A race to be the global crypto hub and digital finance leader

As the SEC in the US is cracking down on crypto companies, Dubai and London are enhancing their rules with the aim of becoming the new global hub for crypto activity. While the European Union is under pressure to fast-track capital rules for banks holding cryptoassets. 

Dubai – United Arab Emirates (UAE)

Dubai is not only aiming to be the best host for world events and charm the world with its hospitality but is also on its way to establishing itself as the world’s leader in digital finance. 

As such, it might not be surprising that Dubai has established the first Virtual Assets Regulatory Authority (VARA) for digital economy development in February 2022. Interestingly, the Authority was created shortly before the crypto winter, when the crypto market experienced a significant downturn.  

This is not the only noticeable challenge for Dubai’s ambitions. Like most countries around the world, Dubai is dealing with some controversies concerning the use of crypto. The Haqq Association created Islamic Coin in 2021 which operates under the rules of Sharia finance. It, therefore, must follow Sharia law (Islamic law).  Illustrating the controversial relationship between Sharia law and cryptocurrency, last June the Islamic Coin was issued a fatwa. The fatwa means that concern was raised about whether the coin was ethical according to Sharia law. The coin received legal endorsement and therefore, meets the ethical standards of the Muslim community.  

Despite the controversy, the support for the currency is substantial. In 2022, Dubai attracted cryptocurrency companies such as Binance, and crypto exchange Bybit, who moved their headquarters from Singapore to Dubai. Binance even agreed with the Dubai World Trade Centre Authority to establish a hub that will assist other crypto companies to acquire a license in Dubai. The increase in crypto companies moving to Dubai is likely to be linked to its forward-thinking attitude towards regulation and supporting innovation.  

Most recently, the VARA has published its 2023 rulebook for regulating cryptocurrency.

Highlights and applicability of the new rules

The proposal contains rules and guidance clarifying terminology, setting out fees necessary to conduct virtual financial activities, and outlining the fines for violations.  

These regulations will apply to any entity within Dubai that issues virtual assets, which includes the requirement to apply for a license to operate within the Emirate.  

One definition is that for anonymity-enhancing crypto, which is “a type of Virtual Asset which prevents the tracing of transactions or record of ownership through distributed public ledgers and for which the [Virtual Asset Service Provider] has no mitigating technologies or mechanisms to allow traceability or identification of ownership.” It, therefore, disallows privacy-enhancing crypto. Many other jurisdictions have taken this step already and it is one that the European Union (EU) is considering.  

It should be noted that a license can also be revoked due to a material violation of any law, regulation, rule, directive, or insolvency. 

The aim of the regulations, as in the US and Europe, is to attract more crypto businesses, protect digital asset brokers and investors and stop illegal practices. Many companies hesitate to use virtual assistants without clear regulations in place. Therefore, it is supposed to attract new business to Dubai and make it the international hub for crypto.  

“It looks like VARA learned the lesson from the United Kingdom and now harmonises digital assets laws in favour of metaverse,” said Dimitry Mihaylov, the Chief Scientific Officer for Farcana.

London – United Kingdom (UK)

Similar to Dubai, London (UK) has ambitions to become the global hub for crypto capital. In 2022, the UK government announced its plans to make the UK “a global cryptoasset technology hub”. Again, similar to Dubai, the UK made this announcement around the time of the crypto winter.  

While Dubai has published its regulations, the UK has published a consultation on the future of cryptoassets which sets out its rules to regulate cryptoassets. The proposal follows similar aspirations as the Emirate. “Our objective is to establish a proportionate, clear regulatory framework which enables firms to innovate at pace while maintaining financial stability and clear regulatory standards,” said Andrew Griffith MP, Economic Secretary to the Treasury.

Highlights of the proposal

The aim of the proposed rules is to mitigate risks associated with cryptoasset businesses operating within financial services and simultaneously benefiting from the advantages of cryptoasset technologies to increase investment in the UK. 

The proposal extends the Financial Conduct Authority (FCA) regulatory coverage to include crypto business such as payment activities; exchange activities; investment and risk management activities; lending, borrowing and leverage activities; safeguarding activities; and validation and governance activities. 

The consultation outlines a new “issuance and disclosure” regime for cryptoassets and a specific crypto market abuse regime. It also covers the risks of financial intermediaries and custodians of cryptoassets.  

The UK is also looking for evidence regarding the sustainability of cryptoassets to assess the advantages of using similar ESG-related reporting requirements to cryptoassets.

What is the SEC doing about crypto?

The SEC has recently intensified its actions against crypto companies, as they are concerned that there is a risk for investors due to a lack of transparency. We have seen that with the crypto exchange Kraken ending its staking service in the U.S. after paying a $30 million settlement to the SEC, which is causing concerns for other proof-of-stake companies like Ethereum.

European Union

While the UK and Dubai are building up their regulatory framework for cryptoassets and the SEC is trying to protect investors, the EU is continuing to work on its all-around framework – the Markets in Crypto-Assets Regulation (MiCA). However, due to delays, this framework is expected to be finalised sometime in 2024.  

Following the repeated delays to the MiCA, the EU is under pressure to rapidly provide legislation that implements tough capital rules for banks dealing with cryptoassets. The Basel Committee has set a January 2025 deadline for the execution of capital requirements for banks dealing with cryptoassets. The aim is to give banks clarity on their requirements for cryptoassets and to reduce risks.

France crypto rules

Simultaneously, France is in the process of passing legislation which will oblige crypto firms to become fully licensed as early as January 2024, ahead of the upcoming EU MiCA. It is expected that the National Assembly will give its final endorsement this month by 28 February 2023.   

“The recent bankruptcy of FTX has highlighted the risks inherent in any investment in cryptoassets, especially when the company operates outside of any regulation. These concerns, including for financial players, are shared at the European Union level,” said Hervé Maurey, a senator who serves on the finance commission and proposed the amendments that would prohibit crypto platforms to operate without a full regulatory license. 

CUBE comment

Both, the UK and Dubai are working on a long-term plan for their aspirations to be the digital finance leader and seem to advance their plans despite the ongoing crypto winter. Regardless of the damage to crypto’s reputation, it seems likely that both nations will have a strong foundation to be the global leader.  

At present, the EU is less advanced in its implementation to regulate the crypto market. However, with the added pressure from the Basel Committee which consists of banking regulations from the top financial centres, it is possible that the proposed framework will be delivered even quicker and will make the EU a strong contender to be a global hub for crypto. 

Keeping up with all developments concerning cryptoassets can be overwhelming. That is why we are here to help. CUBE can support compliance teams by staying up to date with the latest updates and giving companies a head starts when it comes to planning implementation of new regulations. Using AI to automatically map relevant regulations to company procedures – CUBE is a compliance officer’s best friend.

Keep ahead of virtual assets and crypto regulation by speaking to CUBE.