Why Institutional Investment is Fuelling the UAE’s Crypto Market Growth

By Nicola Buonanno, VP Southern EMEA at Chainalysis

Whenever you are looking for a test case in the adoption of some new technology, you need look no further than the United Arab Emirates (UAE). The country has lately been a leader in the field of crypto assets, publishing a strategy on blockchain, legislating on NFTs, and even arising as a possible purveyor of a central bank digital currency (CBDC).

In particular, the UAE leads in institutional investment within the crypto space, in that institutional investment is fast becoming the biggest segment of crypto investments in the country. According to Chainalysis’ fourth annual Geography of Cryptocurrency Report, between July 2022 and June 2023, around two in three (67%) cryptocurrency transactions in the UAE were for values over US$1 million, and therefore classified as institutional investments.

The involvement of large institutions has the potential to catalyse market confidence and lead to widespread adoption of all things crypto. So, I think it is important to understand the various factors behind increased institutional appetite.

1. Market Maturity

Cool-headed institutional investors are beginning to see a mature market for crypto assets to take root. They are recognising that crypto is not as volatile as a few analyst reports suggest, and that even the so-called “crypto winter” has largely been in lockstep with the performance of traditional financial markets. In addition, they have noticed that not all cryptocurrencies have exhibited volatility. An entire subclass known as stablecoins are pegged to fiat currencies. (For example, October saw the launch of the UAE-dirham-pegged DRAM). Stablecoins are backed by an equal amount of fiat currency, sometimes in the form of short-term securities like treasury bills and commercial paper. On decentralised exchanges, which are especially popular in the UAE, stablecoins provide an alternative to fiat, enabling direct trading against global currencies through smart contracts.

2. Regulation and government support

Earlier I mentioned the confidence institutional engagement will bring to the crypto space. But we must remember that those same institutions need reassurances of their own before dipping their toes. Regulations can help protect consumers and the companies that go looking for opportunities. Guidelines on cybersecurity and how to spot fraud are also helpful. Dubai established the Virtual Asset Regulatory Authority (VARA) to oversee the crypto market and authorities are continually updating compliance rules to protect and encourage in equal measure. The UAE is also working with other governments on mBridge, a cross-border payments project, and the central bank is working towards the launch of a CBDC. This clear intent by the government to establish the country as a global crypto hub encourages institutions to also be a part of the burgeoning crypto economy.

3. Insights galore

It’s rare for institutions to invest in any financial asset without first conducting due diligence. Traditional assets afford investors access to swathes of market data to guide informed decision making. Crypto businesses can take this a step further with on-chain data. On-chain segmentation can, for example, look at holdings and wallet age to determine all kinds of behavioural proclivities, which empowers more informed decisions. With the right tools, institutions can extract real, actionable insights.

4. Cyber resilience

Risk management is a function fraught with challenges in today’s global digital economy. As institutional investors look to the crypto-future and try to figure out how to leverage it, they must find ways to protect their assets. Security has always been an issue in Crypto World but one that is being addressed in a manner that institutional investors appreciate. In the early days of crypto, centralised exchanges quickly emerged as a means of transferring ownership of, and storing, cryptocurrencies. But a few such custodians suffered from security shortcomings that led to major attacks. Mt. Gox is just one example of this. The Tokyo-based exchange lost BTC 850,000 in a 2014 attack.

Centralised exchanges have come a long way since then. Hacks against centralised services have largely been on a decline. Whereas between 2016 to 2020, 50 to 90% of cryptocurrencies stolen in all hacks traced back to the exploitation of centralised services, in 2021 and 2022, this figure dropped sharply to well below 25%.

Today’s cyber-attacks are more commonly found at the frontier of crypto: decentralised finance (DeFi), which is also the most transparent sector of the crypto ecosystem where all transactions are visible and the code behind protocols is in the open for all to see. This same transparency is what made DeFi protocols — especially popular in the UAE — a target for hacking incidents. But DeFi is fighting back, partnering with blockchain security firms to conduct code audits, identify vulnerabilities, and patch them. And we must remember that DeFi is like any new technology born on the Internet. The early days are often beset by security challenges but then adoption gathers steam and experience feeds a cycle of improvement.

The final word

The UAE government is behind crypto. Regulations and experience have combined to produce a mature market. And the blockchain and its treasure trove of actionable data is just waiting to be mined. The UAE’s crypto sector is in high gear and on a highway to success. And the more institutions that leverage crypto as an asset class, the more innovation we will see in the segment. The potential use cases could rival, or even outdo, traditional finance once again placing the UAE at the forefront of global innovation.