Dubai: After crypto markets went into a downward spiral last year, regulators worldwide doubled down on setting up or enforcing safeguards. But has this left companies and investors uncertain of the digital currency’s future? Contrastingly, it has brought about stability in the sector. Here’s how.
The industry has been shrouded in uncertainty after a number of high-profile bankruptcies in the US, which included the once-prominent crypto exchange FTX, crypto-focused banks Silvergate Capital and Signature Bank, and Silicon Valley Bank, which had a lot of crypto start-ups as its customers.
These collapses are making a compelling case for greater regulation of the global crypto market, industry experts agree, and as part of their mandate to protect users of financial services, central banks have begun to assess how they can regulate the use of these tokens in most key economies.
Why the crypto industry is in need for regulation now?
“By any measure, 2022 was a terrible year for crypto, with more than $2 (Dh7.35) trillion in largely speculative market value evaporated,” noted Dante Disparte, chief strategy officer, head of global policy at US-based Circle Internet Financial as part of World Economic Forum’s 2023 annual meeting.
“Meanwhile, policymakers who have been sounding an alarm about cryptocurrency’s excessive risks, while failing to create sensible regulations, have been vindicated by not one, but multiple large-scale failures.”
The World Economic Forum had flagged earlier that the growing adoption of cryptocurrencies and its ‘decentralised’ nature (explained below) has been posing “unprecedented” challenges for financial and capital markets regulators, consumer protection and privacy bureaus worldwide.
As there is no central authority, the anonymous nature of ‘decentralised’ cryptocurrencies have made it somewhat of a preferred financial instrument for criminals. While many investors rely on exchanges to store their cryptocurrency, theft could result in losing one's entire investment. Due to the lack of coherent regulations, there are few protections against unethical practices.
Also, unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent. This is why there is increasing concern that the regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both.
Crypto market downturn calls for regulation
The need for digital asset regulation has become more prevalent in the current market downturn, with the risk of trading in virtual asset markets having been highlighted over this past year as several major US crypto exchanges Celsius, Voyager Digital and most recently, FTX collapsed.
“Regulation is needed to protect consumers' financial assets as well as make the market a safer place overall. Not only does this instil confidence in those trading in the market, but it also increases the attractiveness of the industry, facilitating wider adoption of crypto services,” said Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“Because of a poorly regulated industry, billions of dollars in value of crypto assets have been lost by customers locked out of their accounts or unable to withdraw funds. The mistakes of the past have undoubtedly damaged the public opinion of the crypto industry. To restore trust, it is necessary to introduce regulation that protects people’s assets.”
UAE pushes ahead with crypto regulation
With both Dubai and Abu Dhabi moving ahead to position themselves as hubs for cryptocurrencies, new guidelines are being set out, ensuring all entities planning to offer one or more crypto-related services in the jurisdiction must seek the relevant authorisation and licenses.
“I can speak on behalf of the industry when I say that the virtual assets sector is extremely keen on operating in a regulated environment, especially after the events of last year,” said Tim Byun, global government relations officer at Seychelles-based OKX, the world’s second largest crypto exchange.
“We expect to see customers, investors and others demanding greater corporate governance in virtual assets,” added Byun, when speaking about how Dubai is making crypto regulation even more strict after the collapse of FTX. (OKX has been operating in the virtual asset space in Dubai since last year.)
The study indicated that 34 per cent of the UAE population adopted crypto, which meant that one in three people living in this country either used or owned cryptocurrency last year. This is a considerable spike from the 10 per cent crypto adoption rate recorded in 2020.
Dubai, Abu Dhabi has new regulations in place
Last year, the Dubai Virtual Asset Regulation Law was set up as an advanced legal framework to protect investors and provide international standards for industry governance. It also established the Virtual Asset Regulatory Authority (VARA) as an independent body to regulate the sector.
“Having a specialist regulator like VARA that has investor protection at its core, but is also working with the industry to ensure sustainable growth is a welcome step,” added Byun. “Additionally, issuance is a regulated activity under the VARA regime, to allow consumers to make a more informed decision on new tokens being launched in Dubai.”
The Financial Services Regulatory Authority (FSRA), the regulator of Abu Dhabi's financial hub, the Abu Dhabi Global Market (ADGM), have set out clear guidelines on its approach to virtual asset regulation and supervision to outline its expectations for the asset class and service providers in the sector.
Verdict: More regulation to safeguard investor funds better?
So will more crypto regulation make crypto exchanges more transparent and safeguard investor funds better? “It certainly will; regulators all over the world learn from historical debacles,” agreed Byun, while detailing the “significant learnings” made from the different financial crises since 2008.
In its efforts to rebuild trust, OKX has, for example, instituted monthly disclosure of its proof of reserves, Byun revealed, in line with industry experts calling for more exchanges to follow top crypto exchange Binance's move to boost transparency with its detailed holdings disclosure after the collapse of FTX on similar grounds.
When asked how cryptocurrencies will be further regulated in the near-term, Byun opined that certain virtual asset activities can extend the scope of banking, securities or commodity regulations, as well as payment services. “As a result, it depends on the underlying circumstances,” he added.