Crypto assets are square pegs, and some regulators around the world are trying to fit them into the round holes of the existing regulatory ecosystems. Contrastingly, other regulators are developing new, dedicated frameworks. In this article, we explore the various approaches around the globe to regulating crypto.
Regulatory turf wars
In the US, there seems to be a conflict between the Securities and Exchange Commission (SEC) and the Commodities and Futures Trade Commission (CFTC). Between December 2020 and June 2023, the SEC issued notices to Binance, Coinbase and Ripple, alleging possible securities law violations tied to asset listings and staking services.
Broadly, these notices allege that some of the crypto tokens – such as Binance Coin, Binance USD, XRP, and DASH token – fall under the ambit of securities. This means that such platforms are operating as an unregistered securities exchanges. The Binance notice goes even further and alleges internal fraud, specifically highlighting the commingling of customer funds with an account under the control of an entity associated with Binance’s CEO.
Recently, in July 2023, the US District Court partially ruled in favour of Ripple, determining that while the XRP token doesn’t qualify as a security when sold to the general public, it does hold security status when sold to institutional investors. But, the decision has not been conclusive, as SEC has been given the green light to proceed with an appeal.
On the flip side, the CFTC also claims that Binance gave American users access to derivatives, such as futures or swaps, which can be only traded on regulated platforms. However, Binance recently responded by filing a motion to dismiss the CFTC’s complaint, reportedly stating that the allegedly disputed crypto derivative products were not even offered in the time period as specified in CFTC’s notice.
So, the question is clear, but the answer, not so much. Are crypto tokens securities or commodities? According to the industry, they are neither. But, according to the regulators, they may be both. A momentary sense of resolution had emerged when the US District Court ruled favourably for Ripple. However, this sense of clarity has been derailed again with SEC’s appeal.
What businesses want
Innovation-focussed crypto businesses do not want to get pigeon-holed into traditional definitions of securities and commodities, because this will decide the future of the entire industry across the world. They want to be recognised as a new class of products.
The turmoil in the US has led the crypto industry globally to search for regulatory “square holes” that best identify crypto assets from a regulatory lens.
Stuart Alderoty, Chief Legal Officer at Ripple, in an interview with Blockworks stated, “The first advice you give, the first piece of advice you give somebody who’s thinking about a project, is don’t launch it in the US because the rules are unclear… Go to a jurisdiction where the rules are clear, not light-touch, but clear”.
“Not light-touch, but clear” – this is thought provoking! Businesses are open to the enhanced compliances, provided there is regulatory predictability. So, from an ease of doing business lens, stability and clarity seem to be the most essential feature for crypto businesses in today’s time.
Evolving, bespoke frameworks
So, what are these jurisdictions that provide clear, but not necessarily light-touch regulations?
The European Union (EU) has recently adopted the long-awaited Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA). While robust, MiCA is scheduled for a phased rollout stretching from mid-2024 to early 2025, and its on-ground impact is yet to be seen.
Further, MiCA also omits regulating a vital aspect of the crypto revolution: Decentralized Finance (DeFi). This gap is also highlighted by the Association of Financial Markets in Europe (AFME), an industry body, which emphasises the imperative of recognising and regulating ‘Decentralized Organizations’ (DAOs). This omission creates uncertainty around a regulatory path for DAOs.
Indeed, other countries such as Estonia, Lithuania, Croatia, Romania, Cyprus, British Virgin Islands, Seychelles, among others, offer a plethora of light-touch regulatory frameworks for the crypto industry, but some of them may not be comprehensive or clear enough.
Against this background of instability, the UAE sits in the middle of the spectrum, presenting itself as the stable, predictable and yet enabling jurisdiction – “not light-touch, but clear”. At KARM, we call it the UAE falcon’s open arms but sharp claws approach. This is on account of multiple reasons.
Firstly, the UAE continues to sharpen its arsenal of regulations. The Abu Dhabi Global Market (ADGM) launched its crypto framework way back in 2018, and continues to build on it. This was followed by the Dubai International Financial Centre’s (DIFC) framework in 2022. Most recently, in 2023, the Virtual Assets and Related Activities Regulations 2023 of the Dubai Virtual Assets Regulatory Authority have been issued.
These frameworks across the UAE cover not just crypto assets (or virtual assets, as VARA and ADGM they call them), but also touch upon the domain of DAOs within their regulatory frameworks. The Central Bank of UAE has also provided guidance for licenced financial institutions (such as banks) when dealing with virtual assets and virtual asset service provider risks, providing much-needed operational clarity.
Secondly, the UAE government has been a frontrunner in providing policy support to the sector. Way back in 2016 itself, the Dubai Blockchain Strategy was launched. It stated, “Blockchain will do for transactions what the Internet did for information.” Shortly after, the Emirates Blockchain Strategy sough to transform 50 percent of government transactions into the blockchain platform by 2021.
Now, the UAE Digital Economy Strategy aims to double the contribution of the digital economy to the UAE’s GDP from 9.7 percent as of April 2022 to 19.4 percent within 10 years. At Emirate level, the Dubai Metaverse Strategy aims to turn Dubai into one of the world’s top 10 metaverse economies.
The emirate of Ras Al Khaimah announced the RAK Digital Assets Oasis, Hub71 launched the “Hub71+ Digital Assets” initiative, and DIFC launched the AI and Web3 Campus, all dedicated to advancing the Web3 ecosystem in the UAE. The government is also walking the talk and adopting blockchain technologies in governance. For example, the Central Bank of the UAE has launched the Central Bank Digital Currency (CBDC) strategy.
Lastly, the UAE has emerged as a hub where investors, entrepreneurs and talent co-exist to birth new ideas. As per a recent report by CryptoOasis, the UAE has 1,650 blockchain organisations and more than 8,300 people are employed in the sector. Further, according to research by Recap, Dubai emerged as the second most crypto business-ready city globally.
Thus, while on one hand, web3 and crypto businesses are fighting a crypto winter, on the other hand, they are faced by a regulatory cold shoulder by several jurisdictions. In this backdrop, we hope that the UAE desert sun will continue to give the sector a warm welcome!
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