Dubai Leverages AI for Enhanced Crypto Regulation
Dubai is making strides in the cryptocurrency regulation landscape by implementing artificial intelligence (AI) technology to identify suspicious transactions in real-time. The Virtual Assets Regulatory Authority (VARA) recently launched the initial phase of its VARA Connect initiative, which integrates AI tools into the platforms utilized by virtual asset service providers (VASPs). This innovative system enables VASPs to share data with VARA, thus fulfilling their compliance requirements. According to Dan Johnson, the general manager of VARA, the adoption of AI is a response to the increasing volume and complexity of market data the authority receives.
Streamlining Compliance Through Automation
By automating and standardizing information exchange, VARA Connect aims to alleviate the compliance burden on firms, enhance operational efficiency, and ensure that regulatory oversight is both timely and consistent, as highlighted by Johnson. VARA’s regulatory purview extends to Dubai’s free zones and the mainland, although it does not cover the Dubai International Financial Centre.
Reform in UAE’s Crypto Regulatory Landscape
This initiative is part of a broader transformation of the UAE’s cryptocurrency regulatory framework, which is currently governed by the Virtual Assets and Related Activities Regulations. In September, the UAE Ministry of Finance initiated a public consultation regarding the potential adoption of the OECD’s Crypto-Asset Reporting Framework, which seeks to establish a standardized method for the automatic exchange of information related to crypto assets among tax authorities. The UAE has pledged to commence information sharing by 2028, with the consultation period remaining open until November 7.
Challenges and Opportunities of AI in Regulation
While AI offers numerous advantages, it is not infallible; there can be instances of false positives, and certain nuanced human issues might not be addressed effectively. Nitesh Mishra, founder of the ChaiDEX crypto hedging platform in Dubai, remarked that VARA’s proactive stance in adopting AI technology sets it apart from regulatory bodies in the US and Europe, which often face criticism for their slower pace. Mishra noted that Dubai’s early adoption strategy aims to position the emirate as a leader in the global crypto landscape.
Increasing Compliance Measures
Since its establishment in 2022, VARA has been intensifying its compliance requirements. Starting in 2024, companies engaged in digital asset investments will be mandated to inform clients about the potential for complete or partial loss of value, as well as the extreme volatility associated with virtual assets. In August, VARA imposed an undisclosed fine on the Morpheus VASP for conducting unlicensed activities and failing to disclose critical information. The firm has acknowledged the findings and proposed a corrective action plan that VARA will oversee. On October 7, VARA penalized 19 additional firms for unlicensed activities and violations of marketing regulations, requiring them to halt operations immediately.
Addressing Cybercrime Concerns
Dubai must take proactive measures to mitigate reputational risks linked to its association with the rising tide of cybercrime in Southeast Asia. A report from the UN Office on Drugs and Crime earlier this year identified Dubai as a hub for laundering proceeds from cryptocurrency fraud in the region. In 2023, Zhao Dong, known as the “OTC King” in China, was sentenced to seven years in prison for laundering approximately $480 million through a process that involved converting dirhams in Dubai into USDT stablecoins before transferring them to China. The UAE was placed on the Financial Action Task Force’s “grey list” in March 2022 due to deficiencies in its anti-money laundering and counter-terrorism financing frameworks but was removed from this list in February 2024 after implementing several reforms.
AI’s Role in Shaping Global Regulatory Norms
The integration of AI into VARA’s processes is seen as an advancement in regulatory practices rather than a shift in compliance requirements, according to VARA general counsel Ruben Bombardi. He expressed confidence that VARA’s AI-enhanced model could serve as an international benchmark for regulatory standards. However, human oversight remains vital for the project’s success. Henri Arslanian, chairman of ACX Compliance in Dubai, illustrated this point by comparing the process to a CFO utilizing Excel for financial modeling, emphasizing the necessity of human decision-making.
Future Implications of AI in Transaction Monitoring
The deployment of AI enables continuous monitoring of transactions, as opposed to periodic checks, facilitating quicker identification of suspicious activities through real-time alerts and reducing investigative time. Ashwati Kottayi, a lawyer specializing in VARA compliance, noted that while AI systems offer consistency and immunity from bias, the authority must remain proactive despite being relatively new, having been established in 2022. Failing to build a robust foundation of human and institutional experience could leave VARA lagging behind. Nonetheless, she cautioned against over-reliance on AI, which could compromise human judgment, and highlighted the significant initial costs and cybersecurity risks associated with AI systems. Kottayi emphasized that a phased implementation approach is crucial for a young regulator like VARA.
