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Deribit Plans to Relocate to Dubai as Government Finalizes Stricter Regulations

3 mins
Updated by Ryan James
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In Brief

  • Deribit hopes to open a Dubai office with ten staff by Q3 2023.
  • The exchange liquidated $80 million of positions held by 3AC after the hedge fund was stung by last year's downturn in crypto prices.
  • After the collapse of FTX, Dubai authorities released revised crypto regulations requiring companies to obtain a license and comply with KYC rules.
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Crypto derivatives exchange Deribit, famous for its association with crypto hedge fund Three Arrows Capital, plans to relocate to Dubai by Q3, 2023, pending regulatory clarity.

The move comes after the exchange’s clients demanded greater regulatory oversight following the collapse of FTX.

Deribit to Apply for VARA License

According to its chief compliance officer David Dohmen, Deribit will staff the office with ten local hires and existing employees. Its Dutch parent company and other subsidiaries employ 95 people.

“We felt that the whole regulatory regime was more tailored to crypto than other jurisdictions,” Dohmen noted. Deribit, which offers Bitcoin and Ether options, experienced outflows of between 10-15% after Bahamian exchange FTX filed for bankruptcy on Nov. 11, 2022.

Deribit will file a Full Market Product license application to Dubai’s Virtual Assets Regulatory Authority as soon as the watchdog clarifies certain regulations. Additionally, it hopes to secure broker licenses in the U.K., Brazil, and Singapore in the coming years.

The exchange currently operates out of Panama, facing little to no regulatory oversight. 

Deribit Liquidated $80M Belonging to 3AC

Deribit catalyzed the liquidation of Three Arrows Capital after the hedge fund failed to meet margin calls on leveraged trades.

Three Arrows Capital had borrowed Bitcoin and Ether from Deribit in 2020 but failed to top up minimum balances during a sharp downturn in crypto prices in early June 2022 as per the derivative exchange’s loan rules. 

Around June 13, 2022, Deribit started liquidating Three Arrows’ position, worth roughly $80 million. On June 15, the derivatives exchange terminating its lending agreement with the Singapore investment company. 

Three Arrows Capital is undergoing a Chapter 15 bankruptcy process. A U.S. judge recently subpoenaed co-founder Kyle Davies on Twitter to cooperate with the bankruptcy proceedings. 

Despite Three Arrows’ ongoing bankruptcy, Davies and co-founder Su Zhu recently pitched a new idea to potential investors to start a claims marketplace for creditors of distressed crypto firms. 

New VARA Laws Enforce Million Dollar Penalties for Non-Compliance

Despite favorable regulations that saw several major crypto companies, including Binance, set up shop in the region, authorities in the Gulf state are reconsidering their approach after the collapse of several crypto companies in 2022. 

Effective Jan. 14, 2023, new rules unveiled by Dubai leader Sheikh Mohammed Bin Rashid compel crypto exchanges to obtain a license from the Dubai Virtual Assets Regulatory Authority (VARA). They must also comply with comprehensive cybersecurity measures and technical guidelines to safeguard digital assets in their custody. Crypto companies must also comply with know-your-customer checks and anti-money laundering rules. 

Regulatory breaches can result in fines of up to $2.7 million, criminal investigations, and the return of any profits earned. The new laws do not apply to crypto companies operating in free zones within the United Arab Emirates.

Dubai has also established a Digital Economy Court, specifically geared towards resolving disputes in blockchain, artificial intelligence, and fintech. A recent addition to the rules for the Dubai International Financial Center gives the DEC the authority to order modifications to a digital asset using a digital signature or other control or access mechanism.

VARA suspended the license that would have allowed FTX’s Dubai branch to prepare for operation after FTX filed for bankruptcy. FTX received approval to offer customers a minimum viable product in July 2022.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...