Tokenization in the Middle East

Aug 29, 2019 · 3 min read

The UAE’s surge in blockchain investments has become all the more amplified this year as investors in the Middle East are embracing tokenization at a rapid pace. With the UAE looking to publish concrete legal frameworks for tokenized assets, efforts are being made by local authorities to establish the country as a blockchain hub. The UAE has surpassed both the US and the UK to become the most significant contributor to crypto token sales globally this year.

The UAE raised $210.5 million so far this year, accounting for 25% of the total funds raised. Comparatively, the US has fallen to sixth place with $37.2 million.

Security Token Offerings Are on the Rise

Security Token Offerings (STOs) have become popular with institutional investors. This development is because security tokens are representative of underlying real-world assets. These assets, such as real estate, hold real-world monetary value, and afford investors greater protection as they operate within a regulated framework. The UAE saw $67 million in investment via 47 STOs in the first quarter of 2019. In other words, the country’s investment amounted to over half of the total global investment through STOs.

Tokenization may also be prompting local Middle Eastern investors to look for similar investment opportunities abroad, especially as they become more comfortable with the technology as an innovative means of building wealth. Europe now seems to be a particularly attractive destination for real estate investment, due to low unemployment and a strong demand for new residential/commercial units. Tokenized real estate investments, in booming markets like Germany, are preparing a fertile ground for investors from the Middle East region. Saudi Arabian asset management firm Sedco Capital, Sidra Capital, Bahrain’s Investcorp, and Gulf Islamic Investments are just a few of the significant firms focusing on property investment in Germany, France, and the UK.

STO Adoption in the Middle East

While news of Libra and cryptocurrency prices tend to dominate the conversation around blockchain, the Middle East continues to make major strides in the area of blockchain regulation. Recently, Saudi Arabia relaxed its 49% limit for foreign strategic investors in shares of listed companies and opened up the region’s largest market to a more diverse investor base.

Like many countries, Saudi Arabia and the UAE were among those that issued warnings to investors about investing in ICOs due to concern over market volatility, rampant scams, and lack of regulation. Ongoing development has seen the industry move away from ICOs in favor of STOs.

The UAE Securities and Commodities Authority (SCA), asserts that concrete legal frameworks for tokenized assets will be published soon to improve legal security. The Central Bank of Bahrain has already approved 30 companies through its regulatory sandbox, 11% of which constitute crypto services including ATMs and tokenization. Advancements in blockchain adoption throughout the Middle East have accelerated primarily dramatically due to:

  • The Dubai government setting out plans to use the technology for all government documents by 2020
  • The UAE Central Bank collaborating with Saudi Arabia’s Monetary Authority
  • Exploring the use of its cryptocurrency “Aber” for cross border transactions

In the long term, the regulatory regimes around asset tokenization in the Middle East and Europe will converge into a single, unified framework, further strengthening the allocation of capital across these two regions. Today’s migration to a decentralized financial infrastructure that transcends borders will offer the incentive for lawmakers to tear down incompatible regulations in securities laws. For tokenization to deliver on its promise of being a superior form of investment, the market will have to prove its demand for these new investment instruments by investing significant funds into major projects.

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