FTX Chaos Prompts Reckoning on Dubai’s Embrace of Crypto Giants

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On Oct. 26, days earlier than the collapse of his crypto alternate FTX, Sam Bankman-Fried sat for lunch at an upscale Dubai restaurant, subtly testing the waters for funding at a desk of founders, bankers and financiers, together with Anthony Scaramucci.

It turned out to be a ultimate hurrah earlier than the previous billionaire’s troubles had been uncovered to the world. The implosion of FTX, which went from a $32 billion valuation to chapter within the ensuing weeks, despatched crypto markets right into a tailspin, driving billions of {dollars} in outflows from some of the largest world exchanges.

The aftershocks have reverberated significantly onerous within the United Arab Emirates — particularly in Dubai, which has been working to lure the world’s largest corporations with its crypto-friendly insurance policies. While some monetary facilities tightened rules, many UAE officers promoted digital belongings as a gold mine for financial development and pivotal within the nation’s diversification technique past fossil fuels.

That helped the Gulf state place itself as a crypto hub, attracting business heavyweights whereas additionally prompting bankers, attorneys and tech executives to change jobs. Property brokers had been reporting an infusion of crypto funds into luxurious actual property. Yet the tip of the bull market has some expressing remorse on the flip of occasions.

Local exchanges Rain Financial Inc. and BitOasis have trimmed headcount in Dubai. Among these rethinking their foray into the sector is Hazem Shish, a former Barclays Plc banker who not too long ago arrange a crypto hedge fund in Abu Dhabi. While it carried out effectively in its early months, challenges in elevating institutional cash amid the market turmoil prompted him to step again from the primary fund’s administration, in response to individuals acquainted with the matter, who requested anonymity as the data is non-public.

Shish declined to remark.

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FTX was one of the primary corporations granted a license by Dubai’s Virtual Asset​s Regulatory Authority as half of the push to lure enterprise, and the alternate arrange its regional headquarters within the metropolis.

At the time, Helal Al Marri, director common of the Dubai World Trade Centre Authority that homes VARA, praised the transfer and stated it adopted a rigorous analysis — months earlier than the agency went bust.

With FTX and Bankman-Fried now dealing with investigations from the US to the Bahamas, officers have distanced themselves from that call, even scrubbing its license particulars from the regulator’s web site.

Some hyperlinks had been tougher to erase from view.

Banners touting an FTX-sponsored celebration through the Abu Dhabi Grand Prix lined one of Dubai’s most unique beachfront drives. At the race monitor, spectators donned Formula One hats adorned with the FTX emblem.

Twin Blows

The agency’s collapse was the second important blow to Dubai’s efforts inside a matter of months. In June, hedge fund Three Arrows Capital imploded in a single of the biggest-ever crypto buying and selling busts, weeks after acquiring a provisional license within the metropolis.

The drama has prolonged to different asset managers.

Multiple crypto hedge funds that not too long ago arrange within the UAE had put all their shopper cash on FTX, forcing a mad scramble to exit the platform earlier than withdrawals had been halted so as to avert their very own collapse, in response to individuals acquainted with the matter.

Some 4% of FTX’s world prospects are primarily based within the UAE, in response to courtroom filings within the agency’s chapter case, making it one of the highest 10 jurisdictions impacted by the fallout.

FTX and Three Arrows Capital didn’t have full-scale licenses, limiting the native fallout to an extent. The Dubai digital belongings regulator’s construction is geared toward opening the doorways for the largest corporations to function however preliminary licenses solely permit a slender vary of providers.

Still, the incidents have prompted a debate over whether or not authorities had been too nimble of their push to lure crypto corporations, lending legitimacy to firms which have since gone bust.

“As a regulator, there’s all the time the chance that if issues go incorrect it seems to be actually unhealthy,” stated Dapo Ako, a former compliance specialist at UBS Group AG, whose agency J. Awan & Partners helps crypto corporations arrange within the UAE. “But it’s additionally an opportunity to rethink the framework. If Lehman didn’t fail, we wouldn’t have new banking rules.”

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An official at VARA stated FTX hadn’t cleared the approval course of to onboard any shoppers or begin operations. In a July assertion, they stated the license would permit FTX to deploy crypto derivatives merchandise and buying and selling providers to certified institutional traders.

Regarding Three Arrows Capital, the VARA consultant stated a provisional allow is an “approval of idea” factoring within the credibility of different licensing jurisdictions however that steps for a extra full license didn’t progress.

In response to questions, a UAE official stated there’s a dedication to allow mass financial empowerment with a spotlight on shopper safety, cross-border monetary safety and financial stability.

A spokesperson at FTX declined to remark.

‘Walking Time Bomb’

Much of the UAE’s guess on crypto has centered round Binance Holdings Ltd. and its Chief Executive Officer Changpeng “CZ” Zhao.

The world’s largest crypto alternate has discovered a extra receptive viewers within the nation, a lot in order that the 45-year-old government made Dubai his dwelling base and shortly made inroads with the nation’s energy brokers. The UAE granted Binance a number of licenses, and greater than 500 of the agency’s staff settled within the Gulf state.

After FTX’s demise, Binance’s share of world crypto buying and selling volumes elevated to nearly 50%, in response to knowledge from CryptoCompare. Yet the pace of FTX’s unraveling has sparked a debate concerning the well being of centralized crypto exchanges, and merchants have pulled funds from such venues.

At a summit in Abu Dhabi on Nov. 16, the economist Nouriel Roubini, a crypto critic who’s been known as “Dr. Doom,” known as Binance a “strolling time bomb,” blamed regulators for granting the agency licenses and urged officers to take away Zhao from the UAE.

A day later, the Binance CEO responded on stage on the Milken Institute’s convention in Abu Dhabi: “What’s a phrase for unimportant individuals?” he stated. “We don’t care.” The dust-up got here because the alternate acquired extra approvals from Abu Dhabi Global Market.

Tighter Regulation?

Since Zhao’s arrival final yr, influential gamers from Kraken to OKX, Bybit and Crypto.com have constructed up their UAE presence, aligning with the nation’s ambitions for a digital economic system that creates extra non-oil sector jobs. Yet UAE officers privately have expressed issues over the tempo of regulatory approvals — that they might have proceeded too rapidly and did not establish the blowups of Three Arrows Capital and FTX, individuals acquainted with the matter stated.

Dubai Multi Commodities Centre, which has come beneath specific scrutiny from the US Treasury Department for its looser rules, is attracting the lion’s share of crypto firms — greater than 500, in response to a DMCC spokesman.

“I’d count on that total regulators will probably be extra cautious and conservative consequently of the newest developments,” stated Gabriele Dunker, the Vienna-based founding companion of Financial Transparency Advisors GmbH, which has beforehand suggested the UAE authorities.

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UAE crypto gamers at the moment are on alert for updates from the regulators.

Dubai’s VARA plans to announce its CEO within the coming weeks and intends to carry additional consultations with key stakeholders earlier than year-end, individuals acquainted with the matter stated.

Meantime, Abu Dhabi’s efforts to finalize federal laws for crypto have been delayed as authorities navigate a lobbying push from business insiders in addition to scrutiny from worldwide our bodies over cash laundering and shopper safety issues.

The Binance CEO, for his half, has initiated a proof of reserves system to assist “full transparency.” However, his agency has declined to reveal the complete particulars of its company construction.

“We have the most important places of work in Dubai and Paris so you possibly can view these two as world hubs,” Zhao informed Bloomberg TV on Thursday.

A Binance spokesperson stated the alternate is rising its UAE crew and is within the midst of a company restructuring geared toward giving regulators additional readability concerning the group.

Close Calls

For now the UAE, like some monetary facilities, is sticking to its conviction of turning into a crypto hub. Hong Kong has reiterated its want to lure virtual-asset corporations, whereas Japan has proposed easing token-listing guidelines. Singapore, on the opposite hand, has acknowledged its desire for use-case primarily based blockchain know-how whereas warning towards retail crypto buying and selling.

Abu Dhabi funds together with Mubadala Investment Co. had arrange committees to review investments within the crypto ecosystem. They’ve felt vindicated for continuing cautiously and plan to tread fastidiously within the coming months, individuals acquainted with the matter stated.

A Mubadala spokesperson declined to remark.

But different entities managed by UAE National Security Adviser Sheikh Tahnoon Bin Zayed have maintained a extra aggressive method, plowing forward with funding plans within the house. Zhao and his crew met with potential backers, together with entities affiliated with Sheikh Tahnoon, who oversees a big monetary empire in Abu Dhabi, Bloomberg reported on Tuesday.

And earlier this month, simply as Bankman-Fried tried to shut a rescue cope with Binance, Zhao’s colleague Dominic Longman was in Abu Dhabi, launching the Middle East, Africa & Asia Crypto & Blockchain Association alongside UAE officers, who had been pushing forward with their embrace of the business.

“Abu Dhabi, and the UAE, is a pacesetter within the growth of progressive and compliant crypto and blockchain companies,” Ahmed Jasim Al Zaabi, chairman of ADGM, stated. “We are happy to have the ability to assist MEAACBA, which can contribute in the direction of growing this dynamic sector.”

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

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