Digital assets have been at the forefront of financial innovation for over a decade. What started with Bitcoin has now expanded into other avenues, thanks to the tokenization capability provided by blockchain networks. Traditional financial assets, like securities, can also be tokenized on-chain for benefits like enhanced liquidity, rapid cross-border and interbank settlements, and increased efficiency overall.
The world’s nations are coming to terms with the disruptive potential of digital assets, with more than one country approving spot Bitcoin ETP issuance in the past few months. That does not mean other countries have remained insulated from the digital asset revolution. Middle Eastern nations like the UAE have remained one step ahead of most jurisdictions, adopting and facilitating the development of digital assets and allied technologies at the regulatory juncture.
Middle Eastern Nations Are Working Tirelessly to Promote Digital Asset Innovation
Currently, multiple Middle Eastern countries favour digital assets, with Qatar utilizing blockchain technology to institute its CBDC (Central Bank Digital Currency) program, which is in its research phase. The UAE, too, has two distinct CBDC programs in the works. They will result in the deployment of the nation’s CBDC system. Several other countries are following suit. Moreover, the nations in this region are actively releasing new and amending existing financial and digital asset-related regulations to encompass various kinds of digital assets, their distribution, and use.
That includes regulations making it smoother for financial institutions and banks to adopt the assets sooner. That will bring mainstream investments into this space and push it further toward national and global adoption at the institutional and retail levels. Regulatory intervention also brings the need for competent VASPs (Virtual Asset Service Providers) that act as the stewards of the Virtual Digital Asset (VDA) industry.
The Role of Digital Asset Custodians in Safeguarding Financial Systems and Their Participants
Specifically, digital asset custodians that work to safely store, manage, and transact digital assets on behalf of their clients are crucial for institutional investors dealing with large amounts of digital assets. Likewise, Web3 and digital asset firms must turn to custodians for the safekeeping and management of their assets.
The number of hacks, thefts, and scams in the digital asset space is tremendous due to the lack of regulations for numerous years and the learning curve needed to hold and transact the assets. Moreover, the absence of VDA-specific regulations and oversight over the industry lets digital assets facilitate illicit activity.
Now, emerging and evolving digital assets regulations in the Middle East and the emphasis they place on the relevance of custodians in the digital asset space are making it safer for all stakeholders. With custodians, investors and enterprises can operate safely, overcoming hacks, thefts, and facilitating illicit fund flows.
The annual Chainalysis 2024 Crime Report suggests that 0.34% of digital asset transactions were associated with illicit activity in 2023. A whopping $24.2 billion flowed into sanctioned wallets, including those associated with crimes and others from OFAC (Office of Foreign Assets Control) sanctioned geographies. Although a decline from 2022’s $39.6 billion, 2023’s numbers are still significant. Regulations geared to curb illegal activity in the digital asset industry will help bring those numbers down.
Regulations, especially in various areas in the Middle East, are making it mandatory for institutions and enterprises to utilize custodians to manage their digital asset holdings to ward off illicit usage. Custodians act as a massive point for regulators to prevent illegal flows of funds since all digital asset enterprises require custody services, including exchanges, the platforms used to convert digital assets into cash. Obviously, criminals also use exchange services to liquidate their digital asset holdings obtained through crime.
Regulators mandate custodians to observe the digital asset activity of institutions, enterprises, and individuals to screen for illicit activity and sanctioned fund flows. They add a layer of control in jurisdictional digital asset ecosystems, preventing criminal financing. Custodians also ensure their users comply with financial laws by integrating solutions catering to the Travel Rule, KYC (Know Your Customer), and AML (Anti-Money Laundering) requirements and blocklisting privacy-related assets.
Also, custodians bring several layers of protection for investor and user assets by preventing enterprises from illegally using their funds for self-profiting measures. Turning to custody solutions integrates the needed amount of segregation for enterprises, preventing them from blending user funds with theirs.
Of course, these service providers integrate sophisticated cryptographic technologies to safeguard their clients’ funds. MPC Wallet (Multi-Party Computation) and MultiSig (Multi Signature)- enabled storage solutions alongside HSM-based cold wallets for asset storage are the norm with regulated custodians.
Digital asset custody is thus transforming the financial landscape in the region, letting entities and individuals interact with digital assets without worries to harness this innovative asset class boundlessly. VDA-friendly jurisdictions like the UAE, but more specifically, Dubai and Abu Dhabi, with their free zones, are witnessing increased entry of digital asset firms, with numerous being digital asset custodians.
Liminal Custody’s Middle East (First Answer Middle East Limited), has received an FSP (Financial Service Permission) license from FSRA (Financial Services Regulatory Authority) in Abu Dhabi’s ADGM (Abu Dhabi Global Markets) free zone. It has also received initial approval for the VASP license from VARA (Virtual Assets Regulatory Authority) in mainland Dubai.
Liminal will band together with the growing custody space and the digital asset industry to
empower institutions and enterprises to leverage the evident benefits of digital assets without hassles. With that, the Middle Eastern digital asset ecosystem will grow to newer heights, and its countries will emerge as the hotspots of digital asset innovation. This will also bolster the evolution of financial services in the region.
Digital Asset Custodians Will Help Usher in New Avenues for Financial Services
Digital assets are witnessing increasing adoption in the Middle East, with national regulators understanding their importance in bettering financial processes. Simply put, digital assets and their underlying blockchain technology can transform financial services to new dimensions, helping Web3 native businesses.
As that occurs, custodians will play a massive role in creating a safe digital asset landscape, protecting the assets of investors, enterprises, and end-users, and keeping these stakeholders compliant with regulations. Ultimately, digital asset custodians will protect entire financial systems and aid the growth of the asset class.
