Everything You Should Know Before Launching an STO in the Middle East
The Middle East is home to a number of the world’s wealthiest countries and the Gulf region is especially prosperous thanks to its surplus of natural resources. This great affluence makes the Middle East an attractive prospect to anyone seeking investment and a worthy area of focus when raising funds.
While a great deal of funding for blockchain projects originates from within the region, the regulatory frameworks of its individual nations are often prohibitive. Although positive moves towards cryptocurrency regulation are being made, many of these seeds have yet to sprout, let alone bear fruit. In other countries within the Gulf region, a heavy skepticism towards cryptocurrency prevails, leaving little to no room for legal token offerings.
United Arab Emirates
Historically the UAE has been averse to cryptocurrencies, having prohibited their use in early 2017. Now, the UAE is positioning itself as one of the more crypto-friendly regions in the Gulf as the oil-rich nation seeks to diversify its economy. A number of reports recently cited the UAE as the number one contributor to token sales in the world. 25.4% of all funds raised in Q1 2019 came from the UAE, exceeding $210 million.
In the UAE, the Financial Services Regulatory Authority (FSRA) is the ruling body of note. The FSRA requires a full prospectus detailing the method of sale, the names of the participants in the offering, operational and financial information and audited financial statements in any case where a security is offered to the public. It is possible to apply for exemptions from filing a prospectus where the offering only accepts professional investors, only seeks 50 investors in a 12-month period, or only accepts a minimum purchase of $100,000.
As the largest and wealthiest partner in the Gulf Cooperation Council (GCC), Saudi Arabia will always be of interest to startups and investors. That said, the Saudi securities market is largely a closed book to the outside world. As an example, Saudi Arabia’s stock market, the Tadwul, is only open overseas to established institutional investors and not to individuals. A foreign investor would have to have been in business for five years and manage a portfolio of no less than $5 billion to qualify for participation.
Despite a history of strong resistance to cryptocurrencies with the use of Bitcoin being outlawed, Bahrain seems to be warming to the idea of blockchain technologies now. In Q1, 2019 the Central Bank of Bahrain (CBB) released its rulebook on crypto assets. While this document currently contains little pertaining to security token offerings, Khalid Hamad, the Executive Director of Banking Supervision at the CBB, has stated: “We will continue to enhance our regulatory framework in order to keep pace with the innovations taking place in the major financial centres around the globe. The CBB’s introduction of the rules relating to crypto-assets is in line with its goal to develop comprehensive rules for the FinTech ecosystem supporting Bahrain’s position as a leading financial hub in the Mena region.”
At present the CBB is inviting blockchain companies to test out their solutions on a trial basis. In July 2019, the CBB issued a Crypto-Asset Module (CRA) license to Rain, a Bahrain-based cryptocurrency exchange. This is the first regulatory license ever to be assigned to a cryptocurrency exchange in the Middle East. Bahrain seems to be emerging as a future-facing jurisdiction in the region and its first STO may not be far off.
In Oman, cryptocurrency sits in the uneasy grey area of being neither banned nor allowed. The Central Bank of Oman (CBO) refuses to involve itself, even going so far as to issue a statement advising Omani citizens that, while dealing in cryptocurrencies is not legally prohibited in Oman, the Central Bank will not be held responsible for any financial consequences stemming from such dealings. This gives no legal framework from which to launch an STO with the country.
Qatar maintains a strongly anti-crypto position, with the Supervision and Control of Financial Institution Division of Qatar’s Central Bank proclaiming Bitcoin illegal and forbidding any dealings in cryptocurrencies stating:
“For the purpose of maintaining a sound and robust financial and banking sector, Qatar Central Bank urges all banks operating in Qatar not to deal with Bitcoin, or exchange it with another currency, or open an account to deal with it, or send or receive any money transfers for the purpose of buying or selling this currency. QCB shall impose penalties in accordance with the provisions of the Law of the Qatar Central Bank and the Regulation of Financial Institutions “Law no (13) of 2012” in case of any violations of the above-mentioned instructions.”
This being the case, it seems unlikely that Qatar will be the home to an STO any time soon.
The climate in Kuwait is similarly hostile. The Kuwait Ministry of Finance has stated that it will not recognize any official commercial transactions using Bitcoin or any other crypto asset. Kuwait’s Capital Markets Authority has strongly warned investors against involvement in ICOs which it will not regulate.
Israel’s main regulatory authority is the Israel Securities Authority (ISA), although the Israeli Anti-Money Laundering Authority also has a role to play. There is currently no record of any successful STOs being conducted in Israel, but regular security offerings involve a prospectus submission and regular reporting to the authority.
For this reason, Israel does not currently represent the most attractive jurisdiction in which to attempt an STO, but recent developments give reason to keep a close eye on the market. A committee at the ISA has already recommended creating a platform to trade cryptocurrencies under enhanced regulation. As yet, no timeline has been given for a decision.
Though Turkey has not officially banned crypto assets, the Capital Markets Board of Turkey (CMBT) – the regulatory body which deals with securities – has stated that cryptocurrencies shall not be considered as capital market instruments in Turkey and has announced that it will apply administrative fines to initial coin offerings addressing the Turkish market.
Importantly, Turkey has been part of the EU customs union since 1995 with many common regulations and laws. In 2016, a ruling by the European Securities and Markets Authority (ESMA) confirmed that a Turkish securities prospectus is equivalent to EU law under the prospectus directive. This presents the possibility of conducting an STO in a country that bridges the Middle East and European markets, although this compelling prospect has yet to bear fruit.
At present, launching an STO anywhere in the Middle East remains a daunting task. In some cases, there is a lack of solid information, while in others the prevailing conditions remain overwhelmingly negative. From a purely financial perspective, the Middle East is an intriguing region which could as yet present a great opportunity in the future. For now, that promise and possibility are yet to be realized. The Middle East remains a great source of funding, but not a great place to launch and conduct an STO.