UAE's crypto push seeks to draw in high-net-worth individuals

Al-Monitor Pro Members 

Sebastian Castelier

Business journalist covering Gulf economies

July 25, 2022

The United Arab Emirates’ strategy to lure in digital-era wealth via the crypto ecosystem was brought to light by the recent “flood of requests” by wealthy Russians to liquidate billions of dollars of crypto via UAE-based crypto exchanges and turn it into cash or properties in Dubai. Emirati developer Damac Properties started accepting Bitcoin and Ethereum to buy properties. The UAE banks on its appealing tax-free luxurious lifestyle to convince them to call the country home.

However, money-laundering risks embedded in the cryptocurrency industry put the UAE on a hot seat, especially as the Financial Action Task Force (FATF) "grey-listed" the country in March 2022. Globally, illicit financial flow concerns might be overplayed as “almost all cryptos” record data about every transaction in a public ledger, said Standard Chartered’s head of crypto research Geoffrey Kendrick. “It is pretty straightforward to work out who does what. [...] Bitcoin and Ethereum are actually more transparent than cash,” he told Al-Monitor.

Scenario 1: The money-supply era "crypto bubble" bursts, wiping out trillions of dollars from markets. 
 
If cryptocurrency valuations are fueled by central banks' massive liquidity injections since the 2008-2009 global financial crisis, then central banks turning off the cash taps could cause a "crypto crash." The explosion of a possible "crypto bubble" would annihilate part of the UAE's efforts to attract the industry. It would also send shock waves throughout its economy as a "crypto euphoria" has drawn in several bankers and financial executives who did a career pivot into the crypto industry. 

• The "bubble burst" scenario should be nuanced, though. First, deflating extreme leverage has already partially happened as Bitcoin's correlation to the tech-heavy Nasdaq has risen in recent months, signaling investors have already liquidated crypto positions in a similar fashion to tech stock to de-risk portfolios. After spiking intraday above $3 trillion in November 2021, crypto total market capitalization plunged to $1 trillion. “I am not sure bubble is the right word. [...] Crypto is a very volatile asset class, so sharp declines when all asset classes go lower makes sense,” Kendrick said. 
   
  In the UAE, the crypto industry only accounts for a small fraction of Dubai’s diversified economy, and a larger market crash would not wipe out cryptos that have already entered the UAE economy and have been turned into hard cash or real estate. 

Scenario 2: Regulatory competition rises between crypto hubs, and exchanges fly to greener pastures. 
 
Crypto firms have demonstrated agility in jurisdiction-hopping to circumvent regulatory hurdles, which could leave crypto hubs with little room to strictly regulate crypto firms or impose taxes to reap a profit from their presence. For example, Binance, founded in China in 2017, has shifted countries regularly and favored a model of more flexible decentralized regional headquarters over a proper headquarters. Once a go-to destination for the crypto industry, Singapore is falling out of favor after it shut down crypto ATMs and banned advertising crypto. Before it was liquidated during the 2022 crypto crash, Crypto hedge fund Three Arrows Capital planned to ditch Singapore for Dubai. Any pitfall in the UAE could trigger opportunistic crypto firms to leave to greener pastures. 

• The UAE has historically offered investors a reasonably stable business environment, and a state-led crackdown on crypto-related activities is unlikely in the near future. As the years go by, the pool of crypto and decentralized finance (DeFi) talents is likely to increase in the UAE, which would encourage the crypto industry to stick around. On the tax front, the country will start levying a 9% corporate tax, including on crypto firms, but it will continue to honor corporate tax incentives offered to free zone businesses. Companies operating in the Dubai Multi Commodities Centre are exempt from all taxes for 50 years. 

Scenario 3: Governments worldwide take a stricter stance on the crypto industry. 
 
The threat posed by cryptocurrencies on fiat currencies and state-controlled money supply force governments to take a tough stance on the industry and make room for central bank digital currency (CBDC). China's central bank declared all cryptocurrency transactions illegal in 2021. US President Joe Biden signed an executive order in March 2022 calling for proposals within 180 days for supporting the introduction of a CBDC system while introducing new regulations to “ensure the responsible development of digital assets.” 

• In the event of a global crackdown on crypto, the UAE would face the challenge of cooperating to maintain its stature. Following Russia’s invasion of Ukraine, Binance said it would block accounts of individuals sanctioned by Western countries.  
   
  However, Kendrick said: “I think the regulators are going to take a pragmatic approach,” in part because policymakers have acknowledged “huge benefits” of Web3 solutions, while there is “no real way” to stop crypto because it is decentralized. 
   
  Also, similarly to the "bubble bursting" scenario, while stricter regulations on cryptocurrency loom globally, it does not necessarily translate into an exodus of crypto-high-net-worth individuals who moved to Dubai or for them to be penniless. 

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.