As GCC countries look to harness new forms of financial technology (fintech) such as blockchain, deepen their financial services and expand financial inclusion, governments are embracing decentralised finance (DeFi) and are working to attract cryptocurrency companies to the region.
In DeFi – peer-to-peer financial services with no central authority or intermediary involved in trading, lending, investing and other activities – GCC countries see the opportunity to diversify their economies and embrace Web3 technologies – such as blockchain, the internet of things, artificial intelligence, virtual reality, machine learning, 5G, cloud computing and edge computing – to enhance financial services with token-based economies.
In April the Registration Authority for the Abu Dhabi Global Market (ADGM), an international financial centre and free zone, proposed legislative framework for distributed ledger technology targeting disclosures, liquidation and governance structures to build out its DeFi economy.
Earlier that month, the UAE’s Securities and Commodities Authority started accepting licensing applications for companies looking to provide crypto services after crafting a mandatory licensing regime based on the model of Dubai’s Virtual Assets Regulatory Authority (VARA), which put forth its own crypto regulatory framework in March.
Ease of transactions
With high US interest rates and inflation weakening many fiat currencies around the world, cryptocurrencies and the decentralised exchanges on which they are traded allow users in emerging markets to limit exposure to macroeconomic pressures and ease transaction flows.
DeFi can also offer significant advantages across the economy, as it lowers fees due to the lack of intermediaries, enhances transparency and security with blockchain technology, and creates seamless transactions among accounts and entities with no centralised entity.
Long seen as a hedge against inflation, cryptocurrencies as an asset class have seen one of the largest declines since the second half of 2021, when inflation ramped up around the world, prompting many banks and financial institutions to question their sustainability – most prominently after the collapse of cryptocurrency exchange FTX last November.
Western markets remain skittish on cryptocurrencies, not least with international media reporting last month that the world’s largest cryptocurrency exchange Binance had comingled customer funds with company revenue in 2020 and 2021.
Even so, emerging markets are leading the uptake of cryptocurrency adoption to bolster financial inclusion, especially after the Covid-19 pandemic spurred the growth and adoption of new e-commerce solutions and attracted many citizens to seek innovative ways to gain access to financial services.
Regionally, 50% of citizens in the Middle East and Africa were unbanked in 2021, while South and Central America averaged 38%, Eastern Europe 33% and Asia Pacific 24%. Meanwhile, 94% of citizens in Western and Central Europe are considered banked, according to a study from British research platform Merchant Machine.
The largest growth in cryptocurrency adoption in 2022 came in the MENA, with $566bn in crypto transactions from July 2021 to June 2022, up 48% from the same period the previous year, whereas crypto transaction in Latin America grew 40%, North America 36%, Central and Southern Asia 35%, and other regions 22% or less, according to a report from Chainanalysis.
Turkey was the largest cryptocurrency market in MENA with $192bn in transactions, followed by Egypt, Lebanon, Saudi Arabia and the UAE.
To increase security for cryptocurrency users, several companies have launched stablecoins – cryptocurrencies that are pegged to a reference asset such as fiat currencies, exchange-traded commodities like oil or gold, or other cryptocurrencies like Bitcoin or Ethereum.
In March digital asset and cryptocurrency platform AsHuMon launched an innovative stablecoin backed by seven regional currencies, and in May DeFi protocol Num Finance raised $1.5m in funding to expand its stablecoin offerings in Latin America and the Middle East, which will include a coin to be released in June pegged to the Bahraini dinar.
If Gulf countries can continue to build on their regulatory momentum and attract DeFi, and companies and citizens across emerging markets continue to embrace cryptocurrencies and the DeFi model, there are significant opportunities for Gulf-based exchanges to become global leaders in the emerging technology. The global DeFi market is forecast to reach $232.2bn by 2030, up from $12.0bn in 2021, according to economic consultancy Zion Market Research.
Regulatory progress
The interest of GCC countries in tapping into the promise of DeFi will require transparent regulations to attract foreign companies, the importance of which is emphasised in the recent developments in Abu Dhabi and Dubai.
In addition to the emirates, Oman set up a high-level task force in 2021 to study the economic advantages of using cryptocurrencies, and its financial markets regulator, the Capital Market Authority (CMA), took measures to legalise and regulate DeFi products and services in 2022, appointing a consultancy firm to advise on a regulatory framework. Similarly, in October the Central Bank of Oman publicly urged citizens and residents to exercise caution in using cryptocurrencies after a wave of global fraud.
More recently, international media reported in February that the CMA was looking to establish a new regulatory framework for the virtual asset industry.
Meanwhile, Dubai’s VARA is establishing and enforcing comprehensive safeguards, and clarifying compliance costs that can serve as a model for the region. Companies looking to offer exchange services must pay an application fee of Dh100,000 ($27,200) and an annual supervision fee of double that amount. Once accepted, companies can apply to other services such as lending that bring additional licensing fees.
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Though the rules remain a work in progress, they create an opening for the emirate to realise its ambitions of encouraging blockchain and cryptocurrency adoption, and of attracting over 1000 firms and 40,000 virtual jobs by 2030. In 2017 Dubai began work on the world’s first government-developed cryptocurrency emCash, which was launched in 2020.
Abu Dhabi has also long been keen to develop itself as a DeFi leader, with ADGM introducing digital asset regulations in 2018. In February Hub 71, Abu Dhabi’s global tech ecosystem located in ADGM, launched a $2bn initiative called Hub71+ Digital Assets to back Web3 and blockchain technology start-ups in the region.
The legislative framework proposed by ADGM is set to incentivise crypto companies to establish themselves and grow their businesses. Last year UAE-based DeFi platform ZKX raised $4.5m in a seed funding round from Alameda Research, Amber Group, Crypto.com, Huobi and StarkWare, with a goal to increase transaction speeds and lower gas fees.
Bahrain is also seeking to develop its ecosystem for crypto services and has developed its own crypto-asset regulations for licensing, efforts that paved the way for Binance to launch its first platform in the GCC in January in the kingdom.
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