Here’s why MENA is world’s fastest-growing crypto market

Cryptocurrency is more than just a new asset class, it represents a fundamental change in how assets are managed and verified

The Middle East region is one of the fastest-growing cryptocurrency markets in the world, valued at a projected $389.8bn between July 2022 and June 2023, blockchain researcher Chainalysis said in a report last September.

Though the region’s crypto footprint is relatively small in global terms, according to crypto exchange platform Bitget, adoption has skyrocketed with around 500,000 daily traders. The adoption of digital assets in the Middle East is being accelerated by young, tech-savvy adopters with relatively high disposable incomes who are already confident of the value of cryptocurrencies.

Considering these adoption trends and robust regulatory landscapes, the region has emerged as the Wall Street of the crypto market.

GCC countries, especially the UAE and Bahrain, have significantly invested time and resources to burnish their image as emerging crypto-friendly hubs – efforts that have attracted some of the top names in the industry to the region including Binance and OKX.

“The UAE has turned itself into a global crypto hub by passing innovation-friendly regulatory frameworks that allow groundbreaking crypto platforms to develop with oversight that keeps consumers safe,” according to Chainalysis.

Industry experts say the UAE is a valuable example of how regulatory clarity and rules designed to allow innovation can enable countries to establish themselves as crypto hubs, bolstering the local economy.

With a market value of $2.53tn as of May 17, 2024, cryptocurrency is more than just a new asset class, it represents a fundamental change in how assets are managed and verified.

Blockchain technology, a decentralised ledger system of all transactions across a peer-to-peer network that enables participants to confirm transactions, has made verifiable digital ownership a reality, a feat that was unattainable before its inception.

Staying ahead of the curve

The fall of crypto titans – Binance’s Changpeng ‘CZ’ Zhao and FTX’s Sam Bankman-Fried (SBF) – sent shockwaves through the industry, exposing systemic vulnerabilities and challenging the stability and reputability of the ecosystem at large.

The failures underscored why stronger financial regulation and supervision can help address many concerns about crypto assets – a trend that is on full display in the Middle East region where governments are building regulatory architecture around the sector.

“Providing clarity to the industry on risk parameters with defined guardrails for permissible operations, the Virtual Assets Regulatory Authority’s (VARA) approach has been to engage with and enable the convergence of TradFi and DeFi, has so far been effective in enhancing business confidence and investment security,” says Deepa Raja Carbon, the managing director and vice chairperson of VARA.

The UAE and Bahrain have emerged as the world’s crypto hubs, thanks to the innovation-friendly regulatory frameworks that allow crypto platforms to develop with oversight that keeps consumers safe, according to blockchain analytics firm Chainalysis.

The implementation of crypto-friendly regulations has attracted several crypto entrepreneurs and enthusiasts to the GCC, which explains the increased usage of decentralised finance (DeFi) in the region. Over the years, regulators have issued more than 30 licences and passed a raft of laws for crypto exchanges to operate in their respective financial centres.

Vijay Valecha, Chief Investment Officer of Century Financial, believes that the UAE has emerged as a major cryptocurrency hotspot due to a combination of factors. He explains these factors include the country’s rational and industry-friendly regulations and the unfavourable state of cryptocurrency regulations in other markets.

Dubai’s crypto regulator, VARA awarded 19 regulated virtual asset service provider (VASP) licences – of which 11 are already operational – positioning the city as a responsible hub for digital assets.

Binance, the world’s largest crypto exchange by trading volume, reportedly received its full crypto licence from VARA in April. The cryptocurrency platform also holds Bahrain’s Category 4 licence, allowing the crypto exchange platform to operate as a crypto-asset exchange and custody services provider.

Carbon notes that VARA adopts a proactive and agile regulatory posture, often referred to as “living regulations.”

“VARA’s regulatory guidelines are dynamically updated to keep pace with technological advancements and market evolutions within the VA space,” she explains.

Other exchange platforms that have moved to take advantage of the GCC region’s crypto-friendly regulatory environment include Bybit, Rain and Crypto.com.

Meanwhile, Saudi Arabia declared bitcoin illegal in 2018 but the country’s central bank appointed Mohsen Al Zahrani to lead its virtual assets and central bank digital currency programme in 2022, signaling the kingdom’s potential crypto ambitions.

With financial regulators around the world deliberating over how to align cryptocurrency with existing frameworks, VARA, the Abu Dhabi Global Market and the Central Bank of Bahrain seek to stay ahead of the curve providing clarity to companies, investors and finance professionals in the crypto space.

Growth potential

The GCC region has set the global pace with its crypto initiatives, but the race is only just beginning. The entry of global players into the local market has created a thriving ecosystem that contributes to the government’s vision of increasing the nation’s GDP driven by the digital economy.

A study by financial services firm Holborn Assets found that interest in cryptocurrencies is increasing in the UAE. A total of 29 per cent of users view cryptocurrencies as a more convenient way to hold assets, 34 per cent are cryptocurrency traders, and 22 per cent use crypto for daily payments.

Similarly, Saudi Arabia registered a 12 per cent increase in cryptocurrency trading volume from 2022 to 2023, according to a Chainalysis report. Saudi users invest in core cryptocurrencies such as bitcoin and ethereum in spot markets to further diversify their assets and institutional users in the country are also increasingly interested in investing in cryptocurrencies.

On the macro front, the move by the US Securities and Exchange Commission to approve spot bitcoin exchange-traded products (ETFs) and the London Stock Exchange to accept applications for bitcoin and ethereum exchange-traded notes (ETNs) will open the digital assets investment landscape to institutional investors.

Moving forward, GCC regulators seek to foster innovation and market growth while being cautious about the potential misuse of cryptocurrencies for sanctions evasion, fraud, terror financing and money laundering. Industry experts say a facilitative regulatory environment will provide a platform for innovation and healthy competition.