In April, the leading crypto exchange Binance announced that it had received approval to operate in Dubai, the biggest and wealthiest city in the United Arab Emirates. The license was one of the first granted by the Virtual Assets Regulatory Authority, a regulator created in 2022 by the Dubai government to supervise the growing crypto industry.
The green light was a major win for Binance, which was still rebuilding after the criminal conviction and imprisonment of its founder and former CEO, Changpeng “CZ” Zhao, by the U.S. government in late 2023. It also reflected a developing strategy for the nascent regulator: attracting the world’s leading crypto companies to the Gulf emirate, even as other jurisdictions turn them away.
Interviews with Dubai’s regulators, venture investors, and entrepreneurs reveal a city that is establishing itself as a global crypto hub as the industry finds itself at a crossroads, with Dubai boasting a higher risk tolerance than its counterparts in the U.S. and Europe.
As other non-Western cities, from Singapore to Hong Kong, compete to attract blockchain businesses, Dubai hopes that its combination of clear regulations, ample capital, and unique “free zone” structure will set it apart from other competitors. As other governments like the Bahamas discovered with FTX, however, the downsides of inviting the often unruly crypto sector to set up shop can often outweigh the benefits.
“Smaller companies, smaller countries, and smaller organizations are the risk takers,” said Ralf Glabischnig, the founder of Crypto Oasis, a Dubai-based blockchain ecosystem. “I’m very happy that the UAE is taking that risk, and I assume we will have a few more crashes.”
A budding crypto hub
The emirate has taken a novel approach to overseeing crypto by carving out a space for it within a special economic zone called the Dubai International Financial Centre, established in 2004 to attract foreign companies from banks to tech giants to set up operations in the budding economy. DIFC has its own court system and financial regulator, the Dubai Financial Services Authority, which began laying out plans to oversee crypto businesses in 2021. To date, DFSA has granted licenses to around 10 crypto firms, including an in-principle approval for Ripple.
While the setup and separation of DIFC from the rest of Dubai can seem confusing from the outside, the DFSA chief executive Ian Johnston told Fortune that the free zone can be thought of as a “financial Vatican City.” DIFC operates under a common law legal regime—overseen by judges drawn from countries like England and Australia—that has made it a magnet for more traditional firms like hedge funds and law firms used to operating in Western jurisdictions.
Johnston says DFSA has loosened its regulatory strategy as it becomes more familiar with the sector, including creating a white list of approved tokens and welcoming in companies that do not have licenses in other jurisdictions. “As we become more comfortable that we’re getting the right sort of applicant, then we are relaxing our conditions a bit,” Johnston told Fortune.
He insisted that, where U.S. regulators often have a contentious relationship with each other, DFSA does not view itself as competing with the Virtual Assets Regulatory Authority (VARA), which is charged with issuing licenses in the rest of Dubai. As he put it, “It’s all business that’s going to be in Dubai anyway.”
In an interview with Fortune, VARA CEO Matthew White said that the agency’s goal is to balance regulation with innovation. On occasion, it has stepped in to rein in rogue crypto actors, as it did in October when it issued cease and desist orders and fines to seven “entities” for operating without the required licenses. White declined to comment on the decision, though he noted that VARA has around 50 employees, which makes it comparable in size to the New York State Department of Financial Services.
“The challenge that you’ve got is you’re marrying up this industry that moves at a blistering pace with what is largely a traditional kind of regulatory system,” he said.
Risk tolerance
Despite its crypto-native approach, VARA has faced criticism that it is moving too slowly to grant licenses. According to White, the regulator has already received hundreds of applications and is working to increase its staff in order to handle the influx.
White pushed back at the idea that Dubai has a broader risk tolerance than other governments. “It’s not really about whether we’ve got a higher or lower risk appetite,” he said. “The mechanism by which we go through our diligence is different, and that enables us to make those decisions.”
Still, the contrast of VARA granting a company like Binance a license, after it was charged or pushed out of the U.S. and European countries, is striking. Tammer Qaddumi, the cofounder and general partner of the UAE-based VC firm VentureSouq, told Fortune that Dubai’s goal is to expand its economic footprint, with even different emirates within the UAE jockeying for firms.
“The truth is, they are competitive and want people to come and set up, and they will use different tools,” he said. “Some are incentives like cash rebates, some are attractiveness of office locations, and some are licensing and permission.”
As lawmakers in the U.S. continue to squabble over legislation, Dubai has signaled to the crypto industry that it is open for business, even if the embrace comes with growing pains.
Updated on 11/4 to reflect that the approval for Ripple from DFSA was in principle.
