Cryptocurrency regulations and limitations in the GCC: The importance of identity verification and compliance measures

As the Middle East emerges as a significant global hub for the cryptocurrency sector, the risk of  exploitation for criminal activities follows suit. Illicit crypto transactions remain a small fraction of the overall criminal economy compared to traditional fiat currencies. However, rising demand for digital assets highlights the importance of rigorous identity verification and compliance measures.

In recent years, cryptocurrencies have been used in complex money laundering schemes and investment fraud. In response, Gulf Cooperation Council (GCC) governments and regulatory authorities have adapted their regulations and strengthened Anti-Money Laundering (AML) frameworks to curb illicit acts.

The diverse landscape of cryptocurrencies across the GCC

GCC countries have shown varying degrees of acceptance of bitcoin and other cryptocurrencies. The Qatar Financial Centre Regulatory Authority (QFCRA), for instance, prohibits cryptocurrency trading. Qatar Central Bank (QCB), the sole regulatory and supervisory authority permitted to issue licences for the provision of transferring, exchanging, trading or dealing services for virtual assets and cryptocurrencies, has issued no such licences

In contrast, the UAE has embraced the sector by allowing the Dubai Multi Commodities Centre to launch a trading platform in 2021. They also introduced regulations for virtual asset activities in the Abu Dhabi Global Market (ADGM).

The anonymity and irreversible nature of cryptocurrencies attracted the attention of regulators across the globe, including GCC countries such as Saudi Arabia and Oman. The absence of a central authority and highly secure end-to-end encryption meant that bad actors could evade typical security measures, such as AML and Know Your Customer (KYC) procedures. This ability to overcome regulatory barriers made cryptocurrencies a prime target for fraudulent activities. Criminals used them for money laundering, terrorist financing, and extortion schemes.

The Bitcoin blockchain, and those underpinning other major cryptocurrencies, is inherently transparent because every transaction is recorded on a public, decentralised ledger that is accessible to anyone. This feature ensures that transactions are permanently auditable, allowing users to trace the flow of funds and verify the authenticity of transactions. Money launderers, keen to avoid this level of scrutiny, tended to use the services of centralised exchanges to cash out and convert crypto into fiat currencies. Improved regulations to prevent this now require virtual asset service providers to gather more in-depth information regarding customers and their transactions.

Embracing regulations for security

The GCC region is known for its prosperity and digitalisation, and has consequently attracted many of those who want to invest in cryptocurrency, creating a flourishing hub for the digital currency market. However, amid concerns about the regulatory and legal status, potential use in illegal activities, and sector volatility, GCC countries have taken varied approaches to cryptocurrency regulation.

Some countries, like Kuwait, issued warnings about the risks associated with investing in cryptocurrencies.

In contrast, the UAE has taken a more progressive stance and made significant efforts to position itself as a regional hub for blockchain innovation, and to explore the potential of the technology for businesses and consumers. The country hosts a number of cryptocurrency exchange and trading platforms, such as BitOasis and Bitex UAE, on which users buy, sell, and trade cryptocurrencies such as Bitcoin, Ethereum, and Ripple. Moreover, in 2021 the Dubai Multi Commodities Centre launched the DMCC Crypto Centre, a hub for cryptocurrency and blockchain startups. The centre provides entrepreneurs with support and assistance to safely navigate the legal and regulatory framework set up by the UAE government for cryptocurrencies.

Other countries in the GCC region are also exploring the use and regulation of cryptocurrency. Saudi Arabian Monetary Authority (SAMA) partnered with Ripple to use their blockchain technology through ‘xCurrent’, a software solution that allows the instant settlement of payments across borders. Moreover, the Central Bank of Bahrain (CBB) established a regulatory framework to monitor and license cryptocurrency activities in the country, and in January 2023, the bank’s governor, Rasheed Al Maraj, publicly celebrated the launch of Binance after it was granted a licence.

As the GCC region cautiously embraces virtual activities related to cryptocurrency, AML and KYC regulations are becoming more important than ever and are being enforced by governmental entities and banks who seek to prevent the use of virtual assets for illegal activities such as money laundering and terrorism financing. The UAE has already implemented several AML regulations recommended by the Financial Action Task Force (FATF — a global watchdog that establishes and promotes AML standards, and of which the GCC is a member) to help prevent malicious actors from converting dubiously obtained cryptocurrencies into real fiat currency. In KSA, SAMA issues AML and KYC requirements for companies that trade cryptocurrencies, obliging them to implement policies, procedures, and controls to ensure compliance with AML and KYC regulations.  Similarly, in Qatar, the Qatar Financial Centre Regulatory Authority (QFCRA) has issued regulations for cryptocurrency exchanges and related services, including requirements for licensing, AML, and KYC.

A step in the right direction

As GCC countries continue to explore the potential of cryptocurrencies and blockchain technology, their cautious approach highlights the importance of stringent regulations and oversight of related services. Governments and banks in the region have implemented policies, procedures, and controls to ensure compliance with AML and KYC regulations, paving the way for a more secure future for cryptocurrencies.

While the cryptocurrency market remains highly volatile, the introduction of AML and KYC measures can build a more compliant, anti-financial crime platform for both users and firms. Identity verification services and compliance solutions will play a critical role in ensuring the safe integration of cryptocurrencies in the Middle East, fostering a thriving yet secure digital currency ecosystem.

Ahmed Jamal is the Head of Shufti Pro for the Middle East and North Africa.

• Opinion