A three-stage facilitative model for cryptocurrency regulation in the UAE to support the market, companies and investors

A three-stage facilitative model for cryptocurrency regulation in the UAE to support the market, companies and investors 

Thought Leadership

The UAE is one of the fastest growing cryptocurrency markets in the world generating transactions worth $25 billion.

PwC Middle East today launched a new report titled The UAE Virtual Assets Market, which provides insight on cryptocurrencies and virtual assets in the UAE. The report also identifies a three-stage facilitative model for UAE regulators, to ensure transparency and compliance to promote long-term growth in the sector.

Currently, the UAE’s share in the global market is around $25 billion in transactions, and it has increased 500% between July 2020 and June 2021. Regionally, the UAE ranks third by volume, behind Turkey which had $132 billion in transaction volumes and close to Lebanon at $26 billion. The UAE has been harbouring an encouraging environment for the growth of its crypto industry with Abu Dhabi's Financial Services Regulatory Authority (FSRA) providing a regulatory framework for virtual asset activities, as well as Dubai’s enactment of the Virtual Assets Law and establishment of the Dubai Virtual Asset​s Regulatory Authority (VARA), and while the industry was largely unregulated a few years ago, recent legislative measures have shown the government’s commitment to reduce the potential financial crime risk in this nascent industry. 

1. Clear regulations

This crucial building block is clear and unambiguous legislation, backed by law enforcement. The UAE requires a comprehensive, all-encompassing framework that covers all Anti-Money Laundering (AML) while combatting the Financing of Terrorism (CFT) and financial crime aspects. Niche regulation on areas such as Decentralised Finance (DeFi) and Non-Fungible Tokens (NFT) is also essential given the luxury real estate and arts market in the UAE, as this will not only help eliminate ML and TF risks but also help to expand the market. Institutional investors, who seek clarity and protection through regulations, invest in regulated markets. Additionally, regulatory certainty makes it easier for small firms to seek financing and establish banking relationships, and retail investors are more confident when there is government endorsement.

2. Industry self-regulation

In addition to clear legislation, self-regulating approaches can also be extremely beneficial, especially in high-tech and rapidly advancing industries such as crypto where industry players have much greater expertise than external regulators. By collaborating with industry experts, fintechs, crypto firms, academics, consumer interest bodies and subject matter experts, regulators can reduce their monitoring and enforcement costs and encourage greater cooperation and compliance to mutually agreed standards. Added benefits can include advanced training programmes and sharing of insights and research. Self-regulation is proposed as a counterpart to legislation, not as a replacement, and requires the involvement and support of legislators for success.

3. International coordination and cooperation

As indicated by the IMF, calling for greater international coordination, the 'Sunrise Issue' and borderless nature of crypto can not only cause friction and misalignment but also make compliance difficult for firms, especially where extraterritorial treaties exist. Greater international harmonisation, communication and cooperation are required with other jurisdictions for the UAE to succeed in this last stage of our proposed model.

Commenting on the report, Mahmoud Al Salah, Financial Crime Compliance Partner at PwC Middle East, said: “The UAE is one of the fastest growing cryptocurrencies markets in the world. Government support and increased consumer demands for virtual assets [have] led to growth in the industry. However, the crucial policy and strategic question for the UAE is how to maintain the fine balance between inviting innovation, technology and wealth generation and owning the future of crypto and blockchain versus having robust regulations in place to control the potential risks related to financial crime that such new technology frontiers may unwittingly bring. In our proposed ‘three-stage facilitative model for UAE regulators’, we believe that regulators can benefit immensely in establishing clear and comprehensive regulations, collaboration with industry experts, and international cooperation to promote transparency, compliance and innovation within the industry.”

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