GCC countries are increasingly embracing decentralised finance (DeFi) and attracting cryptocurrency companies as they seek to harness new financial technology (fintech) innovations, expand services, and enhance financial inclusion. DeFi, characterised by peer-to-peer financial services without central authorities, is viewed as a means for economic diversification and adoption of Web3 technologies like blockchain, the internet of things and artificial intelligence. The global DeFi market is expected to grow at a compound annual rate of 42.6% from 2022 to 2030, surpassing $232bn in value by 2030, according to a January 2023 report published by economic consultancy Zion Research.

Regulatory Progress

Developing the DeFi sector will require transparent regulations to attract foreign companies. In April 2023 the Registration Authority of Abu Dhabi Global Market (ADGM) proposed a legislative framework for distributed ledger technology that targeted disclosures, insolvency and governance structures. That same month, the UAE’s Securities and Commodities Authority started accepting licensing applications for companies to provide cryptocurrency services after crafting a mandatory licensing regime that mirrored the regulatory framework published by Dubai’s Virtual Assets Regulatory Authority in February 2023. In November 2022 ADGM launched the Middle East, Africa and Asia Crypto and Blockchain Association, which is working in partnership with major global cryptocurrency exchanges, such as Binance and Crypto.com, to address the challenges facing the sector, while promoting the integration of cryptocurrencies into the global economy.

Qatar has taken another approach, prohibiting cryptocurrency trading due to its volatility and perceived risk for financial crime. Qatar Financial Centre (QFC) Regulatory Authority and QFC Authority developed a QFC digital assets framework in October 2023 focusing on investment tokens backed by tangible assets for feedback by industry practitioners. Approval for the final legislation is expected in the first half of 2024.

Ease of Transactions

With high interest rates in the US and inflation weakening many fiat currencies, cryptocurrencies and the decentralised exchanges on which they are traded allow users in emerging markets to limit their exposure to macroeconomic pressures and ease transaction flows. DeFi offers significant advantages, as it lowers fees due to the lack of intermediaries, enhances transparency and security with blockchain technology, and creates seamless transactions among accounts and entities with no centralised entity.

Cryptocurrencies as an asset class have seen a significant decline since the second half of 2021, prompting banks and financial institutions to question their sustainability. This was seen most prominently after the collapse of the cryptocurrency exchange FTX in November 2022. Western markets remain skittish, not least after international media reported in May 2023 that Binance had commingled customer funds with company revenue in 2020 and 2021.

Although adoption has not reached the levels during its peak in 2021, there are signs of recovery, according to an October 2023 report by Chainanalysis. Investor gains in cryptocurrency are estimated at $37.6bn in 2023, compared to $127.1bn in losses the previous year. Between June 2022 and June 2023 MENA accounted for 7.2% of the global cryptocurrency value, with Turkey leading the region at $170bn in value received, while the UAE and Saudi Arabia were frontrunners in the GCC.

To improve security, several companies have launched stablecoins, which are pegged to a reference asset such as fiat currencies, exchange-traded commodities or other cryptocurrencies like Bitcoin or Ethereum. If Gulf countries can continue to build on their regulatory momentum and attract DeFi, and companies and citizens in emerging markets continue to embrace cryptocurrencies and the DeFi model, there are significant opportunities for Gulf-based exchanges to become global leaders in the emerging technology.