In March 2022, the United Arab Emirates (UAE) was designated as a high-risk country by the global financial crime watchdog Financial Action Task Force (FATF) and added to their “grey list” of countries subject to increased monitoring to counter financial crime. Despite the greylisting, many crypto companies such as Binance have set up shop in Dubai in recent months. Lured by the crypto-friendly regulation. This is dangerous for all other regulatory regimes, merchants, and consumers.
Crypto-Friendly Regulation
While the FATF greylisted UAE, the country announced the implementation of an independent crypto regulator: the Virtual Asset Regulatory Authority (VARA) in March 2023. UAE plans to become a global financial power using the dawning crypto sector as leverage. Crypto firms must obtain authorization and relevant licenses to operate in Dubai.
More and more crypto companies are setting up shop in Dubai based on the new crypto regulation. For example Binance, ByBit or most recently the crypto lender Nexo.
However, all companies are currently under general suspicion of money laundering due to the UAE’s greylisting. Payments to and from UAE companies and their bank accounts can no longer be easily processed by non-UAE financial institutions.
The REAL-TOK Case
Most recently, one of the largest Initial Coin Offerings (ICO), the real estate token REAL-TOK (RLTO), has also announced its intention to issue tokens worth up to €1.2 billion via Dubai. The operators of REAL-TOK are real estate investors from in Vienna, Austria and actually have nothing to do with Dubai (read our REAL-TOK report here). They have chosen Dubai as the location probably with the intention to escape the regulatory hurdles in Europe. This could turn out to be a wrong assumption and cause several problems at once.
On the one hand, UEA and thus Dubai is classified as a high-risk jurisdiction. Deposits to accounts of companies in these jurisdictions have to be controlled particularly closely by the financial institutions involved. Thus, for example, the purchase of RLTO tokens for residents of the EEA region via bank or credit card could prove to be impossible.
In June 2023, the HM Treasury in the UK advised that the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 require the UK-regulated sector to apply enhanced customer due diligence in relation to high-risk third countries, including UAE. The same restrictions that apply in the UK also apply in the EU. Thus, the transfer of money to and from UAE is subject to very restrictive conditions.
In addition, a Dubai-regulated cryptocurrency issuer may not offer its tokens publicly in other regulatory regimes without further approval.
Preliminary Conclusion
The crypto-friendliness in UAE is quite commendable. However, it also poses the risk that illicit operators may want to attack customers in other regulatory regimes from within the UAE and launder the illicit proceeds through banks in Dubai.
However, UAE-regulated crypto firms will pretty much face problems with investors wanting to make deposits from non-UAE jurisdictions because of greylisting. Merchants who process payments through UAE-registered crypto payment processors could have difficulty receiving their funds.
In this respect, it is questionable whether locating in Dubai will have advantages for crypto companies or whether it will not be a significant disadvantage. We suspect the latter.
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