products, but officials have assured local businesses that it will be in place by the end of the year, which is coming soon. The regulator was set up only seven months ago and already issued some guidelines on the marketing and advertising of virtual assets.

A wider range of wealth funds in the greater UAE are investing in cryptocurrencies, and a large number of funds are already based in Dubai. Businesses want VARA to be kinder to them than in other jurisdictions where licensing can be slow. After all, the city is already a hub for business travel. It is often praised for its low tax rates, its proximity to talent centers such as India and Pakistan, and the ease with which employees can obtain visas.

The city is working hard to welcome the cryptocurrency industry. It announced its intention to become the top virtual world economy and create 40,000 virtual jobs. Meanwhile, the UAE is working to be removed from the grey list of the Paris-based Financial Action Task Force. It has come under increasing surveillance as it strengthens its anti-money laundering regime.

Pre-regulatory deadlines make lawyers suspicious.

“How can you be optimistic about something you haven’t read?” said Irina Heaver, blockchain and digital assets partner at Keystone Law in Dubai. She said she was building her clients elsewhere until she saw VARA's regulation and its application.

In the absence of regulation, less-than-tasteful elements of the crypto industry have moved to town, including YouTubers shilling altcoins to their audiences, and other projects running scams or pulling the rug. There are many free zones in the UAE, and according to Heaver, "unfortunately, these are easy to navigate and hide". She wants the industry to be cleaned up.

VARA has awarded MVP (Minimum Viable Product) licenses to some of the largest cryptocurrency exchanges. Notably, Binance, which has withdrawn applications in other jurisdictions, was granted an MVP license in September.

The license allows the exchange to offer a "full suite" of services, including spot, leveraged, and futures. There are some excluded services, such as crypto loans offered by exchanges.

Regulators aggressively sued companies. James Bernard, founding partner at consultancy JBLV and founding member of the Dubai Global Blockchain Council, told that VARA is “inviting some of the world’s top companies to be part of its MVP,” he said, whether it be an exchange, decentralized finance (DeFi) or non-fungible token (NFT) project. "VARA will create discussion groups aimed at developing regulatory best practices for each of these industries," Bernard said.

VARA was established under a law promulgated by the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum.

Industry representatives pointed to the importance of creating a regulator only for virtual assets.

“This is the first government to regulate cryptocurrencies under a new crypto-only regulator,” said CoinMENA CEO Talal Tabbaa, adding that he is “super optimistic” about the regulator.

Mohammad Hans Dastmaltchi, chairman of FTX MENA, said that many other regulators have tried to integrate virtual assets into traditional regulatory models.

"[VARA] understand the business, but they are also very tough," he said.

Tim Byun, global government relations officer at OKX, agrees.

"They really want to know what the problems are and how to fix them," Byun said. For him, “the biggest issue in the entire cryptocurrency exchange industry is the FATF travel rule.”

The current discussion focuses on issues such as technical compatibility.

"Not all [virtual asset service providers] are created equal," Byun said. Centralized exchanges need to be careful to who they send information, he said. In his view, regulators could take a more aggressive stance, starting locally and letting exchanges send messages to each other.

Bank has not joined yet

Crypto firms may have the backing of regulators, but it will take longer for them to gain acceptance from traditional players. Opening a bank account has proven difficult.

“Some exchanges have received permission letters saying they can operate bank accounts, but they have crazy restrictions,” Tabbaa said.

Applicants may find that they can only open accounts in the local currency, UAE dirhams, and no other currencies are accepted. That, or they can only cater to professional investors and not retail clients.

Banks may be waiting for a clear signal from the central bank that the crypto industry is going overboard, Tabbaa said.

Crypto companies know they are considered risky.

"It's a new industry entering the region," said Balsam Danhach, operations manager at FTX MENA. "It's not regulated. The willingness of banks to take this risk is very low. "

A cost-benefit analysis may not be helpful for banks, Tabbaa said, noting that the potential revenue banks could generate compared to the liabilities of crypto companies.

According to widespread industry criticism, the region's banking infrastructure is not designed to be business-friendly.

“Any entrepreneur in the area would say banking here sucks,” Heffer said. She explained that banking in Dubai was set up for multinational companies. Banks are profit-oriented. They don't make billions from entrepreneurs' letters of credit or trade finance.

Heaver is aware of several banks in the region looking to sell cryptocurrencies to existing customers.

“Why should I make it easier for my competitors?” she said of banks’ reluctance to serve crypto companies.

But change is underway. Heaver told that she is working with jurisdiction in the region and her main bank to provide bank accounts for crypto businesses. If crypto companies meet established criteria, they may be able to open bank accounts quickly.

Danhach said the central bank in the United Arab Emirates is in touch with other banks there.

"If I look back over the past nine months and the past two months, it's a lot easier to communicate with the bank," he said. He described it as a work in progress.