Op-Ed: UAE’s Approach to Crypto Finds Balance Between Regulation and Progressivism

UAE’s Approach to Crypto Finds Balance Between Regulation and Progressivism

The UAE has taken another decisive step toward a progressive approach to digital asset regulation by exempting transactions from Value Added Tax (VAT). The legislation, effective November 15th, applies retroactively to transactions dating back to January 1st 2018. 

The exemption will further enhance the UAE’s appeal for traders and financial institutions looking to engage in digital asset trading. In a burgeoning regional sector, the implications of these decisions go beyond regulatory borders, signaling to the global market that the UAE is continuing to shape and contribute to the future of digital finance.‍

‍‍Progressive Policy, Strong Regulation

The UAE will exempt cryptocurrency transactions from VAT, including direct exchanges of digital assets and crypto-related services like investment management, transferring ownership of virtual assets, or cryptocurrency conversion. This framework roughly mirrors that of the European Union, which has generally exempted direct cryptocurrency transactions from VAT since 2015. What holds the EU back is a lack of centralised implementation on VAT, leading to uncertainty and fragmentation. 

In comparison, short-term capital gains for taxpayers in the United States on crypto held for less than a year, can be taxed anywhere from 10-37% based on tax bracket and income, whereas long-term capital gains tax on profits from crypto held for one year or longer can reach anywhere from 0-20%.The UAE's recent move extends VAT exemptions to a broader range of crypto activities, positioning it as a more universally tax-friendly environment for the crypto sector. 

What is so important about the UAE’s approach, however, is that it is merely one piece of a broader, progressive approach, appealing to crypto investors and businesses alike.

Local Impact - UAE Traders and Financial Institutions

For digital asset traders in the UAE, this VAT exemption translates into reduced costs and greater incentives to engage with the market. The lowered fiscal burden on traders will make trading more accessible, encouraging broader participation across the country. More than 30% of the population, nearly three million people, own cryptocurrency in the UAE. Therefore, this VAT tax was likely generating noteworthy income for the state. The logic behind the policy however is that it incentivises further adoption of digital assets, leading to stimulation of the digital asset economy, providing long-term fiscal benefits that a simple tax initiative could not come close to. 

For financial institutions, the VAT exemption is a clear invitation to expand their crypto services in the UAE.  By removing this tax, the government reduces operational costs for institutions offering trading, custodial services, and digital payment solutions, potentially spurring innovation and investment in both infrastructure and solutions. It is a call and incentive for companies to engage further in this sector and cement the UAE’s position and the global ‘capital of capital’.

International Implications - The Global Market 

This VAT exemption will have far-reaching international consequences when implemented in November. The UAE has made its stance unmistakably clear, with this new exemption working alongside the UAE’s proactive regulatory framework, led by the Virtual Assets Regulatory Authority (VARA) in Dubai and the Securities and Commodities Authority, to ensure a unified and predictable environment for crypto businesses. These foundational steps can be traced back to the Financial Services Regulatory Authority’s (FSRA) Crypto Asset Legislative Framework, introduced in Abu Dhabi in 2018. Since then, the UAE has consistently worked to build a robust legal infrastructure designed to protect stakeholders and ensure long-term growth. This regulatory clarity provides a competitive advantage over other sectors. The UAE’s streamlined approach, combined with these new tax incentives, draws not only crypto businesses but also investors and innovators who seek stable and clear regulatory conditions. Names such as Ripple, Sui, and Animoca have already been drawn by its favorable tax climate and regulatory clarity.

The broader impact could include increased trading volumes, liquidity, and investment capital in the region, further influencing global market dynamics. The exemption may even pressure other countries to reassess their own digital asset tax policies to remain competitive, leading to a global race for crypto-friendliness.

Future Implications - A New Capital Base for a Progressive UAE

Over the last decade, the UAE has evolved into a global technology hub, welcoming disruptive industries like blockchain, AI, and fintech with open arms. This VAT exemption aligns with the country's broader goals of fostering a forward-thinking, business-friendly environment, especially as it diversifies its economy away from oil dependency. More broadly, this VAT exemption reflects the UAE’s pragmatic progressivism, or its ability to balance traditional economic pillars with new-age digital finance. Whether it’s fostering an environment that encourages innovation in tokenisation practices or hosting academic conferences like the Cryptocurrency Research Conference 2024, the UAE is creating a fertile ecosystem where innovation can thrive.

Those seeking to engage with M2’s institutional and VIP client team can do so via Institutional.sales@m2.com. Alternatively, To be the first to know about the latest M2, you can connect with us on X, Telegram, YouTube, Instagram and Facebook.