Power Letters 2024: Caroline Malcolm, VP of Global Public Policy, Chainalysis

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The year 2023 was an intriguing one for digital assets. The so-called ‘crypto winter’ has thawed, with Bitcoin — the de facto barometer for market performance — recently crossing the $46,000 mark on the back of the landmark SEC decision to approve Bitcoin spot ETFs.

Read: US SEC approves bitcoin ETFs in watershed for crypto market

However, 2022’s collapse of FTX cast a long shadow, and recent AML (anti-money laundering) crackdowns by the US Justice Department have highlighted that this is still a segment experiencing growing pains.

MENA crypto markets are maturing

Closer to home, developments in the Middle East crypto space indicate a deepening level of maturity. In our latest Geography of Cryptocurrency Report, Chainalysis researchers found that institutional investment now accounts for the majority of cryptocurrency transactions in the UAE. Moreover, across the MENA region, the UAE was one of the only countries to see a higher share of crypto activity taking place on decentralised exchanges (48 per cent), rather than on centralised exchanges (46 per cent).

In neighbouring Saudi Arabia, the crypto economy grew more this past year than any other country, with a year-over-year transaction volume growth of 12 per cent. Saudi Arabia was one of just six countries to see any year-over-year transaction volume growth over the period that our researchers studied.

Regulation provides needed clarity

Historically, as new technologies have emerged and spawned a variety of market-disrupting applications, regulation has had to evolve to keep up. Think of Uber — a textbook example of a tech up-and-comer that disrupted its sector through offering important benefits for consumers, which also forced regulators to reactively assess the frameworks they had set in place.

In the case of the digital asset segment, as it has matured beyond its early years with greater retail adoption, effective regulation has become even more important.

With bans increasingly recognised as difficult to enforce and limited in their ability to meet complex policy goals, as we have seen in many countries across the world, there is further urgency for regulators to provide clear rules to foster safe markets with consumer protection guardrails that support the growth of an innovative digital assets landscape.

The UAE has been at the forefront of embracing emerging technologies. By setting up specialised regulatory regimes, such as the Financial Services Regulatory Authority of Abu Dhabi Global Market and more recently, the establishment of a bespoke regulator in Dubai, Virtual Assets Regulatory Authority (VARA), the UAE has showcased a forward-thinking approach to harness and regulate the crypto sector.

Few countries in the region now boast crypto regulation that is as comprehensive as that of the UAE. For example, VARA with its 12 rulebooks clearly outlines everything from market conduct and marketing guidelines to information management procedures and anti-money laundering laws.

Instilling confidence is key, says Chainalysis’ Malcolm

Consequently, this clarity has enabled virtual asset service providers (VASPs) to know exactly where the UAE government stands and thus map out their long-term business roadmaps with confidence. It’s no surprise then that many large crypto businesses are setting up in the country.

The positive impact of forward-focused regulations is also evident in consumer behaviours. The outsized share of institutional-size investors in the UAE is an indication of growing confidence and the consequent eagerness from entities and high-net-worth individuals to add cryptocurrency to their investment portfolios. The growing popularity of DeFi — which represents the cutting edge of blockchain-based applications in many ways — further validates the success the country has had in attracting more sophisticated market participants.

What lies ahead…

The UAE government recognises the value and potential for digital assets to deliver a wide range of benefits to both businesses and consumers. With regulations in place, businesses will now be keeping a close eye on what technologies government entities are utilising to manage the risks associated with digital assets.

If experience is anything to go by, the government will set the pace, and the private sector will follow suit. We have certainly seen this at Chainalysis.

Our partnership with the UAE Ministry of Artificial Intelligence, Digital Economy and Remote Work Applications to provide virtual training programmes for the country’s government entities rapidly led to conversations with prominent financial sector entities who are eagerly waiting in the wings to launch their crypto-centric services. Through 2024 we can expect governments and enterprises to leverage the regulatory clarity in the country and invest in responsibly building out the ecosystems.

Against this backdrop, the UAE’s crypto sector looks to be in high gear on a highway to success. And as more institutions leverage crypto as an asset class, the more innovation we will see in the segment. The potential use cases could rival, or even outdo, traditional finance in placing the UAE at the forefront of global innovation.