Regulation of DeFi: A Push from Wall Street – Part 13

Welcome to my blog on Real World Assets (RWAs) Tokenization. I'm Tarek, a financial engineer coming from UC Berkeley with a strong background in DeFi, Fintech, and machine learning.

In today’s article, I am going to talk about the regulatory status of crypto in the Middle East, specifically in the UAE. Before delving deeper into the subject, I would love to share my personal story of living in the Middle East, specifically Lebanon.

It is the story of how I lost all my savings to the centralized, corrupted banking system in Lebanon. October 2019 was the month when one of the mid-sized Lebanese banks went bankrupt. This was unusual for the Lebanese banking system. One month in, the Lebanese government announced its default on its Eurobonds. By definition, a Eurobond is a debt instrument denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds. Since Eurobonds are issued in an external currency, they're often called external bonds. Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.

This was the red alert for the whole private banking infrastructure. People freaked out. A bank run happened. Banks were not able to pay the people. They froze the accounts denominated in US dollars, while the Lebanese pound was depreciating like crazy. By March 2022, the Lebanese pound had lost around 98% of its intrinsic value.

So, the Lebanese pound is not hard money anymore. And, to be honest, it never was. Fiat currency was, is, and will never be one. I lost all my life savings. I learned it the hard way. Never trust centralized entities. So, blockchain it is. Maybe the Lebanese infrastructure is not ripe yet for disruption through blockchain or advanced payment services, given the wide preference for cash payments, among other cultural considerations. If not Lebanon, then let’s talk about the UAE, a country that is being placed on the blockchain map for its flexible government in crypto adoption.

The UAE is always trying to lead in the financial and technological markets. They are being positioned as a destination for entrepreneurs who want to build within their specialties but for some reason or another are not able to, be it regulatory or financial constraints.

Dubai has become a prominent hub for cryptocurrency innovation, particularly since the UAE announced the Virtual Asset Regulatory Authority (VARA) in March 2022. Despite ranking fifth in CoinDesk's Crypto Hubs 2023, Dubai and Abu Dhabi excel in regulatory structures. Dubai, with a 90% subsidy on commercial licenses and operational licenses for crypto entities, aims to attract global talent and diverse investors. The UAE, holding the sixth position in the global crypto economy, exhibits strong engagement in decentralized finance (DeFi) activities.

The regulatory landscape in the UAE involves multiple entities, such as the Abu Dhabi Global Market (ADGM), VARA, and Dubai International Financial Centre (DIFC). ADGM's comprehensive framework addresses virtual asset activities, focusing on market operators, custodians, and intermediaries. Their recent proposal on Distributed Ledger Technology (DLT) aims to create a legislative framework for the decentralized economy.

VARA, in Dubai, regulates virtual asset services, making it mandatory for Virtual Asset Service Providers (VASPs) to obtain a license. VARA's rulebook covers various aspects, including risk management, cybersecurity, audit, and compliance with anti-money laundering (AML) mandates. The updated Custody Services Rulebook allows licensed VASPs to offer staking services.

DIFC, through the Dubai Financial Services Authority (DFSA), has advanced cryptocurrency regulations, particularly for investment tokens. Their regulatory approach focuses on recognized tokens, with Bitcoin, Ethereum, Litecoin, and Ripple included in the approved list. Businesses dealing with tokens not on this list face restrictions on offering financial services and conducting ICOs.

The UAE's mosaic of crypto regulations, reflecting its federal structure, began in 2017 with an emphasis on authorized exchanges and anti-money laundering protocols. The Virtual Assets Law introduced in 2022 defines the scope of virtual assets, promoting transparency to prevent financial malpractices. Through these initiatives, the UAE aims to balance tradition with innovation and position itself as a global hub for digital assets.

In the next article, we are going to wrap the regulatory series. Stay tuned!