The last two years have been a white-knuckle ride for the Web3 industry. There were several blow-ups across the board, including the bankruptcy of crypto exchange FTX and top cryptocurrencies such as Bitcoin and Ethereum losing over 60% of their value.
And yet, despite the volatility, the Gulf region, especially UAE, is pushing to become a virtual asset hub, developing digital asset regulations to attract new forms of business as economic competition heats up. Not surprisingly, many global companies are looking to expand their footprint in the region amid escalating tensions between the crypto sector and regulators in the US and China stamping out crypto-related activities.
China and the US might be looking at the effect on the UAE, especially following those regulations and picking up Web3 business activity.
GROWING THE ECOSYSTEM
“Right now, the Middle East region seeks to create the best environment for Web3 development and product creation,” says Jeremy Lopez, CEO of Everdome.
Apart from regulatory frameworks to support decentralized networks, the region is making significant investments in building infrastructure – high-speed internet connectivity and cloud computing, essential for Web3 —the umbrella term for the new blockchain-based, decentralized internet, which includes cryptocurrencies, non-fungible tokens (NFTs), and DeFi.
“Government-led initiatives such as the UAE’s Jahiz initiative or Saudi Arabia’s NEOM project have raised the profile of Web3 throughout the region, while programs to attract more Web3 businesses to set their headquarters within MENA are showing success,” adds Lopez.
In the Middle East, Web3 technology is robust due to its decentralized nature, reduced business friction, enhanced security, and advantages in digital transformation and global competitiveness, says Saqr Ereiqat, co-founder of Crypto Oasis. “The region’s governments have been at the forefront of blockchain adoption since 2015, further driving the confidence in this transformative technology.”
Public and private sector entities across Saudi Arabia are adopting Web3 technologies and strategies. In March, Web3 Delight, a Web3 and technology business event held in Riyadh, focused on what it takes to generate value at each stage of the Web3 value chain.
Events such as this bring global best practices towards Web3 technology development, essential to creating an environment for tech to progress.
While the technology has a wide range of use cases and will stand the test of time, creating many $1 billion-plus companies in the region, global companies like Binance and Meta Platforms have set up offices here. The recent partnership between Nvidia and the Saudi Data and Artificial Intelligence Authority further demonstrates the power of the region to attract big names in Web3.
“Such partnerships with global Web3 players grow the ecosystem, and help local projects, such as Islamic Coin, Crypto Oasis, and the Dubai Metaverse Assembly, to gain traction,” adds Lopez.
Alex Chehade, Executive Director and General Manager of Binance FZE in Dubai, had similar sentiments and said the region’s crypto adoption is growing through increased education and strategic partnerships. “This is facilitated by government initiatives, which support the expanding virtual assets industry, ultimately promoting innovation, job growth, and economic competitiveness.”
LOW FUNDING FOR WEB3 STARTUPS
Like in all nascent technologies, there are road bumps along the way. Besides, Dubai is imposing strict regulations on crypto trading platforms.
Last month, Dubai’s digital assets regulator suspended BitOasis’ conditional license and initiated enforcement action three months after issuing one, saying the cryptocurrency exchange failed to meet certain conditions.
“Investors’ enthusiasm for funding Web3 startups and protocols has dwindled this year,” says Amine Nedjai, CEO of ABO Digital, which has committed more than $250 million to Web3 and blockchain companies in the last six months.
Data from Crunchbase shows that Web3 funding for the first half of 2023 dropped by around 80% compared to the same period in 2022. Pitchbook data shows that VCs for crypto firms raised more than $20 billion in 2022 but less than $500 million in the first five months of 2023.
“We’ve witnessed a significant decrease in VC funding. This presents both positive and negative outcomes. On the positive side, this allows for a more discerning selection process, ensuring that only the most promising projects receive funding. Moreover, the challenging times serve to crystallize the winners, separating the truly innovative ventures from the rest. However, it’s disheartening to witness numerous companies facing the risk of extinction due to the scarcity of funding opportunities,” says Ereiqat.
“The situation underscores the importance of strategic decision-making and support for those in need to navigate these difficult times successfully,” he adds.
Nedjai says the caution stems from the reduced risk appetite for emerging technologies like blockchain and decentralized applications.
This has also resulted from firms like FTX and Three Arrows Capital, once influential in providing Web3 venture funding, collapsing following various scandals, thus creating a vacuum in the venture funding space. Some funds had to shut down because they lost access to their funds on the FTX platform.
“This shift in the market landscape has led to instability and restructuring that has shattered investor sentiment. Furthermore, the regulatory environment surrounding Web3-tagged companies remains uncertain, which adds to investor hesitation in allocating substantial capital due to potential legal and compliance challenges,” adds Nedjai.
“Additionally, the current higher interest rate environment has reduced appetite for risky investments in nascent technologies. Therefore, Web3 companies are facing funding challenges.”
Furthermore, there’s trial and error in creating or launching new technology. It has taken some time to figure out Web3 technology’s best use cases, from blockchain to NFT technology.
LEARNED FROM EXPERIENCE
But experts say the region has learned from this experience and is now betting on the future of Web3 to take an early lead position, much as Silicon Valley was with Web2.
“The region enjoys a large and youthful population, highly receptive to technology and digital innovations. The tech-savvy nature of the population creates a favorable environment for early Web3 adoption and engagement,” says Lopez.
According to Chehade, the region can develop a progressive regulatory framework through public-private partnerships, foster consumer education, and facilitate the transition to Web3.
ELEPHANT IN THE ROOM
As more attention turns to innovative Web3-driven technologies, companies are also reckoning with the elephant in the room: energy consumption.
“Bitcoin mining increasingly leverages renewable energy sources. Miners harness solar, wind, and hydropower to power computational hardware, reducing environmental impact, lowering operational costs, and contributing to a sustainable, eco-friendly future for the cryptocurrency industry,” says Chehade.
“Also, moving some protocols from proof-of-work to proof-of-stake has slashed energy. For example, the Ethereum network reduced total consumption by 99.9%.”
This shift, Nedjai says, drastically reduces the demand for energy to secure the blockchain while offering a faster and more scalable network. “These attributes are crucial for Web3 applications targeting a large customer base.”
Observers say Web3 can usher in a more egalitarian future, a viable venture and startup ecosystem where companies are solving practical, real-world problems for individuals and enterprises in the region.
“If we can solve some basic rules of engagement, from collaboration through to aspects of governance and regulation, with rules that will be accepted and adhered to, the opportunity for a more egalitarian digital experience will be very high,” says Lopez.
While the region does not have an ecosystem boasting the best projects today, Lopez says the next two years will usher in “significant migration of top-tier Web3 focused projects and individuals to the region, which will then start to pay off as their projects gain traction.”
And while it’s true Web3 companies face funding challenges when capital is favoring companies with cash flows or fixed income investments, Nedjai says the “firms that can weather this storm and survive on restricted funding will be in a great position to benefit from the next cycle as liquidity will inevitably flow back into this space.”