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Dubai: The UAE is fast emerging as the digital finance capital of the region and a global digital hub, helped by conducive regulations, government leadership and talent inflow.

The UAE is driving digital transformation with the adoption of digitization across public and private sectors.

The UAE government recently approved a Digital Economy Strategy that aims to increase contribution of this sector to 20 per cent - more than doubling the current target of about 10 per cent in 10 years.

Also, the emergence of blockchain-based financial transactions and development of regulatory frameworks for digital assets at onshore and offshore jurisdictions within the UAE gives it a clear competitive advantage in digital finance.

Metaverse transition

As Metaverse becomes the centre of digital transition for economies and enterprises, it does not yet have an industry-wide definition. It can be thought of as one conceptual iteration of the internet supporting a collection of real-time applications and experiences across devices.

As businesses prepare for the Metaverse, the next generation of the internet (Web3) - which combines virtual reality, virtual money and virtual transactions - the UAE is set to emerge as a leader in Metaverse finance (MetaFi).

MetFi is a combination of decentralized finance (DeFi), centralized finance (CeFi), and traditional finance (TradFi), with new products designed to meet the unique needs of the new economic ecosystem.

Dubai/UAE has been emerging as the DeFi/Web3 hub in the past 12-18 months, due to new licensing regimes as well as the influx of Web3 talent during COVID-19

- Ronit Ghose, Global Head of Banking, Fintech and Digital Assets at Citigroup

Financial services in Metaverse

Financial services will play an important role in the evolution from capital formation to supporting commerce within the Metaverse. Fundamental to its economic infrastructure would be a high-transaction throughput financial infrastructure, necessitating need for payment rails in the Metaverse. Financial institutions can also play a role in providing liquidity, including for certain DeFi protocols as well as financing in the Metaverse.

The UAE’s banking sector has witnessed rapid developments in digital transformation with digitization of existing services, a number of digital-only services, and blockchain-based transactions.

Full steam on digital

According to Citibank’s Digital Money Index, the UAE is ranked fifth globally, behind Switzerland, Luxemburg, Hong Kong and Singapore. The UAE is far ahead of its Gulf peers with Qatar at 10, Bahrain and Kuwait at 31 and 33, respectively.

Metaverse readiness

Ghose believes UAE’s digital money readiness potentially ties into the Metaverse, which is emerging as the next potential big-tech. Metaverse combines the physical and digital worlds in an immersive manner – and not purely in the virtual reality space. It would require countless new technologies to come together, including applications around Web3, DeFi and non-fungible tokens (NFTs).

Enterprise use cases of the Metaverse will likely include internal collaboration, client contact, sales and marketing, advertising, events and conferences, engineering and design and workforce training.

What is DeFi?
Decentralized finance (DeFi) refers to an open and programmable financial system built on smart contracts, which allows users to engage in economic activities without intermediaries.

Smart contracts refer to self-executing computer programmes stored on permission-less blockchain. Each protocol on the DeFi is made up of smart contracts that work together. This differs significantly from traditional financial transactions - smart contracts will do exactly what the user has coded and may include a conditional element.

DeFi can help unlock the value in NFTs by means of its use as collateral for lending, especially high-value NFTs that today cannot be unlocked without an outright sale. Fractionalization of NFTs also brings in more liquidity, by combining them with tokens that can be traded in peer-to-peer liquidity pools.

DeFi use cases could include all financial/economic transactions currently undertaken in the traditional world.