Strict Guidelines in the US and Canada Drive Out Exchanges as UAE Opens its Doors to VASPs

The United Arab Emirates federal financial regulator this week said it is accepting licensing applications for companies planning to become virtual asset service providers (VASPs) in the country. The freshly-released mandatory licensing regime requires that VASPs apply with the Securities and Commodities Authority (SCA) prior to setting up their businesses in the region. Firms already licensed in the country’s financial free zones are exempted from this requirement according to an April 17 statement.

UAE's regulator opens licensing applications for VASPs

Worth noting the SCA only took “responsibility for supervising and regulating the virtual assets sector in the State” earlier this year. In a February 7 statement, the regulator said it had been assigned the tasks under Cabinet Resolution No. 111 of 2022.

Bybit announces new headquarters in Dubai

In a related Monday announcement, Bybit exchange said that it has officially opened up headquarter offices in One Central Dubai, almost a year since it secured in-principle approval to set up virtual assets businesses in the region. The debut move completed the exchange's previously disclosed plans to set its global headquarters in the constituent emirate of the UAE. To celebrate the grand opening event, the exchange announced a series of giveaway events that will run until April 22.

Bybit's announcement comes just two months since Dubai's virtual asset regulator unveiled licensing requirements for crypto entities. The currently in effect law was approved by the ruler of the United Arab Emirates, Sheikh Al Maktoum and requires that residents register with the Dubai Virtual Asset Regulatory Authority (VARA) to engage in crypto-related activities. Businesses looking to carry out in digital asset activities must also establish a presence in Dubai. VARA operates as the sole authority overseeing the virtual assets space across Dubai's special development zones and free zones. The regulatory body is also responsible for setting rules and control around virtual assets in its jurisdiction scope which excludes the Dubai International Financial Centre.

The DIFC special economic zone is overseen by the Dubai Financial Services Authority, which announced plans to adopt its own framework on crypto in 2021. Like the other emirate within the UAE, Dubai has subscribed to independent laws and regulations in its endeavor to become the global hub. Being the most populous of other emirates, Dubai has maintained a lead as one of the progressive digital assets environments in the region.

Exchanges still face heat from US authorities

In contrast to the picture in MENA, the North American regions have become even more hostile to crypto firms and potential investors in recent months.

SEC targets Bittrex less than a month after revealing US exit plans

On Monday, the US Securities and Exchange Commission (SEC) filed charges related to illegal crypto issuance against Bittrex and its former CEO William Shihara in the US district court in Washington. The SEC complaint accused Shihara of advising issuers seeking to make their tokens available for trading on the platform to obscure and conceal public statements, which he thought would draw scrutiny from regulators. This collusion was meant to sidetrack potential investigation from the SEC on whether the token offerings are securities.

“Bittrex has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have over the course of decades constructed for the protection of the national securities markets and investors,” a section of the lawsuit spelt.

Subterfuge acts also extended to Bittrex's platform which reportedly delisted some of the tokens to avoid scrutiny in April 2019. The exchange later relisted a few of them, like DASH and OMG, in the context of retaining relevance in the market. The agency flagged the actions, adding that they reflect compromised integrity since the exchange prioritized profits over investors. Bittrex's platform allegedly collected transaction fees from users serviced from 2017 to 2022, contributing to more than $1.3 billion in revenues.

Other lawsuit implications

The lawsuit additionally implied that many of the tradeable assets on the platform tick as securities, narrowing down examples to Dash (DASH), Real Estate Protocol (IHT), Naga (NGC), OMG Network (OMG), and Monolith (TKN). The list also included Algorand's governance token ALGO – a notable inclusion as it ranks among the top 50 cryptocurrencies by market capitalization. The regulator further accused Bittrex's global unit, Bittrex Global of running an unregistered securities exchange.

“Bittrex’s business model was based on three things: circumventing the registration requirements of the federal securities laws; counseling issuers of crypto asset securities to do the same by altering their offering materials; and combining multiple market intermediary functions under one roof to maximize profits,” SEC's chair Gary Gensler remarked.

Bittrex Inc denied that securities and investment contracts were offered on its platform. The exchange lambasted the regulator for being unresponsive and ignoring multiple requests it made seeking guidance and clarity. Bittrex Global separately said it intends to “vigorously defend” its position in court, maintaining that it has no US customers. The regulator's pursuit of Bittrex is part of an intensified crackdown on firms native to the digital assets space, including crypto exchanges, this year.

Plans to permanently exit the US

Last month, Bittrex said it would ice its operations effective April 30, citing an uncertain economic and regulatory environment. Monday's enforcement action also marks the second instance of the exchange being accused of violating crypto regulations in less than ten months. In October, the Financial Crimes Enforcement Network (FinCEN) and Treasury Department through Office of Foreign Assets Control (OFAC) fined the exchange $24 million and $29 million, respectively. The Treasury Department said the exchange allowed users in several sanctioned regions like Cuba, Crimea, Iran, and Syria, to access the platform. Bittrex agreed to pay the effective fine of $29 million as a penalty for these offences between March 2014 and December 2017

Coinbase is ready to relocate outside the US if the picture remains obscure

Bittrex isn’t the only exchange having a hard time in the US scene. Coinbase, which became publicly traded two years ago through a direct listing on Nasdaq, is also the target of regulatory action in the US. In the case of Coinbase, so hostile has the situation grown that the exchange is teasing migration to favorable jurisdiction. Speaking at the Innovate Finance Global Summit Tuesday on Tuesday, Coinbase CEO Brian Armstrong hinted that the exchange is weighing options that guarantee its best interests. The executive said all recourses, including a move out of Stateside, are on the table.

Most industry experts reckon that an exit outcome is unlikely but should push come to shove; they view Europe as a possible destination. The European Parliament is expected to discuss the Markets in Crypto Assets Regulation (MiCA) law, whose final text was drafted earlier ahead of a vote. The pending vote on the forthcoming regulation was scheduled for Tuesday, but the latest reports indicated it has been pushed back to Wednesday (April 19) followed by an imminent vote on Thursday. The UK is also working on a comprehensive framework for regulating stablecoins and crypto assets as proposed under the Financial Services and Markets Bill (FSMB).

Markedly, both frameworks sit well with Coinbase, which has, on past occasions, praised the initiatives. Coinbase has previously indicated that it is willing to challenge the Gensler-led commission. In a more recent interview on CNBC, Armstrong said on Tuesday that the exchange is gearing up for a legal battle with the SEC.

Coinbase CEO isn’t the only one to suggest a potential relocation. Kraken co-founder Jesse Powell said in April 2021 that the exchange business was mulling a US exit to friendlier environment like the United Arab Emirates. In the UK, the Financial Conduct Authority (FCA) is the sole watchdog responsible for commodities and securities oversight. In contrast, the control and management of this turf in the US has been designated between the SEC and the Commodity Futures Trading Commission (CFTC).

Canadian authorities leans on industry players

In Canada, the market authority began bolstering the guidelines for crypto exchanges last year, demanding they subscribe to more stringent oversight and investor protection measures. The Canadian Securities Administrators (CSA) required crypto asset trading platforms to secure an enhanced pre-registration undertaking to operate as a restricted dealer in the country while awaiting full registration to operate there. Among other requirements, the exchanges must separate assets belonging to Canadian customers from those of other international customers and choke back on services offered to Canadians.

Crypto exchange Gemini has complied

Last week, Gemini's strategy & corporate development team conveyed in an April 12 post that it had toed the line with the requirements, informing its Canadian users that its services remain undisrupted. Cynthia Del Pozo, the team's director at the exchange, reiterated that Canada remains an important component of Gemini's global expansion strategy. Just as Gemini couldn't bear losing its retail clientele, other major exchanges, including Binance, Kraken, Coinbase, and Crypto.com have initiated similar efforts to remain in the country.

Other firms would rather quit

Canada's regulatory climate pushes out DEX dYdX

Earlier this month, decentralized crypto trading platform dYdX announced it was withdrawing from Canada. The platform said in the corresponding blog post that the harsh regulatory weather would have to calm down before it can resume services in the country. dYdX ceased onboarding new users to its platform on April 7, adding seven days for existing ones to manage outstanding positions. The platform eventually entered a close-only mode on April 14, where all remaining users will now reside but remain free to withdraw their funds anytime.

Broker Paxos also iced its Canadian operation

Crypto brokerage firm Paxos followed dYdX in quitting the Canadian market, though promising to cooperate with the Ontario Securities Commission (OSC) in finding when best the environment can allow it a comeback. The blockchain infrastructure platform assured users their funds remained safe, as reflected in their account balances, urging them to move their funds. c

Customers can wire their fiat balances to bank accounts linked to itBit accounts under their names.  Alternatively, they can withdraw their crypto to an external wallet. Starting July 2, users can only complete withdrawals and not any other transactions on the platform. Ideally, the accounts would be disabled after this date.  Accounts without any funds will be shut down on May 9.

OKX blamed the regulations too

Pointing to regulatory changes, OKX told users last month that it was temporarily halting services to the Canadian market, informing customers in the country to close all open options, margins, perpetual and futures positions by June 22. Any crypto or fiat held with the exchange must also be withdrawn by the same day.

Kraken seeks restricted dealer status, compliance with the CSA’s investor protection measures

While several firms have announced plans to close shop in Canada, some have remained firm in their commitment to serve users. Kraken, which is registered in Canada as a money services business, is among those that have shown a willingness to adhere to revised tougher rules. The exchange revealed on March 30 that it submitted a pre-registration undertaking with Ontario's capital market regulator, the Ontario Securities Commission. The new registration would classify it as a Restricted Dealer throughout Canada, conforming with the recently revised investor protection guidelines by the Canadian Securities Administrators (CSA).

The CSA defines restricted dealer registration as a unique form of dealing registration meant for firms that do not accurately fall under any other category. Regulators work on fulfilling the requirements of such firms based on their individual needs. Notably, the CSA adopted new guidelines for crypto asset trading platforms in February. As a result, Kraken has been required to file a legally binding document as proof of its commitment to adhere to these measures. These new standards require several changes, including adopting new custody criteria, restrictions on leveraging, and prohibiting stablecoin trading without the CSA's prior written consent.