Firms lured to Dubai “crypto hub” are regretting it thanks to FTX

It turned out to be the last hurray before the world became aware of the former billionaire’s troubles. FTX’s implosion, which went from a $32 billion valuation to bankruptcy in the weeks that followed, sent crypto markets into a tailspin and drove billions of dollars in outflows from some of the largest global exchanges.

The aftershocks have particularly resonated in the United Arab Emirates — particularly Dubai, which has been working to lure the world’s largest corporations with its crypto-friendly policies. While some financial centers tightened regulations, many UAE officials promoted virtual assets as a gold mine for economic growth and as a linchpin of the national diversification strategy beyond fossil fuels.

That helped position the Gulf state as a crypto hub, attracting industry heavyweights while enticing bankers, lawyers, and tech executives to switch jobs. Real estate agents reported an infusion of cryptocurrencies into luxury properties. Yet the end of the bull market brings out some regret at the turn of events.

Local exchanges Rain Financial Inc. and BitOasis have reduced staff numbers in Dubai. Among those reconsidering their foray into the sector is Hazem Shish, a former banker at Barclays Plc who recently launched a crypto hedge fund in Abu Dhabi. Though it performed well in its early months, challenges raising institutional money amid the market turmoil prompted it to step down from managing the main fund, according to people familiar with the matter, who requested anonymity because the information is private.

Shish declined to comment.

FTX was one of the first companies to be licensed by Dubai’s virtual asset regulator in an attempt to attract business, and the exchange established its regional headquarters in the city.

At the time, Helal Al Marri, director-general of the Dubai World Trade Center Authority, which houses VARA, praised the move, saying it followed a rigorous assessment months before the firm went bust.

With FTX and Bankman-Fried now facing investigations from the US to the Bahamas, officials have distanced themselves from that decision, even removing the license details from the regulator’s website.

Some links were harder to delete from view.

Banners promoting an FTX sponsored party during the Abu Dhabi Grand Prix lined one of Dubai’s most exclusive beachfront streets. At the circuit, spectators donned Formula 1 hats decorated with the FTX logo.

twin strokes

The company’s collapse was the second major blow to Dubai’s efforts in a few months. In June, hedge fund Three Arrows Capital imploded in one of the biggest crypto trading busts of all time, weeks after it received a provisional license in the city.

The drama has spread to other wealth managers.

Several crypto hedge funds recently launched in the UAE had dumped all of their client money on FTX, forcing an insane struggle to exit the platform before halting withdrawals to avert their own collapse, according to those with the Matter of familiar persons.

Roughly 4% of FTX’s global clients are based in the UAE, according to court filings in the company’s bankruptcy case, making it one of the ten most impacted jurisdictions.

FTX and Three Arrows Capital did not have extensive licenses, which limited the local consequences to some extent. The structure of Dubai’s virtual asset regulator aims to open the doors to operations for the largest companies, but initial licenses only allow for a limited range of services.

Still, the incidents have sparked debate over whether authorities were too nimble in their attempt to lure crypto firms and lend legitimacy to companies that have since gone bust.

“As a regulator, there is always a risk that when something goes wrong, it looks really bad,” said Dapo Ako, a former compliance specialist at UBS Group AG, whose firm J. Awan & Partners helps crypto firms set up in the UAE . “But it is also an opportunity to rethink the framework conditions. If Lehman didn’t fail, we wouldn’t have new banking regulations.”

A VARA official said FTX had not completed the approval process to onboard customers or begin operations. In a July statement, they said the license would allow FTX to provide crypto derivatives products and trading services to qualified institutional investors.

Regarding Three Arrows Capital, the VARA representative said that a preliminary approval is an “approval of concept” that considers the credibility of other licensing jurisdictions, but that steps for a more complete license have not progressed.

In response to questions, a UAE official said there was an obligation to enable mass economic empowerment with an emphasis on consumer protection, cross-border financial security and economic stability.

A spokesman for FTX declined to comment.

“A Walking Time Bomb”

Much of the UAE’s bet on crypto focused on Binance Holdings Ltd. and its Chief Executive Officer Changpeng “CZ” Zhao.

The world’s largest crypto exchange has found a more open-minded audience in the country, so much so that the 45-year-old executive made Dubai his home base and soon found his feet among the country’s power brokers. The United Arab Emirates granted several licenses to Binance, and more than 500 of the company’s employees settled in the Gulf state.

After FTX’s demise, Binance’s share of global crypto trading volume rose to nearly 50%, according to data from CryptoCompare. However, the speed of FTX’s unwinding has sparked debate about the health of centralized crypto exchanges, and traders have withdrawn funds from such venues.

At a summit in Abu Dhabi on Nov. 16, economist Nouriel Roubini, a crypto critic known as “Dr. Doom” called Binance a “running time bomb”, blamed regulators for issuing the company’s licenses and urged officials to remove Zhao from the UAE.

A day later the CEO of Binance answered on stage at the Milken Institute conference in Abu Dhabi: “What’s a word for unimportant people?” he said. “We don’t care.” The dust cloud came as the exchange received more approvals from Abu Dhabi Global Market.

Stricter regulation?

Since Zhao’s arrival last year, influential players from Kraken to OKX, Bybit and Crypto.com have established their presence in the UAE, aligning with the nation’s ambitions for a digital economy that creates more non-oil jobs. Still, UAE officials have privately raised concerns about the pace of regulatory approvals – that they may have moved too quickly and failed to identify the Three Arrows Capital and FTX blasts, people familiar with the matter said.

The Dubai Multi Commodities Centre, which has come under scrutiny from the US Treasury for its looser regulations, attracts the lion’s share of crypto companies — more than 500, according to a DMCC spokesman.

“My expectation is that, given recent developments, regulators will be more cautious and conservative overall,” said Gabriele Dunker, the Vienna-based founding partner of Financial Transparency Advisors GmbH, which previously advised the UAE government.

UAE crypto players are now on the alert for updates from regulators.

Dubai’s VARA plans to announce its CEO in the coming weeks and intends to hold further consultations with key stakeholders before the end of the year, people familiar with the matter said.

Meanwhile, Abu Dhabi’s efforts to finalize federal legislation on crypto have been delayed as authorities navigate a lobbying push from industry insiders, as well as scrutiny by international bodies over money laundering and consumer protection concerns.

For his part, the CEO of Binance has initiated a system of proof of reserves to support “full transparency”. However, his company has declined to disclose the full details of its corporate structure.

“We have the largest offices in Dubai and Paris, so you can think of those two as global hubs,” Zhao told Bloomberg TV on Thursday.

A Binance spokesman said the exchange is expanding its team in the UAE and is in the midst of a corporate restructuring aimed at providing regulators with further clarity on the organization.

Close calls

For now, like some financial hubs, the UAE is sticking to its belief of becoming a crypto hub. Hong Kong has reiterated its desire to attract virtual asset companies, while Japan has proposed relaxing token listing rules. Singapore, on the other hand, has expressed its preference for use case-based blockchain technology while warning against retail crypto trading.

Abu Dhabi funds, including Mubadala Investment Co., had set up committees to investigate investments in the crypto ecosystem. They felt vindicated in their cautious approach and plan to proceed cautiously in the coming months, people familiar with the matter said.

A Mubadala spokesman declined to comment.

But other entities controlled by UAE National Security Advisor Sheikh Tahnoon Bin Zayed have maintained a more aggressive approach and pushed ahead with investment plans in the area. Zhao and his team met with potential backers, including companies linked to Sheikh Tahnoon, who oversees a major financial empire in Abu Dhabi, Bloomberg reported on Tuesday.

And earlier this month, just as Bankman-Fried was attempting to secure a bailout deal with Binance, Zhao’s colleague Dominic Longman was in Abu Dhabi founding the Middle East, Africa & Asia Crypto & Blockchain Association along with UAE officials supporting their efforts propelled embrace of the industry.

“Abu Dhabi and the UAE are at the forefront of developing innovative and compliant crypto and blockchain companies,” said ADGM Chairman Ahmed Jasim Al Zaabi. “We are pleased to support MEAACBA which will contribute to the development of this dynamic sector.”

– With support from Nicolas Parasie, Leen Al-Rashdan, Suvashree Ghosh and Philip Lagerkranser