What Are Perpetual Futures?

At Scalable Solutions, we are continuously working on bringing more features and products to our clients and users. On this occasion, we have integrated Perpetual Futures into our white-label digital asset exchange solution. We want to use this space to review exactly what futures are, their characteristics, benefits and more.

Before tackling the question “What are futures?”, we first need to take a step back and understand that a future is part of a broader financial asset category: Derivatives.

A derivative is a contract that derives its value from the price and variation of an underlying asset.

Derivatives have a number of purposes, the main one being hedging against price movements of underlying assets. In fact, the first modern derivatives appeared in the Dutch Republic and Osaka during the 17th century; these were created as vehicles for rice farmers to hedge against the variability of their harvests.

Derivatives can be categorized into different classes — the most commonly known are options, forwards, swaps, and, as you might have deducted, futures. Within each class, the underlying asset can be any type of investment vehicle or financial instrument. It can be equity, bonds, interest rates, commodities, market indexes, etc.

In traditional financial markets futures contracts are agreements between two parties to buy or sell a company stock, bond, currency, or another instrument at a predetermined price and at a specified time in the future.

Unlike mainstream spot markets, futures contracts do not enable engaged parties to directly purchase or sell the underlying asset. Instead, they trade a representation of the said asset, with the actual trading occurring on settlement days.

Futures contracts are usually cash-settled and — unlike forwards contracts — live within centralized markets with clearinghouses counterparties. Quarterly futures contracts expire every four months, where the price of the future tends to merge with the underlying price. Additionally, we can find perpetual futures. As their name explains, perpetual futures lack prespecified delivery (expiration) dates, allowing indefinite roll-over.

Instead of using daily settlements, perpetual futures contracts use a different mechanism to maintain a direct relationship with the underlying asset — funding.

“Long and short traders exchange a funding cost periodically (say every 8 hours) to reflect the price expectations during each funding interval (i.e. the spread between the perpetual contract price and spot price) and the cost of funding.” [1]

Futures contracts allow for leverage trading. The most basic understanding of leverage is borrowing/lending money. Traders can carry out trades bigger than their net position (Leverage = 1x), by borrowing money at varying rates (funding rates). In this case, anyone can post trades that are 5x, 10x or even 100x greater than originally possible, while only providing a small security position to ensure that they can pay off any losses. Because of leverage, future markets are very liquid and extremely capital-efficient.

According to The Block Research, the trading volume of BTC and ETH futures in 2021 has risen beyond USD $32 trillion, a 338% increase when compared to 2020.

Also, total spot trading volume on centralized exchanges reached $14 trillion in 2021, 57% less than that of futures.

Source: Volume of BTC and ETH Futures (Jan. 18th, 2022). Coinglass.

Still, in order to borrow funds, users need to post collateral; this is also otherwise known as ‘initial margin’ (the minimum value you must pay to open a leveraged position). In addition to the initial margin, traders need to maintain a certain ‘maintenance margin’; this is the minimum amount of collateral that must be held to keep a trading position open. In those cases where the margin balance drops below the maintenance level, traders will receive a margin call (asking them to add more funds to their account). If the margin is not met, the exchange will trigger a position liquidation, draining a trader’s funds and leaving them with no spot asset.

You can find more on margin trading, options and futures in our blog.

Below you can find the most common uses and advantages of futures contracts.

  • Futures enable hedging and risk management by providing exposure to many assets.
  • When expecting an adverse price movement, traders can post short positions and take advantage of the downward movement. This case would not be possible if one could just buy and sell spot positions alone.
  • Traders can enter positions that are larger than their account balance by the use of leverage — borrowing funds from liquidity providers in order to carry out big trades and realize greater profits.
  • Futures markets tend to improve the liquidity of any asset pair.

Scalable has integrated Perpetual Futures into its white-label exchange solution. The feature is now available under the “Futures” tab, along with a futures market overview for the current time and the updated Terms of Trading. Currently, Scalable exchanges support the most predominant perpetual futures tokens, and is working on including several more.

The current list includes:

BTC, ETC, LINK, ADA, LUNA, SOL, DOT, BNB, MATIC, EOS, AVAX, LTC, SHIB, TRX, MANA, ZEC, XLM, UNI, AAVE, XRP, BCH AND HIT.

You can get in touch with our team to schedule a demo or find out more about Scalable’s white label exchange infrastructure and features.

[1] “What Are Perpetual Contracts?” Bybit Learn, 10 Nov. 2021, https://learn.bybit.com/trading/what-are-perpetual-contracts/.

Stepping into 2022 with Scalable Solutions

As the new year fast approaches, Scalable Solutions has been busy at work finalising some exciting product updates for our current and future clients to enjoy in 2022.

Let’s take a quick look at some of the highlights of the past year.

  • Scalable integrated SumSub, an identity verification platform that provides an all-in-one technical and legal toolkit to cover KYC/KYB/AML needs. The partnership with SumSub helped our clients to easily tackle all onboarding and compliance challenges that come with identity verification. Moreover, it optimized KYC and AML procedures by converting existing policies into automated digital processes that allow faster and safer customer onboarding.
  • We introduced Scalable Audits, a product aimed at helping smart contract projects ensure robust security. Through a thorough analysis of the source code architecture, Scalable identifies vulnerabilities and provides a Security Audit report with recommendations to guard against potential attack vectors.
  • Additionally, Scalable is one of the few to support the FIX protocol — standard in global financial markets, but unusual in the digital assets sector. It allows established financial institutions to integrate trading algorithms designed for traditional markets seamlessly into the world of digital assets. The Scalable platform uses the most advanced APIs. Also, it supports FIX protocol 4.2 (standard in US equities today), 4.4 and 5.0 for MD feeds and managing orders. These battle-tested protocols are optimized for minimum latency.
  • We also received our SOC 2 certification! SOC 2 is an auditing procedure developed by the American Institute of Certified Public Accountants. It ensures service providers manage data securely to protect the interests of organizations and the privacy of its clients. Scalable Solutions’ SOC 2-certified software is already being used by regulated trading venues, for which having the required certifications in place is a prerequisite for successful and legal business operations.
  • Scalable also took a deeper dive in digital asset adoption, developing a series of articles exploring cryptocurrency adoption and regulatory frameworks in regions around the world — find them here.

Stepping into 2022 with Scalable Solutions

For 2022, we have planned an array of positive updates, both to our products and the way we work. Our team has expanded substantially to accommodate the growing demand for advanced trading infrastructure and our company growth plans for the new year.

Below you will find some of the new products and features you can benefit from straight away.

We’re delighted to share that from 2022, Scalable will offer clients its own white label custodial wallet. The wallet is an add-on integration to Scalable Solution’s digital asset exchange, allowing for a comprehensive white label offering. With the Scalable wallet, users can easily buy, send, receive and swap every asset listed on the exchange.

The digital asset wallet features include:

  • An intuitive interface that makes it simple to navigate and trade, regardless of experience
  • It ensured high level security through advanced cryptography
  • Cross-platform functionality
  • Tailored news feed per digital asset
  • It supports the most popular payment methods
  • An option to customize the wallet according to your brand, with a variety of language options

Scalable has integrated Perpetual Futures into the exchange solution. The new derivatives instrument acts similarly to traditional futures contracts. The main difference is that it has no expiration date and can be held indefinitely.

This feature is supported by the Futures Tab with a futures market overview for the current time and the updated Terms of Trading.

SumSub Liveness Check

We are partnered with SumSub to provide a secure and easy KYC process, especially with the new Liveness Check feature. Users no longer need to take a selfie with a passport to prove their identity, or wait for the manual verification that causes delays in the KYC process.

In brief, Liveness Check is based on a biometrics verification. This is a safer and more user-friendly verification method, as opposed to selfies. The ability to perform automated checks reduces officers’ workload and users’ wait times. Trading clients can pass verification in as little as 4 seconds, drastically reducing drop off rates.

Simplex & XanPool Payment Gateways

Simplex and XanPool are the newest additions to our platform, facilitating fiat to crypto payments. Our clients now have a choice of five cryptocurrency payment gateways — BanxaMoonPayMercuryo, and the aforementioned Simplex and XanPool.

KYT with Crystal Blockchain

Besides our existing KYT providers, Elliptic and Ciphertrace, clients can now also choose Crystal Blockchain. Crystal provides crypto transaction analysis and monitoring for exchange, bank, and AML compliance requirements. This ensures a safer trading environment and also avoids the deposit of funds from illegal sources.

Prime Trust

The integration with Prime Trust, an innovative open-banking financial solutions provider, allows users to move fiat on the exchange in real time and on a limitless basis. Hence, we can reduce the time to market in a secure and regulated manner.

Hidden Orders (HO)

The feature allows users to place hidden orders. Thus, we can exclude the influence of the order on the market, enabling a more profitable order execution.

The feature is now available through API, but will soon be available on the web.

Reduce-Only Orders (RO)

When users place a close order, they need to ensure that it doesn’t flip the position. In order to do this, we propose a Reduce Only feature for orders.

Reduce Only is a parameter for buy or sell orders. When specified, the order is limited by the size of the current position and orders before it. Reduce Only orders are compatible with any type of order (except for Scaled orders on the web) and any Time in Force instructions, but are available only on margin and derivatives.

The feature is now available through API, but soon will be available on the web.

Take Profit Orders (TP)

We have added a new order type called Take Profit order (Take). Similar to a stop-loss order, it is activated only when a certain price is reached on the market, but with the reversed price condition. TP Orders are available on all markets, including spot, margin and derivatives.

The feature is now available through API, but will soon be available on the web.

At Scalable Solutions, we are excited for what 2022 will bring and the innovations we have in store for our clients.

We would like to take this opportunity to thank you for your support and wish you a wonderful year ahead. Happy 2022 from Scalable Solutions!

Digital asset exchanges in 2021: Learning from mistakes

Digital asset exchanges in 2021: Learning from mistakes

Introduction

As the digital asset ecosystem continues to break records – transacted volume, total value locked, userbase, and more – it increases the incentive for malicious actors to exploit it. In 2020 and 2021 alone, the amount of funds locked on DeFi protocols increased from USD $500 million to USD $247 billion. Loots rose consequently – according to an Elliptic report, 2021 DeFi exploits totalled USD $12 billion – with theft and fraud accumulating roughly 87% of that amount, a sevenfold rise from the previous year [1]. There is lots to learn from the mistakes made by digital asset exchanges in 2021. 

Analyzing past events is one of the first steps of improving the cycle. As we approach the end of the year, we take a look at the major events that played out in the digital asset landscape, with a focus on learning from the negative and unusual. With this information, we can improve the decision-making process for the upcoming year.

Read on to find out the mishaps that tormented digital asset exchanges in 2021, and how the right technology partner can help avoid these. 

2021 cryptocurrency exchange mishaps

The following guidelines can be used to evaluate exchanges:

  • Market Manipulation

Unfortunately, several exchanges are incentivized to engage in market manipulation practices – pump and dump schemes, wash trading (suspicious trading behaviour using bots), order book manipulation, insider trading, etc. According to NASDAQ’ crypto surveillance unit, wash trading is prevalent in 33% of all transactions.

In a recent study of 29 digital asset exchanges, wash trading accounted for twice as much as NASDAQ reported. According to estimates, wash-trading practices represent roughly 70% of reported volume, improving an exchange’s rankings, temporarily distorting prices, and attracting more users [2]. 

  • Security

Centralized cryptocurrency exchanges have been destabilized by several hacking events in 2021. Among the most significant are the Liquid Global and Bitmart cases. The Liquid Global exchange suffered a hack in August that resulted in the loss of over USD 80 million, forcing Liquid to secure USD $120 million in debt financing from FTX Trading [3]. A few weeks ago, Bitmart lost roughly USD $100 million in Ethereum wallets. It was later discovered that a concurrent hack had taken USD $96 million more from its Binance Smart Chain wallet holdings [4].

Learn about security in digital asset exchanges: Security Issues in Digital Asset Exchanges.

  • Scaling and Outages 

Based on previous experience of traditional financial markets, it would be fair to assume that the high number of scaling issues found throughout digital assets’ history would tend to decrease in time. Surprisingly, to this date, outages and platform freezes have continued to characterize centralized cryptocurrency exchanges from the smallest ones to the biggest ones. 

The months of May, August, September, November and December saw the biggest scaling challenges in 2021. Binance and Binance.US, Coinbase, Kraken, Gemini, Bitstamp, and dozens more have suffered significant downtime and loss of users funds because of this [5]. 

Perhaps you’ve even read about the class action proceeding that faces hundreds of investors against Binance. These investors reported having lost hundreds of millions of dollars during a major outage, and are aligning to sue the exchange that has no official headquarters [6]. 

Want to know more about scalability?: Digital Asset Exchanges: The Issue of Scalability.
Want to know more about outages?: The other side of Bitcoin’s ATH: Outages.

  • Customer Service 

Customer service is often disregarded as it is not a primary input that any user takes into account when selecting a specific digital asset exchange. Still, it has continuously proven to be more and more relevant as issues arise throughout the trading and investment process. While superior customer service lacks its corresponding publicity, inadequate customer service takes the spotlight in all major social networks. Current cases like that of Coinbase display the inconveniences that hundreds of users go through when reporting issues such as hacks and drain of funds [7].

The lack of satisfactory – or even adequate – customer service has proven to impact centralized exchange’s user base and profitability.

Read about Customer service in digital asset exchanges: Customer support and KYC Integrations in Digital Asset Exchanges.

Going the extra mile: Exchanges’ responsibilities

Astonishingly, current exchanges also suffer from non-technical errors. Even unchecked user errors – such as “fat-finger” or trading algorithms – continue to impact the trading experience – and success – of several traders. The most recent and clear case that showcases this lack of attention and verification mechanisms is that of October 20th. Solely on BinanceUS, Bitcoin momentarily plunged 87% – from ~ USD 65,000 to USD 8,200 – overwhelming its order book [8].

A truly Scalable Solution

In Scalable Solutions you can find the most delicate and robust mix of high-end security, liquidity, technology scaling, KYC and regulatory verifications, and superior customer service. Clients that utilize our white-label services are becoming industry leaders. Scalable technology powers exchanges in the top 50 exchanges by volume and have processed trillions of dollars in transactions, yet have never been breached.  Scalable technology provides a myriad of mechanisms that can make your digital asset exchange top of the industry, without the 2021 mishaps explored above.  Get in touch today to book a demo. 

 

 

 

References

[1] Browne, Ryan. Criminals Have Made off with over $10 Billion in ‘DeFi’ Scams and Thefts This Year. CNBC, 19 Nov. 2021, https://www.cnbc.com/2021/11/19/over-10-billion-lost-to-defi-scams-and-thefts-in-2021.html.

[2] Cong, Lin William, et al. “Crypto wash trading.” arXiv preprint arXiv:2108.10984 (2021).

[3] Partz, Helen. “Hacked Liquid Exchange Receives $120m Debt Funding from FTX.” Cointelegraph, 26 Aug. 2021, https://cointelegraph.com/news/hacked-liquid-exchange-receives-120m-debt-funding-from-ftx.

[4] Sarkar, Arijit. “Bitmart Hacked for $200m Following Ethereum, Binance Smart Chain Exploit.” Cointelegraph, Cointelegraph, 5 Dec. 2021, https://cointelegraph.com/news/bitmart-hacked-for-200m-following-ethereum-binance-smart-chain-exploit.

[5] Keely, Aislinn. “Crypto Exchanges Report Outages amid Extreme Market Volatility.” The Block, 19 May 2021, https://www.theblockcrypto.com/linked/105366/exchanges-outages-market-volatility-eth.

[6] Browne, Ryan. “Cryptocurrency Traders Seek Damages from Binance after a Major Outage Cost Them Millions.” CNBC, 19 Aug. 2021, https://www.cnbc.com/2021/08/19/cryptocurrency-traders-seek-damages-from-binance-after-major-outage.html.

[7] Young, Martin. “Coinbase Users Angry with Customer Support after Funds Disappear from Accounts.” Cointelegraph, 25 Aug. 2021, https://cointelegraph.com/news/coinbase-users-angry-with-customer-support-after-funds-disappear-from-accounts.

[8] Baker, Nick. Bitcoin Crashed 87% on Binance’s U.S. Exchange Due to Algo Bug. Bloomberg, 21 Oct. 2021, https://www.bloomberg.com/news/articles/2021-10-21/bitcoin-appears-to-crash-87-on-binance-in-apparent-mistake.

Sources

Walker, Martin C. W., and Winnie Mosioma. “Regulated Cryptocurrency Exchanges: Sign of a Maturing Market or Oxymoron?” LSE Business Review, 16 Apr. 2021, https://blogs.lse.ac.uk/businessreview/2021/04/13/regulated-cryptocurrency-exchanges-sign-of-a-maturing-market-or-oxymoron/.

The state of digital asset adoption in Turkey

Turkey has been at the center of the digital asset adoption discussion for some time now. As a country with the potential to become a global blockchain hub, it deserves careful revision.  

The adoption measurement struggle

Measurement of digital asset use in Turkey has proven to be a more delicate task than in other countries. In its 2021 Global Customer Survey, Statista presented Turkey as one of the top five countries leading digital asset adoption worldwide. According to the study, nearly 16% of survey respondents said they owned or used digital assets [1]. 

Conversely, two recent studies carried out by local exchanges draw a sharp contrast to this posture. Istanbul-based leading cryptocurrency trading platform Paribu reported a digital asset use of less than 1% in 2020, with an eleven-fold increment in 2021 (~7.7%). The same report details a 54 percentage point increase in the number of people who heard about cryptocurrencies; a 74% user satisfaction related to transaction experience was also noted. Respondents also selected the ability to execute transactions 24/7 with no geographic restrictions to be the predominant advantage for digital assets’ use. Interestingly, this growth in digital asset awareness did not come accompanied by knowledge in its underlying blockchain technology. For example, four-out-of-five people never heard of blockchain technology, virtually maintaining this level from the previous year [2].

Furthermore, a more recent data-centered integral study carried out by Statista displays the growth of daily users of selected applications that allow cryptocurrency storage, from January 2017 to February 2021. Nearly 300,000 users utilize cryptocurrency-related storage applications daily, with BtcTurk PRO and Binance leading the list.

 

 

cryptocurrency storage in Turkey

Source: Average number of daily active users (DAU) of selected apps that allow for cryptocurrency storage in Turkey from January 2017 to February 2021 [3].

Potential reasons for adoption

Similarly to many South American or African countries, digital assets have served as protection against inflation in Turkey, and fueled the interest in those looking for a hedge. In February, the lira experienced an inflation rate jump of 15%, a percentage considerably higher than the 5% target set by the monetary authority. In addition to the inflation jump, the lira continues its long-term depreciation against the US dollar. Since its value of 1.78 USD/TRY in October, the exchange rate has been steadily increasing to 8.5 USD/TRY in September 2021, to its current 12.36 USD/TRY.

The current state of affairs

In addition to the opposing positions that overburden the analysis on digital asset adoption in Turkey, one can encounter further data-related challenges – with volume analysis being a central one. Take, for example, the $2.8 billion traded between March 20-24 – a spectacular increase when compared to the $12 million traded during the same period last year. What would otherwise be a valuable piece of information on adoption trends, is subject to a thorough examination. This stems from Turkish exchanges not requiring licenses, with several operating with inflated volumes and incurring unethical practices [4].

A timeline of recent events

Some relatively recent events from 2021 that will probably affect the adoption of digital assets in Turkey include:

  • April 16th. The Central Bank of the Republic of Turkey (CBRT) announced the prohibition of the use of cryptocurrency as a payment method. While taken as a setback by millions of users and payment firms, this statement did not make it illegal to trade digital assets. It did not change the circumstances for cryptocurrency exchanges.
  • April 30th. The CBRT banned the use of digital wallet providers as fiat on-ramps for crypto exchanges. This was the first attempt at introducing a legal framework that would define digital assets as “intangible assets that are virtually generated using a distributed ledger or a similar technology and distributed over digital networks,” not as currencies.
  • September 15th. The CBRT advanced an R&D project to analyze the prospect of a digital Turkish Lira. It signed a memorandum of understanding with three domestic research and technology companies that will form the “Digital Turkish Lira Collaboration Platform.” Participants will develop and test the digital lira prototype network [6] [7].
  • September 20th. A conflict arose between Turkish authorities. Turkish President Recep Tayyip Erdoğan spoke against the CBRT position on digital assets, declaring it to be at ‘war with cryptocurrencies’ [8].

Conclusion

While the current status of digital asset adoption is momentarily unclear, we can gauge one probable conclusion – the Turkish region will be subject to many blockchain-related developments in the coming years. Those developments may see extraordinary adoption rates, political and regulatory developments, or a combination of both. 

Your Scalable Solution

Scalable Solutions can provide a wide range of products and services in the space to make the ‘create your exchange’ journey easier – regardless of the region. With several partners to help our clients navigate the regulatory requirements needed to run an exchange, we are equipped to swiftly adapt to new circumstances – both technological and regulatory.

Get in touch with us today to bring your project to life. 

 

 

 

 

References

[1] Buchholz, Katharina, and Felix Richter. “Infographic: How Common Is Crypto?” Statista Infographics, 17 Mar. 2021, https://www.statista.com/chart/18345/crypto-currency-adoption/.

[2] Paribu, Akademetre. June 2021. Cryptocurrency Awareness Research. Accessible at https://www.paribu.com/blog/wp-content/uploads/2021/09/Arastirma-raporu-ENG.pdf.

[3] Best, Raynor de. “Most Popular Cryptocurrency Apps Turkey 2021.” Statista, 7 May 2021, https://www.statista.com/statistics/1222485/most-popular-cryptocurrency-wallets-turkey/.

[4] Diwakar, Amar. Why Are Cryptocurrencies Booming in Turkey? https://www.trtworld.com/magazine/why-are-cryptocurrencies-booming-in-turkey-45827.

[5] Kahraman, Erhan. “Crypto Payments Banned in Turkey – Is This Just the Beginning?” Cointelegraph, 20 Apr. 2021, https://cointelegraph.com/news/crypto-payments-banned-in-turkey-is-this-just-the-beginning.

[6] Bryanov, Kirill. “Turkish Central Bank Taps Local Tech Firms for Digital Currency R&D.” Cointelegraph, 15 Sept. 2021, https://cointelegraph.com/news/turkish-central-bank-taps-local-tech-firms-for-digital-currency-r-d.

[7] “Press Release on Central Bank Digital Turkish Lira R&D Project.” TCMB, 15 Sept. 2021, https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Announcements/Press+Releases/2021/ANO2021-40.

[8] Kahraman, Erhan. “’We Are at War’ with Crypto, Says Turkish President Erdoğan.” Cointelegraph, 20 Sept. 2021, https://cointelegraph.com/news/we-are-at-war-with-crypto-says-turkish-president-erdogan.

Middle East: Digital Asset Adoption Overview

As a white-label digital asset exchange provider, we are constantly analyzing the landscape for technological innovation, adoption, and regulatory changes. We continue to share an overview of this information with our community, and assist them in making more informed decisions. This path has taken us to far-out regions and special case countries. Some of them included Latin AmericaBrazil, Mexico, Colombia – and AfricaNigeria, Kenya, and South Africa. We will now take a look at the state of digital asset adoption in the Middle East.

The relationship between adoption and regulation

It appears natural to intuitively link digital asset adoption with any given regulatory landscape. Yet one must not fall into the correlation trap. The evidence does not support this implicit relationship – at least not as much as one would think. For example, take Nigeria and Venezuela – countries where adoption rates have been skyrocketing despite the hostile regulatory landscape. 

Yet there is a distinction between correlation and causation. Causation – as opposed to correlation – can trace a distinct cause-and-effect relationship between two variables. While an uncertain regulatory landscape does not necessarily mean low adoption rates, a friendly regulatory landscape invites innovation and therefore has a stronger relationship with high adoption rates. Switzerland, one of the most prominent blockchain hubs, has demonstrated this multiple times.

What does this mean? Finding cases where the regulatory landscape is slowly positioning itself as open can be a strong proxy of digital adoption in the coming years. We’ll see that the disposition of some Middle Eastern countries makes them a suitable and potentially profitable option for those seeking the next region on the brink of blockchain disruption.

Reasons for the shift and steps towards adoption

The case for the adoption of digital assets in the Middle East stems from a similar tree to that of Latin America. Fundamental economic situations – such as hyperinflation – and macro consumption trends have forced Latin American countries to adopt digital currencies. In the Middle East, the drive was born out of a necessity to shift away from oil-like economic revenue sources to cleaner ones – the “green revolution” has led to increased diversification within the Middle East towards investments in alternative sectors like tourism, technology, and finance. Nowadays, ME countries leverage blockchain to reach their sustainability agendas. Thus, the Middle East has established itself as a global hub for innovation in financial technology.

Specific accomplishments toward the goal of responsible adoption encountered a joint CBDC project called Project Aber, where half a dozen commercial banks participated. Furthermore, central banks from Saudi Arabia and UAE have been collaborating on blockchain and its involvement in the financial sector. Project tests were a success, showing as a result that CBDCs would be technically viable for cross-border payments – an  improvement over current centralized systems in costs and processing speed [1]. 

Cryptocurrency adoption trends

Appetite for digital assets has been growing in this region as well. In 2020, the total value of digital payment transactions more than doubled when compared to its previous year –  achieving a vast $US 18.5 Bn [2]. 

According to a McKinsey survey carried out in 2020, even though the region’s population can be categorized as ‘digitally savvy’ – smartphone penetration reaches ~90% in leading markets – the region has remained heavily dependent on cash. Underdeveloped digital payment infrastructure results in underbanked consumers and a cultural bias towards cash (65% of retail transactions) [3]. New developments and digital payment awareness have demonstrated that 58% of ME consumers expressed a ‘strong preference for digital payment methods,’ suggesting that a cultural shift may be underway.

 

Middle East preferred payment methods

 

Source: Most preferred payment mode in 5 years. McKinsey (2020) [3].

A special Crypto Center project launched and managed by the DMCC – Dubai-based world’s No.1 Free Zone – to promote blockchain technology has become the home to hundreds of organizations, with +900 awaiting licence approval. Over 400 crypto businesses already operate in the UAE, with many more expected. Ahmed bin Sulayem, executive chairman and chief of the DMCC, is optimistic that the UAE will have +1000 crypto businesses running by the end of 2022 [4].

Regulation in the Middle East

The need for a regulated marketplace has become the focus of attention for both digital asset adopters and those reluctant to include them in their daily lives. While both positions can passionately argue about their stance, one thing is clear. Digital asset users need a safe space to utilize the technology. Also, countries need a way to control extreme situations. An example of this is the recent incident that included a falsely-claimed official cryptocurrency of Dubai, Dubacoin, which surged in price by over 1,000% in under 24 hours. It subsequently decreased almost as spectacularly – leaving investors empty-handed.

The regulatory stance on digital assets across the world has been as heterogeneous as the coin offering itself. While some government agencies have had a rigid attitude towards cryptocurrencies, others have seen the potential that could be harnessed by embracing them, and are acting accordingly. Several Middle East and North Africa (MENA) countries have chosen this route [2]. 

In 2018, the Abu Dhabi Market regulatory authority (FSRA) introduced a framework for operating digital asset businesses. This has made Abu Dhabi an appealing jurisdiction for blockchain-based financial services firms [2]. 

Later, the ME SEC-equivalent authority (SCA), in partnership with the Dubai World Trade Center Authority, signed an agreement to support trading and other financially-related activities within its free zone. While digital assets are not licensed by the Central Bank – the UAE dirham is the only legal tender recognised by the central bank – the agreement established a framework for the DWTCA to regulate and issue necessary the licences for financial activities related to crypto assets, and the SCA would oversee and monitor operating entities [5]. 

Scalable Solutions

At Scalable, we can help you make the journey of building an exchange seamless. Also, we are there to advise you on the regulatory implications to keep in mind. Get in touch by booking a demo today.

 

 

 

References 

[1] Team, Editorial. “Middle Eastern Central Bank Digital Currencies and the World.” Finextra Research, 3 May 2021, https://www.finextra.com/blogposting/20249/middle-eastern-central-bank-digital-currencies-and-the-world.

[2] Hensel, John. The UAE’s Growing Appetite for Crypto and Blockchain. The National, 21 Sept. 2021, https://www.thenationalnews.com/opinion/comment/2021/09/12/the-uaes-growing-appetite-for-crypto-and-blockchain/.

[3] Chan, Jon, et al. “The Future of Payments in the Middle East.” McKinsey & Company, 26 Aug. 2021, https://www.mckinsey.com/industries/financial-services/our-insights/the-future-of-payments-in-the-middle-east.

[4] Cabral, Alvin R. Dubai Expects to Have More than 1,000 Cryptocurrency Businesses by 2022. The National, 19 Oct. 2021, https://www.thenationalnews.com/business/cryptocurrencies/2021/10/18/dubai-expects-to-have-more-than-1000-cryptocurrency-businesses-by-2022/.

[5] Mansoor, Zainab. “UAE Stock Market Regulator, Dubai World Trade Centre Authority Agree to Support Crypto Assets Trading.” Gulf Business, 23 Sept. 2021, https://gulfbusiness.com/uae-stock-market-regulator-dubai-world-trade-centre-authority-agree-to-support-crypto-assets-trading/

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