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The Russian central bank sent shivers down the spines of virtual asset investors after coming out with a proposal for a ban on digital assets in January. But a few days later the nation’s Ministry of Finance instead said that further regulation would be enough to protect citizens from fraud and other misuses, setting the stage for more internal debate. More regulation seems to be where the debate is currently pitched in the nation, with authorities setting their sights on boosting tax revenue.

The apparent split over virtual assets among Russia’s financial top brass is reminiscent of a larger global pattern that has emerged in recent years. Nations openly fret about whether to ban, or not to ban, cryptocurrencies.

Some countries, such as China and Algeria, imposed strict bans on digital currencies. Others, like the US, many European nations, and it seems, Russia, are slowly but surely moving toward comprehensive regulatory regimes.

In the Middle East, crypto has generated traction, often in different ways. ¶¶Òõ¶ÌÊÓƵ has been quite welcoming to crypto companies and has experimented with blockchain for banks. The Kingdom has pledged to invest billions into blockchain and the metaverse. NEOM, its futuristic city in the making, will get a metaverse twin city, which will incorporate crypto and non-fungible tokens. This makes for a daring experiment, not just in crypto, but for urban development, as the end result could be nothing short of a city within a city, a place where the physical and digital worlds come together.

Bahrain is another leading nation in crypto adoption. In January, Bahrain’s national bank tested a blockchain platform built by US bank JPMorgan in another likely hint of where the lending industry may be moving its operations next. It previously rolled out a set of comprehensive rules in 2019, covering security, due diligence, and other digital asset operations. The Gulf nation allowed banking access to crypto companies, easing a major pain point these firms have traditionally faced due to a reluctance by banks to deal with digital assets.

But it is the UAE that stands out as a global and regional regulatory trailblazer in this area, seizing momentum early on and putting together a comprehensive regulatory framework to support digital asset firms. The country has emerged as a bustling hub for crypto innovation and bets on blockchain as a crucial part of its plan to double its gross domestic product by 2030.

Keeping up with innovation

The UAE has built up a network of around 40 free zones over decades, which are special economic areas with looser regulatory control. Their benefits include tax and customs exemptions, support for 100 percent foreign-owned businesses, and easy market access. These conditions are obviously very effective in attracting foreign talent and new firms to the country. But the benefits don’t end there— this arrangement is good for the nation’s administration.

Free zones are usually focused on a specific market niche and have their own regulators, who are well placed to keep the finger on the pulse of the relevant industries they oversee. The arrangement allows free zones to advance the government’s regulatory framework as innovation occurs.

This flexible model helped the nation move quickly to embrace virtual assets, even though the process is not evenly spread across the country. On the mainland, beyond the boundaries of the free zones, the virtual and digital asset sector is playing catch up. This is also true when it comes to banks, which are yet to make significant moves into the blockchain space. But in free zones, things could hardly be more progressive, with the digital asset business steaming ahead at full speed.

In June 2018, the Financial Services Regulatory Authority, the regulator of the Abu Dhabi Global Market, a financial free zone, published the first edition of its virtual asset framework. Essentially, the FSRA became the world’s first regulator to offer a bespoke regulatory framework for this novel asset space, and this work serves as a good example for others to follow.

What the regulator got right

The FSRA built its virtual asset guidelines from the ground-up four years ago, in a move that treated this kind of digital infrastructure as a self-standing asset class. Its regulations include a clear-cut definition of digital assets, giving them the three key features of a currency — as a medium of exchange, a store of value and a unit of account. It also distinguishes different sub-classes in this category, such as digital securities and fiat tokens.

These guidelines show a thorough
understanding of the playing field, which the FSRA was able to gain by maintaining proximity to the industry and monitoring
its development.

Also, by treating crypto as a self-standing asset class, it went further than many other regulators, who tend to put the sector on the same shelf as money transfer companies.

The problem with the money transfer approach is that it focuses only on knowing your customer and anti-money laundering issues, ignoring other factors. The FSRA’s rulebook includes provisions designed to guarantee market integrity, consumer protection, custody regulations and technology governance.

When it comes specifically to exchanges and platforms where users can trade digital assets, the FSRA rulebook goes far beyond knowing your customer supervision. It provides guidelines for transparency, fair trading practices, market surveillance, and other aspects of exchange operations.

The FSRA continues to monitor the industry and updates its regulations in line with key developments. It also incorporates the best practices proposed by international bodies, such as the French Financial Action Task Force.

With its fast-moving and flexible approach to virtual asset regulations, the UAE sets the example for every nation outside the crypto ban club to follow. Countries looking to capitalize on this novel asset class should pay close attention and take notes.

• Vasja Zupan is the president of Matrix, the first Virtual Assets Multilateral Trading Facility and Custodian to be launched under the regulations of the Financial Services Regulatory Authority of Abu Dhabi Global Market.