UAE to benefit from US cryptocurrency brain drain

Reuters/Brendan McDermid

• High-profile collapses wiped out over $1trn from digital assets
• US federal regulators cutting off crypto industry from banking services
• Dubai and Abu Dhabi creating blockchain fintech hub in region

Tightening regulations in the US to bring cryptocurrency and digital assets operators to heel could see talent and investment turn to the UAE.

The US Securities and Exchange Commission (SEC) has been targeting the cryptocurrency industry, which its chair Gary Gensler referred to as a “Wild West”.

At the same time the UAE is welcoming leading global crypto players and will complete the first phase of its own central bank digital currency in the next 12-15 months.

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A number of high profile collapses wiped out more than $1 trillion from the crypto market’s capitalisation last year.

Its efforts intensified after the demise of Sam Bankman-Fried’s FTX in November.

Last Friday Montenegrin police formally charged Do Kwon, the crypto entrepreneur and co-founder of Terraform Labs, for forging official documents. He was behind the TerraUSD and Luna currencies that lost an estimated $40 billion last year.

And crypto exchange Coinbase announced last week that it had received a Wells notice – a formal declaration that SEC staff intend to recommend an enforcement action.

“There’s clearly a regulation-by-enforcement push by federal agencies in the US – dubbed Operation Chokepoint 2.0 – that is making it harder for crypto-focused financial institutions to operate,” Richard Mico, US CEO and chief legal officer of Banxa, a payment channel for cryptocurrency users, told Reuters.

“Indeed, this pressure is making it increasingly challenging for crypto businesses and traders to operate within the US.”

Operation Chokepoint 2.0 refers to a perceived effort by the Joe Biden administration and federal regulators to use whatever means necessary to cut the crypto industry off from banking services.

Karl Blomsterwall, CEO of Stockholm-based Planet IX, the non-fungible token (NFT)-based strategy game, said: “The US has the deepest pools of capital and engineering talent in the world.

“But, for the blockchain industry in particular, the US’s position has remained ambiguous in terms of its regulatory approach. 

“As a result, many startups in the space are considering other geographies. Singapore and the UAE in particular have become important hubs for the crypto space and it seems likely that these places will continue to increase in importance.”

Cryptocurrency firms head for the UAE

UK crypto lender Nexo, which is opening offices in the UAE, fell foul of US authorities in January as it was sanctioned by the SEC for failing to regulate a crypto lending product.

In an interview with AGBI, co-founder Antoni Trenchev, said: “There appears to be a political will to create a blockchain fintech financial hub in the region but more specifically Dubai and Abu Dhabi, which is always welcoming.

“Not all jurisdictions and governments have this level of comfort and desire to interact with crypto and fintech.”

Nexo agreed to pay a $45 million penalty to both the SEC and state regulators without admitting or denying the SEC’s findings.

Ace Desai, CEO of public blockchain String, insisted that the US was not the only country clamping down on crypto.

“Globalisation, regulatory landscapes and evolving industry trends all play a role in shaping the distribution of talent and investment within the crypto space,” he said.

The UAE has built an ecosystem for its cryptocurrency industry in recent years. An influx of laws and regulations, at UAE federal and individual emirate level, are promoting and regulating the use of crypto assets, particularly Dubai’s Virtual Assets Law and Virtual Assets Regulatory Authority.

Last year Dubai also launched its own metaverse strategy, which targets $4 billion of extra gross domestic product from technology and Web3-based business by 2030.

Harishkarthik Gunalan, CEO and co-founder of CoinFantasy, said: “Dubai has become a hub for crypto companies serving customers across Asia and Africa, not just in the Middle East. 

“The government support also means, unlike other countries, adoption in the UAE is driven by both the retail and consumer segment and the business ecosystem, with banks and financial institutions also demonstrating interest and innovation in the space.”

Tim Bhatnagar, co-founder of Paiverse, an asset-backed NFT platform in London, suggested establishing an industry forum to prevent bad actors entering the region.

He said: “In a rush to welcome founders from other jurisdictions, one must exercise caution to ensure that one bad apple doesn’t damage the region’s reputation irreparably.

“It’s crucial to screen newcomers and be careful about who comes dressed as a sheep in wolf’s clothing.”