A look into UAE Central Bank’s AML guidance document for virtual assets and what it means for the future of VASPs in UAE

A look into UAE Central Bank’s AML guidance document for virtual assets and what it means for the future of VASPs in UAE

The UAE Central Bank has issued its long awaited virtual assets and virtual assets service provider framework under the umbrella of a new guidance on anti-money laundering and combating the financing of terrorism (AML/CFT) for licensed financial institutions (LFIs) with a focus on the risks of dealing with virtual assets.

The actual document is more telling than the initial press release. In reality the UAE Central Bank has clarified what is considers as virtual assets and who can offer services in this realm, as well as how banks and financial institutions will work with VASPs when it comes to opening accounts for them and meeting compliance requirements. It also makes clear that virtual assets are not considered a legal tender in the UAE.

Now a lot has been made clear. Earlier this month, there was a position for a Fintech virtual assets senior manager job at a UAE Bank who was required to be specialized in Fintech and virtual assets compliance from a finance crime perspective, which was eye catching because there wasn’t anything yet announced from the UAE Central Bank. Yet now one thing is for certain, banks in the UAE will be scrambling to hire talents who understand the virtual asset ecosystem so they will be able to comply with the recent guidance.

Definition of virtual assets and VASPs

First the UAE Central Bank has defined as they mention in alignment with FATF definitions, what virtual assets are, leaving out of the definition CBDCs and security tokens, as well as some NFTs. As per the guidance, “A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes, excluding digital representations of fiat currencies, securities, and other funds (such as those separately regulated by the competent authorities of the UAE, including the CBUAE, SCA, VARA, FSRA, and the Dubai Financial Services Authority (“DFSA”).”

It goes on to explain, “Virtual assets, so defined, typically include assets commonly referred to as cryptocurrencies, cryptocoins, payment tokens, exchange tokens, and convertible virtual currencies. Without prejudice to the definitions in the laws and regulations referred to above, stablecoins may be considered either virtual assets or traditional financial assets depending on their exact nature. No asset should be considered a virtual asset and a traditional financial asset (e.g., a security) at the same time.”

The guidance also discusses payment tokens offered and licensed by payment token service providers. Payment Tokens are defined as a type of Crypto-Asset that is backed by one or more Fiat Currency, can be digitally traded, and functions as a medium of exchange and/or a unit of account and/or a store of value, but does not have legal tender status in any jurisdiction. A Payment Token is neither issued nor guaranteed by any jurisdiction and fulfills the above functions only by agreement within the community of users of the Payment Token. Payment Token Service Providers, in turn, are defined as persons engaged in Payment Token issuing, Payment Token buying, Payment Token selling, facilitating the exchange of Payment Tokens, enabling payments to Merchants and/or enabling peer-to-peer payments, and Custodian Services related to Payment Tokens.

What Virtual assets are not

As for NFTs, they are not considered virtual assets, but this does depend on the nature of the NFT and its function. As stated, “Some NFTs that on their face do not appear to constitute VAs may fall under the VA definition if they are used for payment or investment purposes in practice.”

The guidance makes it clear that the Central Bank of the UAE does not accept or acknowledge virtual assets as a legal tender/currency in the UAE; rather, the only legal tender in the UAE is the UAE dirham. As such, those accepting VAs as payment for goods and services or in exchange for other assets bear any risk associated with the future acceptance or recognition of VAs.

The guidance adds,  by definition VAs cannot be digital representations of fiat currencies, securities, or other separately regulated financial assets, a bank record maintained in digital format, for instance, that represents a person’s ownership of fiat currency is not a VA. However, a digital asset that is exchangeable for another asset, such as a stablecoin that is designed to be exchangeable for a fiat currency or a VA at a fixed rate, could still qualify as a VA, depending on the relevant features of such a stablecoin.

VASP activities overview

There are five basic activities that fall under VASPs as per the UAE Central Bank, but these are not considered as comprehensive only meant for illustrative purposes. They include virtual asset exchange, virtual asset brokers, who transfer ownership of VA from one user to another, virtual asset custodians, P2P exchanges, remittance payments, payment for nonfinancial g goods or services, or payment of wages. A provider offering such a service will likely be a VASP.

The UAE Central Bank has even considered decentralized virtual assets Exchanges or decentralized finance (“DeFi”) application creators, owners, and operators as VASPs given they maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the definition of a VASP where they are providing or actively facilitating VASP services. For example, there may be control or sufficient influence over assets or over aspects of the service’s protocol, and the existence of an ongoing business relationship between themselves and users; even if this is exercised through a smart contract or in some cases voting protocols.

Even entities that provide related financial services to issuer’s who offer or sell virtual assets through participation in and provision of financial services related to an issuer’s offer or sale of a Virtual asset through activities such as initial coin offerings (“ICOs”) are considered as VASPs.

Licensed Financial Institutions AML CFT

Finally as per the AML-CFT Decision, every natural or legal person who carries out any VASP activities, provides VASP products or services, or carries out VASP operations from the state must be licensed, enrolled, or registered by a competent supervisory authority in the UAE.

LFIs are strictly prohibited from establishing relationships or processing transactions with individuals or entities that perform covered VASP activities and are not licensed to do so by UAE authorities. It is therefore essential that LFIs form an understanding of whether its customers perform covered VASP activities and, if so, whether they have fulfilled applicable UAE licensing requirements. LFIs are not permitted to establish relationships or process transactions with foreign VASPs that have not secured a license to operate as a VASP from UAE authorities, even if the foreign VASP is duly licensed or registered outside the UAE.

The guidance warns that LFIs may be indirectly exposed to VA or VASP activity through its customers that use their account or relationship with the LFI to provide downstream financial services to VASPs. In the case of VASP customers, this may include the provision of accounts or custodial wallets that can be used directly by customers of a third-party VASP to transact business on the customer’s own behalf.

The AML-CFT Law brings virtual assets and virtual asset service providers within the scope of the UAE’s AML/CFT legal, regulatory, and supervisory framework. Under Articles 9 and 15 of the AML-CFT Law, VASPs must report suspicious transactions and information relevant to such transactions to the UAE FIU, and under Articles 13 and 14, supervisory authorities are authorized to assess the risks of VASPs, conduct supervisory operations (including inspections) of VASPs, and impose administrative penalties on VASPs for violations of applicable laws and regulations.

Conclusion

In conclusion this is the first comprehensive framework that the UAE Central Bank has published which will allow a select number of VASPs to be able to deal with the licensed financial institutions in the UAE. It will not be easy for the financial sector as the AML and CFT requirements are exhaustive, but it will also not be easy for the VASPs.

Moreover, there is one gap that seems huge and over looked by the UAE Central Bank, and that is what if licensed financial institutions actually want to offer Virtual asset services. So what if a bank actually wants to offer VA custodial services, or VA payment services, or brokerage services, can they both be the provider and the client and what happens to AML and CFT requirements then.

In Bahrain for example the Central Bank is allowing crypto entities to move into the other financial arenas and has even allowed the first digital bank which deals in digital assets to make their base in the country.

Another question that can be raised, is that in a country which has called for more international cooperation and coordination when it comes to regulating virtual assets, then concurrently does not allow any of its financial institutions to deal with any VASP not regulated in the UAE even if they are regulated in other jurisdictions, what precedence is the UAE making in this regards and is reciprocity the new name of the game?

With regulations taking force in UAE especially when it comes to virtual assets, the country that once boasted of having 1800 blockchain and crypto entities might see that number dwindle as most of these companies will not be able to comply to the regulatory requirements rendering them unable to receive services from the banking sector. 

We can already see this decline in number on the new website for VARA, where there were once dozens of names listed as on the course of receiving licenses, today there is a handful.

Next to be published will definately be the payments rulebook under VARA which was missing before. Can’t wait to see what that will bring to the table. 

UAE regulated virtual assets activities now offered at Department of Economy and Tourism branches

UAE regulated virtual assets activities now offered at Department of Economy and Tourism branches

In a recent announcement by Dubai’s virtual asset regulatory authority ( VARA), the Department of Economy and Tourism is now offering regulated virtual assets activities in its branches.

This means that Virtual Asset Service Providers (VASPs) seeking to conduct business in Dubai’s mainland or make changes to their current commercial licenses may submit their applications for the below-mentioned activities at DET branches.

The list of Regulated Virtual Assets Activities (require a license from VARA) include, VA Advisory Services,  VA Broker-Dealer Services,  VA Custody Services,  VA Exchange Services, VA Lending and Borrowing Services and  VA Management and Investment Services. In addition to VA propriety trading which requires a NOC from VARA. 

Firms carrying on VA activities in Dubai [except DIFC] prior to 7 February 2023 [Legacy VASPs], must have their applications seeking regulatory oversight or relevant guidance from VARA by the final deadline of 30 April 2023.

As per the announcement, firms that have failed to comply with the regulatory framework by the aforementioned deadline must comply immediately to avoid substantial punitive measures including material fines/penalties and potential firm closure.

DET Centres offering commercial licences for the Regulated Virtual Assets Activities are available in – Al Barsha Mall, DED Café, Palm Strip Mall Jumeriah,  Al Twar Centre , Dubai Mall and  Clock Tower Deira

Qatar Ahli Bank warns customers against trading in virtual assets

Qatar Ahli Bank warns customers against trading in virtual assets

In a recent tweet, Qatar’s AhliBank warned customers against, trading, buying and selling virtual assets and currencies through accounts and banking services, citing the reasons as being associated with high risks.

According to the statement, “The regulators have banned trading, buying and selling virtual assets and currencies through accounts and banking services, as they are associated with high risks. Please be careful and don’t deal with any person or entity that provides trading services in virtual assets and currencies through your bank account and banking services, to avoid any risks that may arise as a result of trading in these virtual assets and currencies. “

The statement reflects the growing interest in clients for trading in virtual assets, while the regulatory authorities in Qatar specifically the Central Bank have yet to regulate this sector or introduce crypto exchange licenses. 

In 2022, CoinMENA, crypto broker exchange had announced that it was now serving clients in Qatar, as does Binance and other international crypto exchange platforms. 

Yet Qatar has been moving forward both in Blockchain, DLT, and digital assets with the recent news coming from Qatar Financial Authority Center which has just finalized its digital assets framework.

UAE Securities and Commodities Authority issues two new virtual asset regulations for rulebook

UAE Securities and Commodities Authority issues two new virtual asset regulations for rulebook

According to a recent Baker McKenzie client alert, the UAE Security and Commodities Authority has issued two new regulations pertaining to virtual assets. UAE SCA will be creating a list of accepted virtual assets as well as regulations allowing already regulated financial institutions to offer virtual asset services while amending capitalization requirements for virtual asset exchanges, custodians, and brokers.

These regulations while published in Arabic were translated by Baker Mckenzie in their client  report.

As per the report, the SCA has issued two new decisions,  (26/RM) of 2023 in relation to Virtual Assets Platform Operators (the “SCA VA Exchange Regulations“); and  Decision No. (27/RM) of 2023 amending SCA Chairman of the Board of Director’s Decision No. (13/RM) of 2021 in relation to the SCA Rulebook (the “SCA Rulebook Amendments Regulations“).

The SCA VA Exchange Regulations define VAs as a “digital representation of a value that can be traded or digitally transferred and can be used for investment purposes, and does not include digital representations of fiat currencies, securities, or other funds”.

The SCA VA Exchange Regulations clarify that VA Exchange Platform Operators will be subject to certain provisions of: the SCA Board of Director’s Decision No. (2/R) of 2001 concerning the Regulations as to Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities, as amended (the “SCA Trading & Settlement Regulations“); and the SCA Rulebook (SCA Chairman of the Board of Director’s Decision No. (13/RM) of 2021).

Samir Safar-Aly, MENA FinTech & AI Lead at the international law firm, Baker McKenzie, told Lara On the Block, “SCA is fulfilling its role as the federal level VASP regulator in the UAE. Following Cabinet Resolution No. 111 of 2022, in addition to being the UAE’s federal-level securities, commodities and capital markets regulator, SCA became the federal VASP regulator. This is a positive step towards making the UAE, as a whole, a jurisdiction with a supportive legal and regulatory framework for Virtual Assets and Crypto-related services. There are significant consumer protection and financial crime related concerns within the Virtual Assets and Crypto sector, and having a regulatory framework to support growth is what many major players in this space are often struggling to find in other jurisdictions.”

Baker Mckenzie  states that the SCA have taken a similar approach to that of the DIFC’s DFSA and the ADGM’s FSRA (both of which have taken a ‘Recognized Crypto Token’ / ‘Accepted Virtual Asset’ approach) in that no VAs may be traded on such platforms unless approved on the SCA’s Official List of Virtual Assets.

UAE Cabinet Resolution 112 outlines that VARA’s decisions shall be consistent with the decisions issued by the SCA.

As for the relationship between SCA and other regulatory authorities, Samir, explains to Lara on the Block, “Under both Cabinet Resolution No. 111 and No. 112 of 2022, the relationship between SCA and other “Local Licensing Authorities” (which only includes VARA at the moment), makes it clear that the SCA would retain sole regulatory remit over “digital securities” and “digital commodities” in Onshore UAE. Separately, UAE Cabinet Resolution 112 outlined the relationship between the SCA and VARA in particular, whereby there will be joint regulatory roles between the two authorities through delegated authorities (granted to the SCA under UAE Cabinet Resolution 111) to VARA accordingly.”

As per Baker McKenzi, the second of the New SCA Regulations, amends certain provisions of the SCA Rulebook in relation to VAs and includes VAs to the list of products that may be dealt or brokered by SCA-regulated financial institutions.

The definition of ‘Brokers’, ‘Dealers of Financial Products’, ‘Financial Consultation’, ‘Portfolio Management’ and ‘Custody’ services, all now extend to and cover VAs, with relevant compliance-related obligations.

Samir explains, “Under the new SCA regulations, existing SCA-regulated financial institutions can extend their activities to Virtual Assets. However, this will need to be in collaboration with discussions with SCA to ensure that adequate systems, controls, expertise and disclosures are in place, including relevant amendments to regulatory business plans and compliance / AML policies”

Finally a new Category 7 License in relation to VASPs has been added to the SCA Rulebook, outlining the following capital requirements, a capitalization of AED 1 million plus six months of operating expenses if the activity is operating a VA Exchange Platform only; a capitalization of AED 2 million if the activity is the Brokerage of VAs; a capitalization of AED 4 million plus six months of operating expenses if the activity is the Custody of VAs; and a capitalization of AED 5 million plus six months of operating expenses if the operator of a VA Exchange Platform provides any other VA service.

As for the future, Samir expressed that both digital Securities and digital Commodities, under Cabinet Resolution No. 111 of 2022 remain in the regulatory purview of SCA in Onshore UAE including the ‘Onshore’ Dubai territory that VARA covers. He expects SCA to issue guidance relevant to such products in the near future.

As for payment tokens, Samir clarifies that this is the regulatory remit of the Central Bank of the UAE (CBUAE). When VARA issued its Rulebooks in February this year, it noticeably did not issue its Payments & Remittances Services Rulebook. He states,” I would expect this to be issued in due course once similar arrangement to those that have taken place between VARA and SCA, take place between VARA and the CBUAE.”

UAE Based VAF Compliance democratizes crypto compliance with telegram bot

UAE Based VAF Compliance democratizes crypto compliance with telegram bot

UAE based VAF Compliance, a virtual assets and fintech compliance firm has launched a telegram bot service that assesses the risks associated with accepting cryptocurrency as payment.

VAF Compliance’s Telegram Bot can help individual clients and small businesses avoid situations where they may unknowingly accept tainted funds. With this service, VAF Compliance aims to democratize access to AML solutions to all users, who now can assess risks before accepting crypto, receive a clear and user-friendly report, understand the risks associated with interacting with other wallets, and prevent the receipt of crypto with criminal origins.Crypto exchanges, the entry point to cryptocurrencies, are particularly vulnerable to compliance issues. To maintain compliance, the implementation of robust Know Your Customer (KYC) and Anti-Money Laundering (AML) policies is essential.

While recent sanctions against entities providing money laundering services to criminals have had a positive impact, alternative money laundering services may still be found, highlighting the need for robust KYC and AML policies in the crypto industry.

The bot is now available in English and Chinese (Mandarin) and will cover over 45 blockchains. It also provides an easy-to-read report to understand the risk level prior to accepting any funds in the user’s wallet. 

 In addition, users have the option to pay fees per report or package, and if they refer the service to others, they can receive free reports that cover more than 70 different risk parameters.

“We are very excited to launch our newest solution, the VAF Compliance Bot service, which provides an easy-to-use, yet comprehensive solution for individuals and small businesses looking to navigate the complex world of crypto compliance,” said Gilson Ribeiro Da Costa, CEO of VAF Compliance.

“We believe our innovative solutions will help our clients achieve their compliance goals, while also enhancing the overall reputation and credibility of the crypto industry.”

Not only does the company offer support to clients in the MENA region, but it also extends its services in countries such as Turkey, Africa, and Europe. In fact, the company has announced its expansion to Switzerland and the establishment of its office in Zug. The team will be led by Farzaad Gaibie, a seasoned financial services consultant with extensive industry knowledge and experience.

The expansion to Zug will enable VAF Compliance to better understand the needs of its clients and offer tailored solutions that meet their unique requirements.

Bahrain first country in MENA to launch onshore security token regulations

Bahrain first country in MENA to launch onshore security token regulations

Bahrain Central Bank has announced the issuance of regulation for security tokens as amendments to its current crypto asset module.

The Central Bank has expanded the crypto asset regulations to include digital token offerings, in specific those with the characteristics of security tokens.

In determining whether a digital token qualifies as a security, the CBB will examine the underlying economic purpose of the digital token, its structure, characteristics, as well as the rights attached to the digital token.

The new amendments also outline new requirements to enhance safeguarding clients’ assets to provide high levels of protection for investors.

In addition the Central Bank of Bahrain will allow crypto-assets licensees (after obtaining the CBB’s approval) to engage in additional activities, which are not within the stipulated regulated crypto-asset services.

 Commenting on the new amendments, Director of the Capital Markets Supervision Directorate – Mrs. Abeer Al Saad, stated,  “We at the CBB are delighted to issue the new amendments to our regulatory framework for crypto-assets and to specifically introduce new regulatory requirements for the digital tokens offerings, in order to regulate the crypto-assets market in a fair and transparent manner. Therefore, the CBB has adopted a risk-based regulatory approach towards requirements, which are proportionate and commensurate to the regulated activity undertaken by a licensee. We endeavour to provide adequate safeguards to investors without inhibiting innovation adoption at the CBB, as we continue to monitor market trends and review the regulatory framework to keep up with the latest developments in the field, as well as maintain the competitiveness of the sector. This milestone is a reflection of the pioneering role the CBB continues to play in regulating crypto-assets.”

Bahrain was the first country in the GCC region to regulate crypto allowing for the launch of crypto exchange brokers such as RAIN, CoinMENA, and most recently Binance. It is also one of the leading GCC and MENA countries when it comes to crypto payments.

The new amendments are also a first in the region, no other country has regulated security tokens onshore yet!

Global crypto exchanges in first phase of Dubai’s regulator journey with Binance and Crypto.com a step further

Global crypto exchanges in first phase of Dubai’s regulator journey with Binance and Crypto.com a step further

Global Crypto exchanges, Huobi, Bybit, Equiti, and OKx have all made it to the MVP ( Minimum Viable Product) provisional phase of VARA’s regulatory journey, while crypto.com  and Binance have moved one step forward to the preparatory license phase. 

As per VARA the MVP License is a 3-stage process starting with a (1) Provisional Permit; graduating to a (2) Preparatory License and concluding with an (3) Operating License. Applicants that are already in the MVP process will be advised by VARA to either continue within the MVP licensing process and/or be transitioned to the FMP Licensing process, ensuring a seamless transition with a focus on efficiency.

So far as per VARA the only crypto exchanges in the second phase under preparatory license are Binance and crypto.com. Binance is also in preparatory phase for its payments offering. 

VARA recently announced that Crypto.com move to the preparatory phase of the license after graduating from the provisional phase. 

As per the release, Crypto.com  received this MVP preparatory license after a detailed review of its key personnel, governance procedures, Anti Money Laundering / Countering the Financing of Terrorism (AML / CFT) capabilities, Know Your Customer (KYC) and Ultimate Beneficial Owner (UBO) policies and procedures, cross-border safety and security measures, and best-in-class compliance practices. 

“We are pleased to welcome Crypto.com to the MVP Programme preparatory phase,” said Henson Orser, Chief Executive Officer of VARA. “VARA’s regulatory framework will be instrumental in creating and managing a unique, resilient and securely future-proofed ecosystem that delivers a sustainable and thriving global best-in-class VA market with secure cross-border interoperability. As such, participation from credible players like Crypto.com will further our mission of delivering a progressive and future-focused regulatory framework”.

“This achievement is the next significant step for Crypto.com in an incredibly important market for our business and industry,” said Kris Marszalek, CEO of Crypto.com. “With the MVP preparatory license, we look forward to continuing to work with regulators in providing customers the most comprehensive and secure crypto experience.”

Only VASPs that receive a final approval post review from VARA – and receive the FMP License, are in a position to undertake any regulated VA activities, or offer such services to and/or from the Emirate of Dubai.

The only entity in VARA that has reached one stage before a fully operational license is HexTrust which provides crypto custody and staking services.

During a recent interview by LaraontheBlock with the CEO of VARA, Orser explains how VARA will be offering more licenses in areas such as DAOs, DeFi, Crypto mining, and more. He also explains what is of most importance to VARA as a regulator.

Kraken closes its UAE office, Chainalysis hires for MENA

Kraken closes its UAE office, Chainalysis hires for MENA

As per Bloomberg Kraken, crypto exchange based out of Abu Dhabi UAE has closed its office  while Chainalysis lays off 4.8 percent of its global workforce, but continues to hire in the MENA region.

Kraken has closed its  third office in less than a year. The first one was its headquarters in San Francisco, then Japan and now UAE.

Kraken had received a full license to operate in the UAE in April 2022.  With these closures have come layoffs. Kraken announced back in November 2022 that it would be laying off 30 percent of its workforce, equivalent to 1,100 employees.

As per Bloomberg, Kraken laid off the majority of its team in the MENA region, a total of 8 people. Benjamin Ampen, managing director for the region, will stay with the firm. On the Abu Dhabi market registry, Kraken is no longer listed as an active exchange.

In addition the exchange has suspended support for transactions in the AED, but clients in the region will still be able to use other products and services. That doesn’t require a local license, the spokesperson said.

In parallel, Chainalysis which last year had hinted to opening an office in the UAE hiring many employees as a prelude, also lays off part of its workforce globally but not in the UAE nor in the MENA region.  Actually while Chainalysis is laying off about 44 of its 900 employees, 4.8% of its workforce, it is continuing to hire for its operational expansion in the MENA region.

Sources close to Chainalysis within the UAE told LaraontheBlock that Chainalysis are actually hiring in the MENA region given the growth of crypto in countries such as Morocco with the potential to see KSA and Qatar on boarded into the crypto ecosystem in the future.

In an official statement, Chainalysis confirmed that it did not open its office in the UAE yet. It also stated with regards to the layoffs, “Chainalysis announced reorganization primarily impacting our go-to-market team – in order to meet new challenges and opportunities in the market. As a part of this reorg, some folks will have new roles, responsibilities, and reporting lines. Unfortunately we will also part ways with some incredibly talented people within our team. Chainalysis is well capitalized and will continue to hire and build out teams aligned with our refocused strategy in 2023.”

In July 2022, The UAE’s Ministry of Artificial Intelligence, Digital Economy and Remote Work Applications signed a preliminary agreement with blockchain data platform Chainalysis to provide virtual training programs for the country’s government entities.

So while some crypto entities close their offices and lay off employees in the MENA region, others continue to hire because the MENA region is a crypto growth market! So is it really the fault of the crypto winter or is it the fault of internal organizational issues and maybe even slow crypto regulation? 

Whatever the case while we say goodbye to Kraken, we welcome Chainalysis and many others to come!

Which homegrown MENA crypto exchanges will do proof of reserve and who was exposed to FTX

Which homegrown MENA crypto exchanges will do proof of reserve and who was exposed to FTX

It all started with the FTX downfall and then Binance’s Co-Founder and CEO call for crypto exchanges to carry out proof of reserves. Since then crypto exchanges such as Binance and crypto.com have provided wallets addresses tied to company wallets while Nansen blockchain analytics firm is creating a display of crypto exchange proof of reserves dashboard that currently includes Binance, crypto.com, OkX, Kucoin, Deribit, Bitfinex, Github, and others.

But what are locally homegrown crypto exchanges in MENA doing. Will they carry out proof of reserves, do they see it as the solution to bring trust back to crypto exchanges, and who has exposure to FTX?  

MENA Crypto Exchanges and Proof of Reserves

Bahrain based CoinMENA Talal Tabbaa and Dina Sama’an when asked by LaraontheBlock about if they will be doing proof of reserves stated, “This FTX news is a major setback for our industry and highlights the importance of regulation. This is why CoinMENA was established under the Central Bank of Bahrain, with a robust regulatory framework and compliance requirements. We go through regular audits and have to submit periodic reports to the regulators. More importantly, we keep our user funds in segregated accounts and we don’t offer leverage or margin which severely increases the risk profile of an exchange. We see crypto as a long-term investment and will continue to manage our risk prudently to build a sustainable and profitable business.”

Tabbaa adds, “CoinMENA is also reaching out to Nansen who is heading this effort globally to see the best way for it to be done.”

UAE regulated BitOasis CEO Ola Doudin states, “We believe that locally regulated platforms that follow industry best practices with proper oversight and supervision by their local regulators is the best way to ensure consumer protection and proper risk management practices.”

Vasja Zupan, President of UAE based Matrix Exchange in a reply to the question of whether they will do proof of reserves states, “We simply hold 1:1 client assets in our custody that is literally reconciled daily and regularly reported and checked by regulator and external auditors.”

Basil Askari Co-Founder of UAE MidChains has a similar reply, “In terms of proof of reserves we are already doing this on a daily basis with our regulator by providing daily client account reconciliations.”

Ola Doudin in her reply to this question stated, “BitOasis holds client assets in segregated client money accounts and custody environments. We’re an audited company that maintains the highest level of security and industry practices in storing and maintaining client assets one to one backed. We do not engage in any fractional reserve practices, proprietary trading, lending, and borrowing and we do not have an exchange token.”

Christopher Flinos, Chief Executive Officer of Hayvn crypto exchange in UAE “We already do proof of reserves. Our client’s crypto stays in segregated client wallets and our clients have always had access to their reserves. The firm in addition keeps shareholder funds in USD We hold no treasury in any coins not even stablecoins.”

Will Proof of reserves bring trust back to crypto exchanges?

Zupan believes that proof of reserves is totally useless without “proof of liabilities”. As he explains, “Proof of reserves alone should not bring trust back without 3rd party reviews and regulatory oversight over centralized services. I believe that CeFi needs a strong regulatory overview in combination with strong transparency and DeFi needs total transparency with independent reviews (not everyone can evaluate complex software and framework).”

Basil Askari co-founder of MidChains believes it is not enough to publish numbers. He explains, “Regulation and strict supervision by regulators on how client funds are used, is and has always been critical, as in TradeFi.”

Talal Tabbaa believes that the way crypto exchanges are carrying out proof of reserves at the moment is missing an important element. He explains, “In accounting when you provide information on your assets, you also provide information on your liabilities. Crypto exchanges need to do both proof of reserves and proof of liabilities preferably on a blockchain in real-time.”

Flinos agrees that with the current behavior of crypto exchange leadership trust is continuing to be damaged and what is need is strong regulation, control and corporate governance.

Exposure to FTX

In the past both CoinMENA and BitOasis had in their investment rounds received investment from FTX Ventures through Alameda Research. As such CoinMENA in a joint statement from both Talal Tabbaa and Dina Sam’an, Co-Founders, to LaraontheBlock clarified the following:  “FTX’s Investment arm Alameda Research invested $1 million in CoinMENA’s $9.5m seed funding round in 2021. All the funds were received prior to the close of the seed round. Their stake is less than 3% and has no voting rights. In light of the recent news, we have offered to buy back their minority stake.”

BitOasis also made a public blog post where it stated the following: “BitOasis confirms that it has no commercial relationship or exposure with Alameda Research (Alameda) or any other FTX entity. Accordingly, recent events at FTX and Alameda do not have any bearing on our business, or our ability to provide our customers with a safe and secure trading experience. In 2021, Alameda participated in BitOasis’ Series B financing round. As a result of its investment Alameda holds a 2.2% shareholding in BitOasis through Alameda Ventures Limited. Alameda is not represented (nor has it ever been) on BitOasis’ board of directors or on any governance forum or committee in any capacity. The shareholding is small and hence creates no exposure to our business.”

Matrix, Hayvn and MidChains founders confirm that they have zero exposure to FTX. Zupan stated, “We don’t have any exposure to FTX or any related party or similar protocols.” Al Askari as well confirmed, “Both our client funds and corporate assets are not exposed. We keep our (and our clients) funds in a safe boring 1:1 holding.” Flinos confirmed that they do not deal with unregulated counterparts.

Two crypto exchanges, RAIN in Bahrain and Veromex in UAE have not yet replied to the queries posed, if and when they do reply, their responses will be added.

Take Away

While up until now international exchanges have always looked more attractive because of their liquidity and the amount of crypto they list as well as their geographic coverage, it seems that those regulated in the region whether in UAE or Bahrain are looking more attractive because of their adherence to strong regulatory bodies.

A lot of news is coming out that international exchanges undertaking so called proof of reserves are not being transparent. For example Crypto.com’s cold storage revealed a suspicious transfer of 320,000 Ether worth $404 million, to Gate.io.  Kris Marszalek, CEO of Crypto.com assured traders that the transfer was accidental; funds were to be moved to a new cold storage address. Experts allege that the transfer helped Gate.io show its proof of reserves of user funds shortly after the transfer. Even more so it seems that 20 percent of crypto.com reserves are in Meme Token SHBB.

This also happened with Huobi. It was noted that after Huobi released the asset snapshot of the asset reserve, 10,000 ETH was transferred from Huobi to Binance and OkX deposit wallets. (Etherscan.io)

Binance CEO CZ also made an interesting tweet today November 13th 2022 where he says Binance is not just a CEX (Centralized Exchange). This comes as the crypto mood globally moves towards DEX (Decentralized Exchanges). In his tweet he gives advice on how to store crypto in your own wallet, and refers to trustwallet while saying that Binance is not just a CEX but provides other options.

In the end, the future is in decentralized exchanges, smart contracts, and blockchain databases for proof of reserves such as Etherscan.io and others. Crypto was never the culprit, it was molding crypto into a traditional financial sector that was.

Central Bank of Egypt to fine crypto violators $516,000

Central Bank of Egypt to fine crypto violators $516,000

The central bank of Egypt has once again reiterated its warning against dealing in any types of cryptocurrencies, saying that crypto is risky, highly volatile, and is used in financial crimes and e-piracy.

In the Egypt independent article, the Central Bank of Egypt will fine anyone who violates the Law No 194 of 2020 which prohibits issuing, trading, promoting cryptocurrencies, operating crypto exchanges or any other related activities. The Central Bank will fine violators up to $516,000 ( 10 million LE) or face imprisonment.

The CBE statement reads, “Whoever violates this shall be imprisoned, and fined no less than one million pounds and no more than LE10 million ($516,340), or one of these two penalties.”

The Egyptian central bank issued a similar warning about cryptocurrencies in January 2018, specifically naming Bitcoin. At that time the Central Bank had noted, “Cryptocurrencies are not backed by any tangible assets and are not supervised by any regulators worldwide, and consequently, they lack the official governmental guarantee and support enjoyed by the other official currencies issued by central banks.”

Yet Egypt has one of the highest crypto usages across Africa and Middle East. In January 2022, TripleA published a report which noted that Morocco topped the Arab countries in terms of crypto ownership, followed by Egypt, then UAE and KSA.

The report stated that in 2021 global crypto ownership was estimated at an average of 3.9 percent, 300 million crypto users and 18,000 businesses already accepting crypto payments.

In addition as per the report there are 32 million crypto users in Africa, 160 million in Asia, 38 million in Europe, and 28 million in North America, while Latin America has 24 million users.

Morocco was reported as having 878,168 crypto owners which was 2.38 percent of the population. It was followed by Egypt which had 1, 791,185 million crypto owners at 1.75 percent of the population.