When the world's biggest cryptocurrency exchange decided in December to set up an advisory body in Dubai, local bitcoin enthusiasts celebrated. Binance's presence would be the jewel in the city's crypto crown as it tried to position itself as a hub for the digital asset.
The crypto exchange's CEO Changpeng "CZ" Zhao — recently ranked as one of the richest people on earth —even tweeted a photo of himself in a traditional white Emirati robe, the kandura, captioning it with an emoji of the Emirati flag.
But despite Dubai's efforts, the emerging regional crypto hub is not in the United Arab Emirates.
Binance isn't even licensed as an exchange in Dubai. It did, however, recently get approval in principle to become a fully regulated, centralized crypto exchange in neighbouring Bahrain.
Unlike the UAE, the small Gulf state has banking regulations for crypto in place, and that is why crypto companies in the region are setting up there, says Talal Tabbaa, the CEO of CoinMENA, an exchange licensed by the Central Bank of Bahrain (CBB).
By accepting cryptocurrencies as an official method of payment, the CBB allows established banks to work with exchanges so that customers can withdraw and deposit their money easily. In most countries, digital assets fall under the jurisdiction of securities regulators, not central banks, and only El Salvador recognizes a cryptocurrency — bitcoin — as legal tender.
The CBB's approach contrasts with the Central Bank of the United Arab Emirates (CBUAE), which doesn't recognize it as a means of payment.
"In general, most of the 'cryptocurrencies' are not commonly accepted as a medium of exchange in any advanced economies or are not for general payment purposes," the CBUAE told CNN in a statement. "Nevertheless, as is the case with most global financial regulators, CBUAE remains fully vigilant on the rapid developments in this area and agile in its regulatory response."
"That's the biggest obstacle," says Tabbaa, who lives in the UAE, referring to the lack of banking regulation in the country. "If banking was sorted, then Dubai could be the number one destination for crypto."
CoinMENA isn't alone in Bahrain. Rain, one of the leading cryptocurrency platforms in the Middle East with a trading volume of more than $1 billion during the first half of 2021, is also Bahrain-based and licensed by the central bank.
"In response to the growing demand for crypto assets, the Central Bank of Bahrain has been one of the Middle East's early adopters in the crypto-assets space," CBB Governor Rasheed M Al-Maraj told CNN.
Other countries are more sceptical. China said in September all cryptocurrency-related business activities in the country are illegal while the UK limited Binance's operations last summer. Soon after, the United States Securities and Exchange Commission said the cryptocurrency market is "ripe with fraud, scams and abuses in certain applications."
India's crypto industry is booming among young investors, but the government there has yet to decide how to regulate the industry, and the possibility of a ban lingers.
Bahrain's financial sector makes up 17% of its non-oil GDP, and with that in mind it set up a comprehensive framework for licensing crypto exchanges back in 2019, quickly moving ahead of Gulf rivals.
The Dubai Multi Commodities Centre (DMCC), a financial services provider, has set up a special economic zone for crypto-related projects that promises zero taxes and easy visa access. More used to dealing with the diamond trade, the DMCC CEO, Ahmed Bin Sulayem, bemoans the pace at which the central bank is acting on what he sees as the next big gold rush.
"We can only go at the pace of the weakest link in the UAE, we cannot overrun them," he said. "I'd rather have a successful crypto ecosystem in the medium to long term than rush into it and lock horns with the central bank."
Dubai's openness and willingness to build a regulatory environment for cryptocurrencies makes the Gulf city "a perfect home for [crypto firms]," Bin Sulayem said.
And indeed, Dubai still offers incentives for entrepreneurs; 0% capital gains tax, safety in a complex region and a carefree lifestyle in the sun. Tabbaa, of Bahrain's CoinMENA, lives in Dubai and the CEO of Binance, who awaits final approval for a Bahraini license, is reported to have recently bought a home in the city.
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