As GCC countries look to harness new forms of financial technology (fintech), expand services and improve financial inclusion, governments are embracing decentralised finance (DeFi) and attracting cryptocurrency companies. DeFi – peer-to-peer financial services with no central authority or intermediary involved in trading, lending and investing – is seen by GCC countries as an opportunity to diversify their economies and embrace Web3 technologies, such as blockchain, the internet of things and artificial intelligence. The global DeFi market is forecast to grow at a compound annual growth rate of 42.6% from 2022 to 2030, with its value exceeding $232bn by 2030, according to a January 2023 report by economic consultancy Zion Market 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. Prior to these developments, 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 various challenges facing the sector, while simultaneously promoting the integration of cryptocurrencies into the global economy.
Bahrain hopes to develop an ecosystem for cryptocurrency companies, having implemented crypto-asset regulations for licensing. This allowed for cryptocurrency exchange Binance to officially launch its first platform in the GCC in the kingdom in January 2023.
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.
The largest growth in cryptocurrency adoption in 2022 was in the MENA region, with $566bn in cryptocurrency transactions from July 2021 to June 2022, up 48% from the same period the previous year. Cryptocurrency transactions were up 40% in Latin America, 36% in North America, 35% in Central and Southern Asia, and 22% or less in other regions, according to a report from Chainalysis. Turkey was the largest cryptocurrency market in MENA with $192bn in transactions, followed by Egypt, Lebanon, Saudi Arabia and the UAE.
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.
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