Gulf States and Tokenization: How UAE, Saudi Arabia and Bahrain Are Using Crypto Policy as Soft Power

In 2022, when the United States was litigating whether Ethereum was a security and China was banning cryptocurrency trading for the third time, Dubai launched the Virtual Assets Regulatory Authority. VARA was not merely a new financial regulator. It was a geopolitical announcement: the UAE intended to become the world’s preeminent hub for digital asset activity, and it was prepared to build the institutional infrastructure to support that ambition.

The Gulf states’ embrace of tokenization and crypto policy is not primarily a story about financial technology. It is a story about sovereign strategy: how relatively small, hydrocarbon-dependent states are using financial innovation to diversify their economic bases, attract global talent, and build leverage in a multipolar world that increasingly requires middle powers to navigate between Washington and Beijing.

UAE: The Aggressive Posture

The UAE’s approach is the most ambitious and the most successful. Dubai’s VARA framework covers the full spectrum of virtual asset activities — trading, custody, advisory, lending, and derivatives — with a licensing regime that provides regulatory clarity without the compliance costs and legal uncertainty that have driven activity out of New York and London. VARA has licensed more than 70 entities as of early 2026, including Binance, OKX, Bybit, and Crypto.com — firms that relocated significant operations to Dubai specifically to access the VARA framework.

Abu Dhabi’s ADGM (Abu Dhabi Global Market) operates a parallel framework through its Financial Services Regulatory Authority and RegLab innovation testing environment, creating regulatory competition between the two emirate-level authorities that has driven both to increase responsiveness to industry needs.

The UAE’s numbers are compelling. Dubai became the world’s third-largest crypto hub by trading volume in 2023 and maintained that position through 2024-2025. Tens of thousands of crypto industry professionals have relocated to the UAE, drawn by the combination of regulatory clarity, zero personal income tax, and geographic positioning between European and Asian time zones. The financial services sector’s contribution to UAE GDP has increased substantially, partially displacing the reliance on oil revenues that Vision 2021 and its successor strategies have sought to reduce.

At the sovereign level, the UAE has participated in mBridge — the multi-CBDC settlement platform developed with the BIS, China, Hong Kong, and Thailand — making it the only Western-aligned country in the consortium’s core membership. This positioning is deliberate: the UAE wants to be present in the emerging Chinese-led settlement infrastructure while maintaining its relationships with the US dollar system. It is hedging its monetary bets with precisely the same sophistication that it hedges its security relationships, maintaining both American air bases and deep Chinese investment relationships.

Saudi Arabia: Ambition vs. Constraints

Saudi Arabia’s relationship with digital assets is more complicated, constrained by two factors that do not apply to the UAE: Islamic finance considerations and the kingdom’s role in the global oil market.

The Islamic finance constraint is real but often overstated. Most Islamic scholars have not issued categorical prohibitions on cryptocurrency, and several major Gulf Islamic finance institutions have issued conditional approvals for specific digital asset structures. The actual constraint is more subtle: Saudi Arabia’s financial system is deeply integrated with Islamic finance principles that emphasize risk-sharing, prohibit interest, and require tangible underlying assets. Highly speculative crypto assets sit uneasily within this framework, and the kingdom has been conservative about retail crypto adoption relative to its Gulf neighbors.

The oil market constraint is structural. Saudi Arabia’s leverage in the global economy derives from its ability to set the marginal price of oil, and that leverage depends on oil being denominated in dollars — the petrodollar arrangement that has underpinned dollar hegemony since the 1970s. Any enthusiastic embrace of dollar bypass mechanisms risks antagonizing Washington at a time when the kingdom needs American security guarantees for its regional security architecture.

Yet Saudi Vision 2030 is explicit about financial technology as a priority sector, and the kingdom has participated in Project Aber — a joint CBDC initiative with the UAE that tested interbank settlements using a shared digital currency. Project Aber demonstrated technical feasibility for bilateral CBDC settlement and produced significant intellectual output on CBDC design, even as its broader rollout has moved cautiously.

Saudi Arabia’s fintech ambition is channeled through Riyadh, rather than the offshore financial center model that Dubai and ADGM use. The Saudi Central Bank (SAMA) has licensed dozens of fintech companies and created sandbox frameworks, but the kingdom’s approach is more conservative and domestically oriented than Dubai’s explicitly global hub strategy.

Bahrain: The Pioneer’s Reward

Bahrain deserves more credit than it typically receives. The Central Bank of Bahrain established its regulatory sandbox in 2017 and issued its first crypto-asset module in 2019 — years before the UAE’s VARA and well before most global regulators had produced comprehensive frameworks. Bahrain’s sandbox approach was genuinely innovative: it allowed firms to test regulated activities with real clients under temporary authorization, generating evidence about what consumer protection mechanisms worked in practice.

Bahrain’s crypto regulatory framework is proportionate to the kingdom’s scale — its financial sector handles regional rather than global volumes — but its early mover advantage created institutional knowledge that has made the CBB a reference institution for regulators building their own frameworks elsewhere. Rain Financial, the first licensed crypto exchange in the Middle East, launched under CBB oversight in Bahrain and has used that regulatory credibility as a foundation for expansion across the region.

The Gulf Cooperation Council has begun, tentatively, to coordinate on virtual asset policy through the GCC Financial Cooperation Charter. The degree of harmonization is still limited — each member state has moved at its own pace and with its own priorities — but the direction of travel is toward a regional framework that would allow virtual asset firms to passport across GCC jurisdictions, similar to the model MiCA creates in the EU.

The Soft Power Calculation

What unifies the Gulf approach to tokenization policy is the soft power calculation. Traditional soft power instruments — cultural export, development aid, diplomatic prestige — are available to large, culturally rich states. The Gulf states have deployed their own version: financial regulatory attractiveness as a form of influence.

By becoming the global hub for an industry that the US, EU, and China are all handling more restrictively, the UAE has attracted talent, capital, and corporate headquarters that generate economic activity, tax revenue (at the corporate level), and — crucially — political relationship networks. The CEOs and founders of major crypto firms who have relocated to Dubai are not neutral political actors; they have become advocates for UAE interests in their interactions with regulators and politicians in their home jurisdictions.

This talent and capital attraction also serves the diversification agenda. Every professional who relocates to Dubai to work in crypto, every corporate headquarters that establishes in Abu Dhabi, every venture fund that registers in ADGM, is one step away from oil dependency. The Gulf states understand that the global energy transition, however slow, will eventually reduce hydrocarbon revenues. The question is whether they can build alternative economic foundations fast enough. Financial services — including digital asset services — are one answer.

Between East and West

Perhaps the most strategically interesting aspect of Gulf crypto policy is its positioning between the competing American and Chinese digital finance architectures. The UAE participates in mBridge (Chinese-led) while licensing primarily US-headquartered firms and maintaining dollar-pegged currencies. Saudi Arabia participates in BRICS Plus discussions while remaining a core petrodollar pillar. Bahrain hosts American financial institutions while developing independent regulatory frameworks.

This positioning is neither incoherence nor opportunism. It is a sophisticated middle power strategy for an era in which the great powers are bifurcating the global financial system and smaller states must maintain access to both sides. The Gulf states are building their own regulatory infrastructure — VARA, CBB, ADGM — precisely to avoid dependence on any single external framework.

In a world where Washington threatens 100% tariffs on dollar-bypass nations and Beijing promotes e-CNY through Belt and Road investment, having your own regulatory ecosystem and your own financial infrastructure is not just an economic advantage. It is a sovereignty hedge.