Trade between India and the UAE surged to US$85 billion last year, and both countries are exploring interoperability between their central bank digital currency (CBDCs) projects.
India topped Chainalysis Global Crypto Adoption Index in 2023, and is now the world’s second-largest cryptocurrency market by transaction volume. But the local industry, that has been drying up due to the government’s strict tax rules, is inspiring local players to seek the oasis of Dubai’s burgeoning cryptocurrency ecosystem.
The Burj Khalifa skyscraper (center) among other commercial buildings in Dubai, United Arab Emirates, on Friday, Nov. 18, 2022. Photo: Bloomberg
“A lot of Web3 founders prefer Dubai or Singapore as their hub, because they have clarity and certainty around regulations and greater community support. When you’re setting up a business, investors are more comfortable in a jurisdiction where there are no last-minute surprises. I am starting to see this trend on the ground and it must be reversed,” said Sumit Gupta, the chief executive of Indian cryptocurrency exchange CoinDCX.
“We have seen a [volume] decline of more than 90 per cent. That is a huge, steep decline. India continues to be number one when it comes to grass roots cryptocurrency adoption, but a lot of that activity is happening on alternative channels because of the high tax rates,” said Gupta.
A bitcoin trading company in Bangalore on November 23, 2021.Photo: AFP
Finance Minister Nirmala Sitharaman last year introduced 30 per cent tax plus applicable surcharge and 4 per cent levy on profits from cryptocurrency trading.
This year brought more bad news for Indian traders with the introduction of a 1-per cent tax deducted at source (TDS) on cryptocurrency transactions above 10,000 rupees. Failure to pay TDS may result in a penalty equal to the unpaid amount, a 15 per cent interest on late payments and even a jail sentence.
The “regulatory arbitrage” may not be around for much longer, Gupta said. The Indian Finance Ministry did not respond to a request for an interview or provide commentary for this article.
“The arbitrage will not sustain for long, and has to go away. The government is aware of that. It’s a matter of when they decide to remove that arbitrage. Serving Indian customers from offshore is not scalable, not reliable and not compliant,” said Gupta.
Low taxes, ease of setting up businesses, a dedicated regulator and access to international markets such as Asia and Europe are driving the wave of Indian cryptocurrency firms towards Dubai.
Cryptocurrency projects can meet the rest of the world through Dubai. “New businesses [from] the UK, India, China, US and Russia make up the top 5 per cent,” said Belal Jassoma, head of business development at the Dubai Multi Commodities Centre (DMCC), at the Future Blockchain Summit. “Dubai is basically a hub.”
One in 10 of the companies in its dedicated Crypto Centre is Indian. The DMCC Crypto Centre welcomed the Solana Foundation as its ecosystem partner at the Future Blockchain Summit and houses a long list of Web3 companies including cryptocurrency exchange Bybit, digital asset market maker DWF Labs, Web3 incubator TDeFi, and venture capital fund Brinc.
The city’s dedicated regulator for digital assets, Virtual Assets Regulatory Authority (VARA), oversees cryptocurrencies and related activities in all free zones in Dubai except the Dubai International Financial Centre (DIFC). Abu Dhabi has a similar scope of work through the Abu Dhabi Global Market (ADGM).
“VARA has crafted its regulations to be adaptable to market demands and be agile in addressing global market risks, aiming to attract entrepreneurs to solidify Dubai’s position as a central hub for Web3,” said Sunita Khatri, Commercial Director, Dubai World Trade Centre (DWTC).
The UAE lies within the Middle East & North Africa (MENA) region. According to Chainalysis, the region had the sixth-largest cryptocurrency economy with an estimated US$400 billion dollars or 7.2 per cent of global transaction volume recorded between July 2022 and June 2023.
“MENA as a region is quite an interesting opportunity for CoinDCX to tap into because it’s a fast growing market, the adoption numbers there are pretty impressive and Web3 can unlock many opportunities in the India-UAE corridor. New use cases around remittances and payments are emerging from that region,” said Gupta.
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“BitOasis was a strategic investment approach by CoinDCX to create an impact in international markets, maybe not directly, but by partnering with the right companies who are aligned with our mission and values,” the company said.
India is not alone tightening cryptocurrency restrictions. Australia’s progress on regulations has been slow. The country is aiming to release a draft legislation in 2024 for licensing and custody of cryptocurrency asset providers and Australian cryptocurrency exchanges may not get licensed until 2025.
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The Commonwealth Bank (CBA) and other Australian lenders restricted cryptocurrency exchanges, citing “scams” as the reason. As a result of debanking, Binance Australia had to halt customer deposits and withdrawals.
“We’ve always been an Australia-only exchange, but with the difficulties and challenges, we’re now actively looking to expand overseas,” said Caroline Bowler, CEO, BTC Markets.
“Dubai [has] gone for something very tailored, very specific,” she said. “They’re looking to build out this sector for the longer term.”
An undated photograph of Binance founder Zhao Changpeng, also known as CZ, photographed in an Emirati abaya, the customary dress in the United Arab Emirates (UAE). Photo: @changpengzhao/Instagram
Binance recently earned an operational license in Dubai, opening up services of the world’s largest cryptocurrency exchange to customers in Dubai. Cryptocurrency exchanges Gemini and Bybit are also seeking a license in the United Arab Emirates.
US-based Coinbase’s Brian Armstrong discussed with UAE regulators plans to set up a second headquarter to access markets in the MENA region. Coinbase suspended its operations in India three days after its launch in April 2022 due to issues with the local digital payment service. Informal pressure from India’s central bank was cited as a factor. The exchange remains inactive in India, but its wallet services and tech hub remain active.
Ripple’s XRP recently received approval from the Dubai Financial Services Authority (DFSA) for use within the Dubai International Financial Centre (DIFC). Licensed virtual asset firms in the DIFC can now offer XRP as part of their services.
Ripple’s CEO Brad Garlinghouse said: “Dubai continues to demonstrate global leadership [in] the regulation of virtual assets and nurturing innovation … Ripple will continue to double down in Dubai and we look forward to continuing to work closely with regulators to realise crypto’s full potential.”
“The US regulatory climate has been relatively hostile or unclear for digital asset businesses, so exchanges such as Coinbase and other major players have announced that they’re going to be applying for licenses here,” said Jimmy Nguyen, CEO, New Win Global, a Web3 venture advisory firm. “Dubai has been progressive at creating regulatory clarity with the launch of the VARA, putting out guidelines and policies about licenses to get. So [global] exchanges and other digital asset service providers are setting up second headquarters.”
Nexo the UK-based cryptocurrency lender is expanding its UAE operations, aiming for 30 per cent of its global footprint. The move follows US sanctions on a cryptocurrency lending product, where Nexo paid US$45 million in settlements.
