When Satoshi Nakamoto started the Bitcoin phenomena in 2008, the phrases “blockchain” and “bitcoin” were unfamiliar to the general public in the United Arab Emirates (UAE). Today, however, with one of the world’s first cryptocurrency deep “cold storage” companies based in Dubai, it is apparent that the tides have turned, and the UAE cryptocurrency is actively participating in this worldwide trend.
Blockchain is a public or private decentralized ledger that records transactions between two or more parties. This important element of “decentralization” is what makes this technology so appealing to investors all over the world. Nakamoto, in particular, took advantage of blockchain technology’s capabilities to establish the most well-known cryptocurrency, Bitcoin. Cryptocurrency is a digital currency that uses blockchain technology to operate. Unlike fiat currency, which is managed by a single institution such as a central bank, cryptocurrencies are validated by a decentralized system in which any party engaging in the transaction can verify the transaction.
REGULATORY SYSTEM IN UAE
The UAE has launched the UAE Blockchain Strategy 2021 in order to become a pioneer in blockchain technology, with the goal of adopting blockchain technology for 50% of government transactions by 2021. Regulations on the usage of crypto assets, including cryptocurrency, were recently published to strengthen the company’s mission.
The Financial Services Regulatory Authority (FSRA), which is the financial authority for Abu Dhabi Global Markets (ADGM), an Abu Dhabi free zone, has become the first agency in the UAE to publish complete instructions and regulations on conducting cryptocurrency-related activities. Under its Financial Services and Market Regulations, the FSRA provided supplemental guidelines on the regulation of Initial Coin/Token Offers and Virtual Currencies, in which it remarked on initial coin offerings (ICOs), in which cryptocurrencies are offered for general sale.
The FSRA will use these guidelines to decide whether a suggested coin token is a security or a utility on a case-by-case basis. If the FSRA determines that the token is the former, the ICO will be governed by the Financial Services and Market Regulations; however, if the token is the latter, the ICO will be ungoverned. Furthermore, the FSRA introduced a regulated activity of “running a crypto asset business” on June 25, 2018, through the publishing of the Regulation of Crypto Asset Activities in ADGM (ADGM regulations), which includes the operation of crypto-asset exchange houses but excludes ICO issuances.
The ADGM laws emphasize obligatory requirements for carrying out the operation and aim to encourage transparency and technology governance in order to be in compliance with anti-money laundering and counter-terrorist financing standards.
Meanwhile, the Dubai Multi Commodities Centre (DMCC) has approved “proprietary trade-in crypto-commodities,” implying that the DMCC regards cryptocurrencies as a commodity. However, enterprises in the DMCC with this license are only allowed to trade on their own behalf (that is, with their own funds), and this license does not cover the formation of exchange houses or the conduct of initial coin offerings (ICOs). Another notable event is the DMCC’s granting of a license to a DMCC corporation, allowing it to become one of the world’s first cryptocurrency deep “cold storage” vaults.
The UAE Central Bank released a Regulatory Framework pertaining to Stored Values and Electronic Payment Systems in January 2017, prior to the publishing of the AGDM regulations and the DMCC’s actions, stating that all virtual currencies, including virtual currency transactions, are forbidden. This regulatory framework, as expected, sparked concern.
Following confusion among market participants over the scope of the prohibition, the UAE Central Bank Governor issued a statement clarifying that the regulations do not apply to cryptocurrencies, crypto exchanges, or underlying technologies such as blockchain technology. The UAE government is now reviewing virtual currencies, according to the Governor, and relevant legal laws would be released in due time.
This declaration was a positive step forward. However, regulators other than the FSRA have yet to issue any restrictions, and UAE crypto-traders are concerned about the activity’s legality. From a strictly legal standpoint, until the regulatory framework is amended or new regulations are issued to deal with virtual currencies, the regulatory framework remains in effect, and the UAE Central Bank can technically take action against existing and proposed businesses (with the exception of businesses licensed to conduct the regulated activity in the UAE).
The Securities and Commodities Authority (SCA), the UAE’s securities regulator, and the Dubai Financial Services Authority (DFSA), the financial regulator of the Dubai International Financial Centre, recently announced that no regulations governing ICOs or the establishment of cryptocurrency exchange houses have been issued in the UAE. Both financial agencies stressed in their remarks that trading in cryptocurrencies carries a significant level of risk and that investors do so at their own risk.
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