Companies lured to Dubai ‘crypto hub’ have regrets thanks to FTX and Sam Bankman-Fried

On October 26, days before his crypto exchange FTX collapsed, Sam Bankman-Fried sat down to lunch at an upscale restaurant in Dubai, subtly testing the funding waters at a table of founders, bankers and financiers, including Anthony Scaramucci.

It turned out to be one last hurray before the former billionaire’s problems were exposed to the world. The implosion of FTX, which went from a $32 billion valuation to bankruptcy in the weeks that followed, sent crypto markets plummeting, dragging billion dollars of exits from some of the largest stock exchanges in the world.

The aftershocks have impacted particularly hard in the United Arab Emirates, especially Dubai, which is trying to attract the world’s biggest companies with its crypto-friendly policies. While some financial centers have tightened regulations, many UAE officials have promoted virtual assets as a gold mine for economic growth and a linchpin in the country. diversification strategy beyond fossil fuels.

This has helped the Gulf state position itself as a crypto hub, to attract industry heavyweights while enticing bankers, lawyers and tech executives to change jobs. Real estate brokers were reporting an infusion of crypto funds in luxury real estate. Still, the end of the bull market is causing some to regret the turn of events.

Local exchanges Rain Financial Inc. and BitOasis reduced their workforce in Dubai. Among those rethinking their foray into the sector is Hazem Shish, a former Barclays Plc banker who recently set up a crypto hedge fund in Abu Dhabi. Although he performed well in his first few months, difficulties in raising institutional funds amid market turmoil prompted him to step down as head fund manager, according to people familiar with the matter, who requested anonymity as the information is private.

Shish declined to comment.

FTX was one of the first companies to obtain a license from the Dubai Virtual Assets Regulatory Authority as part of the business attraction incentive, and the exchange has set up its regional headquarters in the city .

At the time, Helal Al Marri, managing director of the Dubai World Trade Center Authority which houses VARA, welcomed the move and said it followed a rigorous assessment – months before the firm went bankrupt.

With FTX and Bankman-Fried now under investigation from the United States to the Bahamas, officials have distanced themselves from the move, even removing details of its license from the regulator website.

Some links were harder to clear from view.

Banners touting an FTX-sponsored party during the Abu Dhabi Grand Prix lined one of Dubai’s most exclusive beachfront promenades. On the race track, spectators donned Formula 1 hats emblazoned with the FTX logo.

Twin shots

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

The drama has spread to other asset managers.

Several recently established crypto hedge funds in the UAE had put all their clients’ money into FTX, forcing a mad dash to leave the platform before withdrawals were halted to avoid their own meltdown, people say close to the file.

About 4% of FTX’s global customers are based in the United Arab Emirates, according to court records in the company’s bankruptcy filing, making it one of the top 10 jurisdictions affected by the fallout.

FTX and Three Arrows Capital did not have large-scale licenses, which limited local spinoffs to some extent. The structure of Dubai’s virtual assets regulator aims to open the doors to the biggest companies, but the initial licenses only allow for a narrow range of services.

Still, the incidents have sparked debate over whether authorities have been too nimble in their efforts to lure crypto firms, giving legitimacy to companies that have since gone bankrupt.

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

A VARA official said FTX did not clear the approval process to onboard clients or start operations. In a July statement, they said the license would allow FTX to deploy crypto derivatives and trading services to qualified institutional investors.

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

In response to questions, a UAE official said there was a commitment to enabling mass economic empowerment with a focus on consumer protection, cross-border financial security and economic stability.

A spokesperson for FTX declined to comment.

“A Walking Time Bomb”

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

The world’s largest crypto exchange found a more receptive audience in the country, so much so that the 45-year-old executive made Dubai his home base and quickly made inroads with the country’s power brokers. The United Arab Emirates has granted Binance several licenses and more than 500 company employees have moved to the Gulf state.

After the demise of FTX, Binance’s share of global crypto trading volumes increased to almost 50%, according to data from CryptoCompare. Still, the speed of FTX’s collapse has sparked a debate over the health of centralized crypto exchanges, and traders have withdrawn funds from these venues.

At a summit in Abu Dhabi on Nov. 16, economist Nouriel Roubini, a crypto critic nicknamed “Dr. Loss,” called Binance a “walking time bomb”, accused regulators of licensing the company and urged officials to remove Zhao from the UAE.

A day later, the CEO of Binance replied on stage at the Milken Institute conference in Abu Dhabi: “What’s a word for unimportant people? he said. “We do not care.” The dust came as the exchange grew more approvals of the Abu Dhabi global market.

Stricter regulations?

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

The Dubai Multi Commodities Centre, which is under particular scrutiny from the US Treasury Department for its looser regulations, attracts the lion’s share of crypto companies – over 500according to a DMCC spokesperson.

“I expect global regulators to be more cautious and conservative following the latest developments,” said Gabriele Dunker, Vienna-based founding partner of Financial Transparency Advisors GmbH, which previously advised the UAE government. .

UAE crypto players are now on high 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 crypto legislation have been delayed as authorities navigate lobbying pressure from industry insiders as well as meticulous examination international bodies on money laundering and consumer protection issues.

Binance’s CEO, for his part, launched a proof-of-reserve system to support “full transparency.” However, his company declined to disclose full details of its corporate structure.

“We have the biggest offices in Dubai and Paris, so you can think of them as global hubs,” Zhao said. Told Bloomberg TV Thursday.

A Binance spokesperson said the exchange was expanding its team in the United Arab Emirates and was in the midst of a corporate restructuring aimed at giving regulators more clarity on the organization.

Close calls

For now, the UAE, like some financial hubs, is sticking to its belief of becoming a crypto hub. Hong Kong reiterated its desire to attract virtual asset companies, while Japan proposed to relax token listing rules. Singapore, on the other hand, has declared 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 study investments in the crypto ecosystem. They felt justified in proceeding with caution and plan to exercise caution in the coming months, people familiar with the matter said.

A Mubadala spokesperson declined to comment.

But other entities controlled by UAE national security adviser Sheikh Tahnoon Bin Zayed have maintained a more aggressive approach, continuing with plans to invest in space. Zhao and his team met with potential funders, including entities affiliated with Sheikh Tahnoon, who oversees a large financial empire in Abu Dhabi, Bloomberg reported tuesday.

And earlier this month, just as Bankman-Fried was trying to strike a bailout deal with Binance, Zhao’s colleague Dominic Longman was in Abu Dhabi, launching the Middle East, Africa & Asia Crypto & Blockchain Association. alongside officials from the United Arab Emirates, who were pushing forward with their embrace of the industry.

“Abu Dhabi and the UAE are a leader in developing innovative and compliant crypto and blockchain businesses,” said ADGM Chairman Ahmed Jasim Al Zaabi. “We are pleased to be able to support MEAACBA, which will contribute to the development of this dynamic sector.

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

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