The UAE is “ahead of the curve” in regulating cryptocurrency and digital assets, experts told Arabian Business, estimating that a regulatory framework could be seen within the next five years.
Experts have previously warned that the cryptocurrency sector was in dire need of regulation for the industry to see long-term success, with valuations of digital assets swinging wildly over time.
In the UAE, Binance’s Global Head of Market Surveillance Vladimir Contreras and Chen Arad, co-founder and CXO of Solidus Labs, voiced the need for a proper regulatory framework to be implemented, adding that doing so will give investors a greater sense of safety and security while protecting the integrity of the market.
While Arad believes it will take five years to devise and implement a regulatory framework for digital assets in the Gulf country, Contreras said it could actually even take three years.
“With the pace things are moving at in the UAE, I would say within three years. We will have more clarity and a proper framework in the industry,” Contreras said in an exclusive interview with Arabian Business.
“It’s obviously hard to say, but if I can make an educated estimation or assumption, I think that within the next five years. After this bull market, and with the really impressive regulatory and industry innovation that is happening here, then it’s going to be a massive industry in the UAE and it will become a very, very important hub for crypto,” said Arad.
Although some may initially think that regulating crypto and digital assets in general may turn investors away, Contreras believes the contrary. Having clear rules in place can make investors feel more secure, making the country a more appealing place to invest.
“The UAE and the whole industry is ready for regulation,” said Contreras. “What the authorities have been doing here in recent years is great and it is going to benefit the economy as well.”
His comments come as the crypto sector tries to recover from 2022 which saw a spate of bankruptcies and collapses which has stoked calls for better regulation, especially in the US – among other markets.
“The industry is thirsty for regulatory clarity. The UAE, without a question, is ahead of the curve,” said Arad.
“We [Solidus Labs] just put out a detailed compliance playbook for how companies can utilise our solution to comply with regulation and in order to do that, there needs to be clear regulatory requirements, which is not given in a lot of other places.”
However, he stressed that regulatory clarity is still an evolving concept in this seemingly new industry of decentralised finance.
“It’s such a dynamic industry. It’s not like regulators will put out requirements and everything is going to be clear.”
Too many cooks in the kitchen?
One of the biggest challenges facing crypto market regulation is over-regulation, the experts said.
“It’s very difficult to have too many regulatory authorities out there. So sometimes, you don’t know where to go, which is a challenge,” Contreras said.
“I think innovation will lead the way and shape the UAE’s regulatory environment. We need to remember that we’ve got the Virtual Assets Regulatory Authority [VARA], SCA, and FSRA. So a lot of regulations, a lot of regulations. I think they need to work closely together to ensure they could implement something that is applicable to the whole UAE because right now, it is not.”
The decentralised nature of the crypto ecosystem has made it challenging to enforce regulatory measures. Despite the existence of multiple regulatory authorities, there is often confusion about which agency to approach, and some authorities lack the power to enforce regulations on people from other jurisdictions.
This issue is further exacerbated by the intertwining of on- and off-chain transactions, as well as the growing popularity of decentralised finance (DeFi). While the current regulatory coverage may be sufficient, it’s crucial for authorities to have the power to act and enforce regulations in order to maintain the integrity of the crypto ecosystem.
“We need to work together in the industry to actually close this gap,” Contreras added.
In the UAE specifically, the market is already quite regulated, he said, meaning that market abuse and insider trading can be efficiently prevented.
“The policies and regulations are there, but companies just need to follow them and collaborate with the regulators once again and also be open minded and adaptable to changes that are happening in the industry because it’s an evolving industry, so many things are happening, and there are so many products.
“So, sometimes it is quite challenging just because you are monitoring market manipulation in one market. I mean, the challenges are different in different markets. So how do we close that gap? That’s where the technology comes into play. In this sense, so we need holistic systems that allow us to actually close the gap.”
Echoing Contreras’ sentiment, Arad also agreed that understanding market abuse can be very difficult due to the cross between on- and off- chain elements.
“In a way, digital assets are the first asset class where an asset is not native to any one particular exchange. That means that anyone can really open an exchange wherever they want, they can trade, and they can trade Bitcoin very easily on-chain or off-chain.”
Currently, about 80 percent of the activity in the market is off-chain, creating a “complex reality” for many who use Solidus Labs’ system to monitor for market abuse.
“It’s critical to have crypto native systems that can unify and understand risk both across on and off chain that are utilising new technologies like machine learning in order to not only look for forms of behaviour that we know from traditional markets like wash trading, spoofing, and pump and dumps, but also we’re constantly looking for new kinds of anomalies that are unique to crypto,” Arad explained.
“In addition to just following regulation and see what your regulator requires – usually a regulator would require a comprehensive, holistic, thoughtful programme that is constantly updated, etc. – you also just need to be proactive, and really look for crypto native tools that address the crypto native challenges.”
Global framework
The experts’ comments came on the side lines of the DACOM Summit in Dubai on Thursday which brought together several industry experts from across the globe, including former members of the US Security and Exchange Commission and experts from the UAE’s Virtual Assets Regulatory Authority (VARA).
As a “massive ambassador” for regulation, Contreras believes that we global framework is just what the industry needs as everyone will stand to benefit from it.
“It will create clarity and give people guidance on how they can shape their compliance strategies,” he said. “I’m very happy to welcome the European Parliament’s MICA [Markets in Crypto Assets] which is, in my view, going to set the benchmark for the industry standard. Even though regulations are already out there, this is a massive step for the industry.”
Proposed in the EU, MICA advocates for crypto regulation in an effort to create a harmonised framework for digital assets in the EU in order to address issues related to consumer protection, market integrity, and financial stability.
“MICA is a very important development in Europe and I agree that it will probably set the benchmark. It already addresses very advanced elements which is interesting to see because ultimately, it is a cross border framework because it’s in the EU so it will be interesting to see how it is ratified through the different member states,” Arad said.
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