*Originally Published Dec 2021.
Abstract
COVID-19 massively accelerated the extent to which GCC markets were exposed to crypto-currencies, particularly in the UAE, which for a number of months saw elements of the global crypto-community descend on Dubai. Beginning in 2015, GCC States such as the UAE, Bahrain, Qatar and Saudi Arabia have demonstrated advanced regulatory and policy innovation in the FinTech space. Now GCC states stand at a cross-roads.
On the one hand, the UAE, Bahrain and increasingly Saudi Arabia want to position their countries for a potential shift in the global balance of financial power, towards decentralized networks, and away from the 1944 Bretton Woods financial order.
On the other hand, Central Banks in these countries are anxious to retain control over monetary supply and control. These competing impulses explain the mixed signals and complex regulatory environments which are emerging, as well as emerging cross-border case studies in Central Bank Digital Currencies, such as “project Aber” between Saudi Arabia, and the UAE.
Key Points:
COVID-19 & the GCC as a Crypto-Haven
During COVID-19 a combination of relative openness and attractive freezone laws for exchanging crypto into fiat, made the UAE a global destination for the crypto-industry.
The Tax Justice Network shows that the UAE became one of the world’s largest and fastest growing tax havens in March 2021, alongside Switzerland and Bermuda [1]. In April the UAE’s Minister of Economy, Abdulla Bin Touq Al Marri, declared that cryptocurrencies and asset tokenization will become key to plans for the country to double its economy in 10 years [2]. The UAE has invested significant resources into the global central bank digital currency (CBDC) race, and has tasked both the Dubai Financial Services Authority (DFSA) and the Abu Dhabi Global Market (ADGM) with adopting new regulatory frameworks for both crypto-currencies and digital assets.
The Tax Justice Network shows that the UAE became one of the world’s largest and fastest growing tax havens in March 2021, alongside Switzerland and Bermuda
COVID-19 has to some extent accelerated and transformed the UAE’s position relative to other GGC markets, in a short space of time. Antecedent to 2020, Bahrain looked to be establishing itself as the center of the crypto-market in the region, as Rain and other providers established an HQ in Manama. While Bahrain and now the UAE have secured an early lead, Saudi Arabia is also moving heavily toward becoming a safe harbour for crypto-currency companies. Analysts have implied that sovereign wealth funds in the region will directly invest in crypto at some point in the near future[3].
The accommodation towards crypto across MENA countries is not without controversy: the United States is filing lawsuits against companies such as Ripple, even as Saudi Arabia announced that it will launch an “On-Demand Liquidity Platform” for international payments by working with the same company [4]. Central bankers within Saudi Arabia, Kuwait and other GCC states have warned against decentralized currencies, even as other sectors within the same countries have appeared to embrace the technology as a store of financial value.
Meanwhile fatwas in countries such as Indonesia against crypto-trading have complicated the situation for Islamic finance, drawing criticisms for a perceived lack of distinction between legitimate and illegitimate uses, and leading to a search for Shariah-compliant forms of crypto-asset management [5].
At the moment the MENA market is served by a few regional players. This includes Swiss-based BitOasis, which is based in the UAE, and Coinbase backed Rain, both serving a potential 600 million users in the region [6]. Headquartered in Bahrain but also seeking to establish a greater presence in the UAE is CoinMENA, which recently received a $9.5 million seed funding round from established investors such as BECO Capital, Arab Bank Switzerland, Bunat Ventures and the investment arm of Alameda Research [7]. Finally, there have been signs Binance has been testing the waters in Dubai, Singapore and other locations for a possible new HQ, as pressure is applied on the Cayman Islands HQ by US regulators [8].
Central bankers within Saudi Arabia, Kuwait and other GCC states have warned against decentralized currencies, even as other sectors within the same countries have appeared to embrace the technology as a store of financial value
One Islamic finance expert has observed that ““In the Organization of Islamic Cooperation’s 55-plus states, the status and stand (of cryptocurrencies) varies substantially from one country to another, and even in some cases is inconsistent within the same country[9].” The existing global financial regime was established by the allied powers, in 1944, at Bretton Woods. This financial regime established the dollar as a global reserve currency, created a global system of exchange rates, and allowed nation-states to control currency through the invention of a central bank.
After the 2008 financial crisis in the West, and contemporary fears of inflation in developed economies, the opportunity for Muslim states and around 1.9 billion Muslims worldwide to access a more global and distributed financial system, has been noted by states and regulators across the region.
The GCC’s Key Crypto-Markets
UAE
The regulatory environment for crypto-currencies in the UAE is complex, and at times benefits from a degree of complexity. For example, crypto-currencies are not licensed by the UAE Central Bank, however a number of crypto-currencies have been given permission to operate within the freezone of the Abu Dhabi Global Market (ADGM)[10]. In May a currency called “Dubai coin” launched itself as the “official currency of Dubai”, only for authorities to issue a warning that there was no affiliation with the emirate [11].
Despite apparent setbacks such as this, the UAE has invested significant intellectual and regulatory capital in preparing for a future in which digital currencies are more widely accepted.
UAE regulatory complexity
The UAE Central Bank, the Security and Commodities Authority (SCA) and recently the Dubai International Finance Center (DIFC) currently share authority in Dubai for financial sector regulation and activities in onshore markets.
At the moment, any company or individual working on investment tokens, in or from the DIFC, will require DFSA approval and authorisation [12]. Onshore and outside of the DIFC, the SCA issues decision No. 23 regulating the provision of crypto asset, custody, exchange and fundraising platforms[13]. The purpose of the decision, according to a Central bank circular, was to facilitate Fintech firms and other ‘challenger banks’ to secure easier access to the UAE market, at the same time as protecting against speculators, and retaining the UAE dirham as the sole legal tender inside the country[14].
Regulation of crypto assets in ADGM is also regulated under the Financial Services and Markets Regulations Act of 2018 (FSMR) in which a definition of ‘Virtual Asset’ is provided as follows: (i) a medium of exchange; and/or (ii) a unit of account; and/or (iii) a store of value, but does not have legal tender status in any jurisdiction[15]. This definition reflects the regulatory head-start the UAE has gained in this space, as ADGM plans to double the number of crypto-exchanges it is working with[16]. The ADGM remains one of the first regulatory jurisdictions in the world to draft a framework from the ground up for digital asset exchanges[17].
Finally, the SCA recently signed a Memorandum of Understanding with Dubai World Trade Centre Authority (DWTCA) in which the SCA will supervise, offer, issue and oversee the trading and listing of crypto assets within the limits of the DWTCA freezone.
UAE Advantages
Regulatory complexity has not hindered fast-paced changes in the crypto-community of the UAE. Many of the world's foremost crypto-traders and blockchain based developers now frequently visit Dubai, or can be found applying for residency, and attending a wide range of public and private gatherings across the city.
At the recent Digital Mining Summit, UAE based Phoenix Technology Consultants signed a $650 million order for crypto mining rigs, one of the largest purchases on record[18]. A press release suggested Phoenix will also place orders for over $2 billion worth of crypto mining application-specific integrated circuits (ASICs) in the third quarter of 2022, a fantastical sum which reflects the difficulty of auditing both the financing and investment ecosystem of this asset class in general[19].
At the same time, it reflects the status of the UAE as a country located between East and West, which is accessible to both United States and European innovation, as well as Chinese, Russian and Eastern European talent. For a series of reasons, eastern europe and Russia have a significant talent base of blockchain based coders, many of which have found high-level positions within the UAE Fintech and banking sector. Equally, with the closing of crypto-currency trading in China, a significant number of Shanghai and Beijing’s top crypto-asset companies have established a presence in the UAE. Because of the crackdown on crypto in China, many of these entities operate in a way which can best be described as ‘understated.’
At the recent Digital Mining Summit, UAE based Phoenix Technology Consultants signed a $650 million order for crypto mining rigs, one of the largest purchases on record
Even as the UAE develops regulatory, development, and network access to this space, the possibility of enhanced investment appears likely. For example, Mubadala Investment company has backed two fully operational virtual asset exchanges in ADGM (Midchains and Matrix), with a third known as DEX’ in the process of a soft launch[20].
Bahrain and Saudi Arabia
During the first half of 2021, the first crypto-asset service provider licensed by the Central Bank of Bahrain announced more than $1 billion in trading, with the Rain platform witnessing a twenty fold increase in growth over the first six months of 2021, compared to 2020 [21]. The year before, in 2020, the platform userbase increased nine times faster than during the same period in 2019 [22]. These statistics illustrate a degree of demand across Middle Eastern states, given that traders in other jurisdictions usually have access to different platforms such as Binance. Equally, the statistics suggest a global trend, in that COVID-19 seems to have historically increased crypto adoption, acceptance and experimentation.
Rain enjoyed a series A round that saw investors such as Middle East Venture Partners (MEVP), the largest US based crypto-currency platform (Coinbase) and Saudi-based Vision Ventures, US based CMT Digital ventures, DIFC Fintech Fund and Saudi’s JIMCO [23]. The platform provides services for users in Bahrain, Saudi Arabia, UAE, Kuwait and Oman, demonstrating both a GCC focus and the extent to which crypto-trading is still regulated by Central Banks (in this case, the central bank of Bahrain).
Shariah Compliance
In January of this year, Bahrain approved a Shariah-compliant crypto-currency exchange, with a view to increasing the participation of other Muslim countries[24]. Manama has also hosted events and conferences in this space, such as the General Council for Islamic Banks and Financial Institutions (Cibafi) and the Islamic Corporation for the Development of the Private Sector (ICD), for a conference entitled “Cryptocurrencies – A Double-edged Sword: Challenges and Opportunities for Islamic Finance[25].” Cibafi and others have established an ‘Innovation and Technology working Group’ (ITWG) with the aim of improving adoption and blockchain based technologies within the Islamic financial services industry[26]. To some extent, Bahrain has acted as a center of exploration for Saudi Arabia, whose status as an Islamic leader means that the issue of Shariah-compliance cannot be ignored.
Within Saudi Arabia, there are signs of a considerable shift towards heavily investing in new decentralised and crypto-based financial instruments. An emphasis on crypto is now being phased into plans for Vision2030[27], while the mega-project of NEOM is exploring new digital currencies and metaverse enabled token based markets. As the New York Times observes, many of the Wall Street elite regularly visit Saudi Arabia, as the likes of Goldman Sachs CEO David Solomon, and Blackstone CEO Stephen Schwarzman attend investment summits in Riyadh[28]. As Bitcoin in particular receives institutional support from major US hedge funds[29], Saudi Arabia’s deep connections with US finance could help it more assertively into this new space.
Within Saudi Arabia, there are signs of a considerable shift towards heavily investing in new decentralised and crypto-based financial instruments. An emphasis on crypto is now being phased into plans for Vision2030
As elsewhere, the Saudi perspective is not consistent. For example, the governor of the Central Bank has stated that the country should have “no involvement” with crypto-assets, suggesting that anyone who works with such instruments should be regarded as a “criminal.”[30] This may explain a strong role for Saudi Arabia in working alongside other states on Central Bank Digital Currencies (CBDCs). Here one project in particular, is of critical regional interest.
UAE and Saudi Arabia: Project ‘Aber’ CBDC Collaboration
Central Bank Digital Currencies are not without controversy. Edward Snowden recently described them as instruments of ‘fascism,’ due to the ability to track every single coin, and also ‘code’ money so that it can only be spent on certain items, in certain locations, and within a certain timeframe[31].
Detractors also see a geopolitical dimension behind the creation of CBDCs: existing crypto-currencies bypass the central bank, and do not depend on any world state to guarantee their meaning as a unit of exchange. By contrast, CBDC’s are centralized and allow nation-states to retain and expand their control over the financial system. Analysts have suggested that CBDCs will exist alongside crypto-currencies, or that a period of financial uncertainty will follow, in which centralised and decentralized regimes will compete for global adoption.
Against this background, ‘Project Aber’ between the UAE and Saudi Arabia stands out as a globally important case study, and is almost as significant as China’s “digital yuan.” Announced in January 2019, Project Aber was an effort by the UAE and Saudi Arabian Central Banks to establish a “proof of concept” designed to “contribute to the body of knowledge in CBDC and Distributed Ledger Technologies (DLT)[32].
By contrast, CBDC’s are centralized and allow nation-states to retain and expand their control over the financial system.
With ‘Aber’ signifying ‘across-boundaries’ in Arabic, the trial later expanded to include six commercial banks. A final report on the trial concluded that a dual-issued CBDC was “technically viable” across the Saudi and UAE borders, and that CBDC currencies could offer “significant improvement over centralized payment systems in terms of architectural resilience[33].”
Aber remains one of the first pilots in the world between the central banks of two different nations, and was initiated within the context of the 2019 “Azzam Strategy” on cooperation between the two countries[34].
Concurrently, the Central Bank of the UAE has launched a 2023-2026 three year plan, in which it announces the launch of a digital currency and a bid to stand among the top 10 central banks across the world[35]. The UAE is now also collaborating with China, Thailand and Hong Kong on cross-border CBDC projects, suggesting the potential of these technologies to subtly shift the balance of financial relationships - and power.
Kuwait, Qatar and the Remittance Economy
In May of this year the Central Bank of Kuwait launched a “Diraya” campaign managed by the Kuwait Banking Association, and supported by local banks, which warned of the dangers of crypto-currencies[36]. The campaign specifically referenced the role of the state in administering currency, again suggesting the extent to which crypto is regarded as antagonistic towards elements of the existing monetary order.
Qatar invested heavily in FinTech startups, with the Qatar Finance Center (QFC) reporting a 35% growth in 2019[37] and working to find ways to integrate blockchain based architecture into its existing financial and legal systems. A local digital payment solution, ‘Qpay’ has become the country’s largest Fintech company[38]. The Qatar Central Bank launched a QR based mobile payment system during COVID-19, which used a mobile phone wallet to allow citizens to pay for services or complete peer-to-peer transactions[39].
Finally, as a subject of future research, it should be mentioned that remittance payments across GCC states from Indian, Pakistani, Bangladeshi and Filipino expats are slowly shifting into crypto based transactions
The Qatar Development Bank (QDB) has also launched a fintech incubator and a new ‘Fintech Circle’ coworking space[40]. However Qatar’s investment in Fintech is not mirrored by investments in crypto based transactions; in 2019, the Qatar Central Bank prohibited virtual asset providers and services from operating in the country, as part of a drive against money laundering[41]. Qatar has now expressed an interest in exploring CBDCs, raising the distant prospect of a GCC digital currency, working across borders, in the future.
Finally, as a subject of future research, it should be mentioned that remittance payments across GCC states from Indian, Pakistani, Bangladeshi and Filipino expats are slowly shifting into crypto based transactions.
These transactions are faster, with no commission rates, and they often avoid the ID checks associated with existing services such as Western Union, some of which were temporarily closed during COVID-19[42]. Some crypto-analysts suggest the migration of the remittance economy into crypto-currencies, will be one of the largest macro-financial changes to arrive in the years ahead.
Executive Summary
As GCC States experiment with decentralized crypto-currencies and their nationalized twin, the CDBC currency, a range of economic and geopolitical incentives are leading policy. On the one hand, access to Asian markets and a geography between East and West mean that GCC States are anxious to position themselves at the center of what could be a new, global, monetary regime. In this regard, emerging crypto-based technologies represent a hedge against economic crisis or inflation in the West, at the same time an integrating into more horizontal & inclusive ‘global’ financial networks.
emerging crypto-based technologies represent a hedge against economic crisis or inflation in the West, at the same time an integrating into more horizontal & inclusive ‘global’ financial networks
These macro geopolitical trends are balanced against a risk assessment in which central banks can no longer control monetary supply, and citizens access their wealth across decentralized networks, weakening the fiscal authority of states and raising the potential for illegal transactions.
CBDC’s have thus emerged as a compromise between the proven utility of digital currencies, and their long-term geopolitical consequences.
CBDC’s have thus emerged as a compromise between the proven utility of digital currencies, and their long-term geopolitical consequences. As countries form the United States, to China, United Kingdom and Europe continue to struggle with the power-dynamics inherent in decentralized finance, GCC States such as the UAE, Bahrain and possibly Saudi Arabia, have adroitly and pragmatically positioned themselves to become havens, brokers and markets for these disruptive financial instruments.
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