Clear regulations, industry self-regulation and international coordination and cooperation will ensure transparency and compliance in the fast-paced UAE cryptocurrency sector with current transactions worth $25 billion.
Crypto deals have grown 500% between July 2020 and June 2021. Regionally, the UAE ranks third by volume, behind Turkey which had $132 billion in transactions volumes and close to Lebanon at $26 billion, said PwC Middle East in a new report titled, The UAE Virtual Assets Market.
The report also identifies a three-stage facilitative model for UAE regulators to follow to ensure that there is enough transparency and compliance.
The UAE has been harbouring an encouraging environment for the growth of its crypto industry with Dubai’s enactment of the Virtual Assets Law and establishment of the Dubai Virtual Assets 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 the nascent industry.
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) / Combatting the Financing of Terrorism (CFT) and financial crime aspects. Niche regulation on areas such as Decentralised Finance (DeFi) and Non-Fungible Token’s (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 more confident when there is government endorsement.
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, and not as a replacement, and requires the involvement and support of legislators for success.
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 is 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 has 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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