Compete or cooperate

September 4 - 10, 2019

Gulf Weekly Naman Arora
By Naman Arora

Gulf Weekly Compete or cooperate

Bahrain and UAE are in a race to become the region’s leading FinTech Hub. According to a report by American online publication Stratfor, both these countries are in a race to portray themselves as the one-stop shop for cryptocurrencies. The two regional financial hubs have issued licenses to crypto companies, developed crypto-friendly regulation and even invested in crypto startups.

Interest in cryptocurrencies has skyrocketed across the Gulf alongside global efforts to attract cryptocurrency firms, while regulating digital assets.  Costly financial centers like New York and London apply traditional financial service regulations to the cryptocurrency asset class. Meanwhile, cheaper, less-regulated jurisdictions provide fewer protections for investors as well as limited infrastructure.

Bahrain and Abu Dhabi are attempting to chart a happy middle combining strong regulatory security with attractive investment incentives. While there is no guarantee of success, cryptocurrencies could allow these hubs to grab a slice of an emerging market, potentially attracting investment and creating jobs, at a time when big financial hubs are taking the conservative “wait-and-see” path.

ZPX, a Singapore-based cryptocurrency firm, estimated that setting up a firm in Bahrain would cost around $200,000, whereas similar setup costs in London could reach $750,000.

Crypto-asset exchanges in Abu Dhabi Global Market must pay an initial authorisation fee of $125,000 and annual supervision fees of $60,000.

Bahraini policymakers are pushing to portray the country as the Middle East’s premier cryptocurrency hub. As the GulfWeekly reported recently, cryptocurrency exchange Rain became the first fully regulated, onshore cryptocurrency exchange in the Middle East and North Africa and closed a $2.5 million funding round. Rain acquired a Crypto-Asset Module regulatory license from the Central Bank of Bahrain, after graduating from its regulatory sandbox and received a Sharia-compliance certificate. CBB regulators offer quick regulatory access with the CBB maintaining offices in Bahrain FinTech Bay but implement centralised regulation.

On the other hand, Abu Dhabi Global Market is creating cryptocurrency policy and regulation in the UAE’s financial free zone Financial Services Regulatory Authority (FSRA). In May and June, FSRA granted three crypto exchanges – BitOasis, MidChains, and Arabian Bourse an in-principle approval to operate.

BitOasis, the most established of the UAE’s exchanges, has been operating for approximately four years in a relatively unregulated environment. MidChains is based in Hub71, Abu Dhabi’s version of the Bahrain Fintech Bay. Mubadala, a state-owned holding company, invested in MidChains through Mubadala Ventures, a subsidiary fund that hopes to expand its asset portfolio to about $1 billion by 2021.

While the UAE seems to have taken a more free-market based approach to the industry, Bahrain has elected to go the centralized path. Which one proves to be more successful will depend on the primary industries that develop with the approaching twilight of the oil era as well as their respective ability to attract investors.

Bahrain boasts a lower cost of living, a diverse population and by implementing its Sharia-backed environment, companies are less likely to face barriers in expanding across the region.

Abu Dhabi promises greater access to global capital and supposedly a less strict regulatory authority. However, there is greater uncertainty around the hub since there are three regulatory authorities depending on whether a firm chooses to function within or beyond the financial free zones.

This uncertainty can deter investors who may prefer a centralised bank that they can easily approach with regulatory or economic concerns.

Both these regions face challenges ahead as the GCC region has seen an uptick in the number of cyber attacks targeted at a region with high tech penetration. Especially in domains like FinTech, cybersecurity is becoming increasingly important and how the hubs mitigate these risks may well affect the rewards they reap from the budding industry.

How the battle between these two financial playgrounds shakes out is impossible to predict. We may have instead a synthesis of the two arise or, as the MENA FinTech Association promises, greater synergies between two diverse ecosystems.

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