The perception of digital assets on the part of investors has changed significantly. Once viewed with skepticism, digital assets – and blockchain – have cemented their place in the financial mainstream, with a number of crypto companies such as Coinbase going public, and some of the world’s largest asset managers developing crypto services. It is now 13 years since cryptocurrencies first entered public consciousness, in the form of the Bitcoin white paper. This period has seen plenty of innovation, including the creation of an entire industry of decentralized finance (Defi), the rapid rise of tokenized assets in the form of non-fungible tokens, or NFTs and a virtual reality web experience powered by blockchain in the form of the metaverse.
Today, the digital assets sector stands at an inflection point. The barriers that once hampered engagement and adoption of digital assets and blockchain have been eroded. The availability of mature institutional-grade infrastructure and regulated counterparties in the industry offers a secure and trusted means for stakeholders to access the digital asset sector. Regulation in our opinion is the final hurdle. Corporates, institutions and investors need clarity to operate in the space, and countries with clear legislative frameworks have already established themselves as leaders in attracting such activity, such as Switzerland. Europe as a whole has also made progress, with the EU’s Market in Crypto-Assets framework at advanced stages in the legislative process. In Singapore, the Payments Services Act provides clear guidance for crypto companies to apply for a license to establish operations in the country. The US is stepping up its game as well.
The demand for digital asset services has accelerated the pace of progress among many regulators. However, it is in our opinion those jurisdictions that move early on regulation and provide a supportive environment for blockchain companies to operate that are most likely to reap the benefits. Economic power is increasingly built on the development of technology and jurisdictions that can tap into the power of blockchain, as the next iteration of foundational technology may well supplant the existing global tech centers of gravity.
The United Arab Emirates (UAE), a country that has developed a comprehensive regulatory framework for blockchain and digital assets, is one such example poised the capitalize on this opportunity. The UAE has a number of features that position it as an ideal global hub. It is ideally positioned in terms of existing business networks to take advantage of connectivity between the Middle East, North Africa, India and the West. Its role as a regional financial hub can also enable its digital-assets sector to flourish.
The Middle East’s second-largest economy, the UAE has a clearly defined strategy on establishing itself as a global leader on blockchain, which prioritizes both bringing crypto investment to the UAE, as well as encouraging indigenous engagement and innovation in blockchain. It has already proved to be successful in implementing blockchain as a foundational technology throughout public services, with estimated annual savings of 11 billion dirham (3bn dollar) in transaction and document processing by doing so.
To complement this strategy, the country has developed a comprehensive regulatory framework for Abu Dhabi and Dubai to cultivate investment in digital assets on its shores. In 2018, the Abu Dhabi Global Market’s Financial Services Regulatory Authority already established a virtual asset framework for trading digital assets by businesses, including exchanges, custodians and brokers. Abu Dhabi is focused on providing the sector with a sandbox where they can test their products in a live environment. Much like its fellow crypto hub in Southeast Asia, license applications have been in high demand, with only a select few companies meeting the rigorous regulatory standards necessary to operate in the country. The country in our opinion has struck the right balance between encouraging crypto enterprises and investment, and ensuring that only the most innovative, compliant and secure operators set up on its shores. Three regulated digital assets exchanges have already set up shop in the state, with license applications expected to be granted for a number of other operators during the first half of the year. The scale of Abu Dhabi’s vision for a blockchain-powered future goes well beyond regulation. Mubadala, one of the largest sovereign wealth funds in the world, is investing in suitable companies in the blockchain industry. This holistic approach to the industry is in our opinion likely to pay dividends for the emirate, as it cements its place as a blockchain hub.
It is clear to us that the UAE has positioned itself as a leader in the next wave of technological transformation. Its strategy presents a useful blueprint for other countries to follow suit, and may indicate the dangers of being left behind for those who fail to regulate and innovate fast enough and for those governments who believe, that a tax machine is still a technology standard in the 21st century.