The terms “Blockchain” or “Bitcoin” were alien to the general public in the United Arab Emirates (UAE) when Satoshi Nakamoto began the Bitcoin phenomenon in 2008. However, today with one of the world’s first cryptocurrency deep “cold storage” companies operating in Dubai, it is clear that tides have shifted and the UAE is actively becoming part of this global trend. This article aims to summarise the current legal framework in the UAE relating to the global phenomenon that is blockchain technology and trading in cryptocurrencies. We will explore what the future may hold in relation to this digital space in the UAE and also briefly highlight regulatory updates in the Kingdom of Saudi Arabia (KSA).
Blockchain Technology and Cryptocurrencies
Blockchain technology is a decentralised public or private ledger that records transactions between two or more parties. It is this key feature of ‘decentralisation’ that makes this technology particularly attractive to investors globally. In particular, Nakamoto took advantage of the features of blockchain technology to create the most well-known cryptocurrency, Bitcoin. Cryptocurrency is an encrypted digital currency that operates using the blockchain technology. Unlike fiat currency, which is regulated by a single entity such as a central bank, cryptocurrencies are validated through a decentralised system whereby any party participating in the process can verify the transactions that take place.
Regulatory Framework in the UAE
In a bid to become a pioneer in blockchain technology, the UAE has launched the UAE Blockchain Strategy 2021 pursuant to which, 50% of government transactions will be conducted using blockchain technology by 2021. To solidify it vision, regulations on the use of crypto assets, including cryptocurrencies have recently been issued.
The Financial Services Regulatory Authority (FSRA) which is the financial regulator of the Abu Dhabi Global Markets (a free zone in Abu Dhabi) (ADGM), has become the first regulator in the UAE to issue comprehensive guidance and regulations on carrying out activities relating to cryptocurrencies. The FSRA issued supplementary guidance on the regulation of Initial Coin/Token Offerings and Virtual Currencies (under its Financial Services and Market Regulations) under which it commented on initial coin offerings (ICO), whereby cryptocurrencies are offered for sale to the general public. Under this guidance, the FSRA will, on a case to case basis, determine whether a proposed coin token is a security or a commodity. If the FSRA finds the token to be the former, the ICO would be subject to the Financial Services and Market Regulations but if the token is the latter, the ICO would be unregulated. In addition, the FSRA on 25th June 2018, through its publication of the Regulation of Crypto Asset Activities in ADGM (ADGM Regulations), introduced a regulated activity of ‘Operating a Crypto Asset Business’ which includes operation of crypto assets exchange houses (but excludes issuances of ICOs) (Regulated Activity). The ADGM Regulations highlight mandatory requirements to carry out the Regulated Activity and aim to promote transparency and technology governance in order to ensure compliance with anti-money laundering and combating financial terrorism requirements. It should be noted that the ADGM Regulations have recently been published and as such, a concrete conclusion with respect to their implementation cannot be provided in this article.
Meanwhile, the Dubai Multi Commodities Centre (DMCC) has introduced a regulated activity known as ‘Proprietary Trading in Crypto-commodities’ suggesting that DMCC views cryptocurrency as ‘commodities’. However, businesses in the DMCC carrying this license are only permitted to trade on their own behalf (that is to use their own funds for trading) and establishment of exchange houses and conducting ICOs is still not covered under this license. Another noteworthy development is the issuance by DMCC of a licence to a DMCC company enabling such company to be among the world’s first cryptocurrency deep “cold storage” vaults.
Prior to the publication of the AGDM Regulations and the steps taken by DMCC, the UAE Central Bank, in January 2017, issued a Regulatory Framework relating to Stored Values and Electronic Payment Systems (Regulatory Framework) stipulating that all virtual currencies (including virtual currency transactions) are prohibited. As expected, this Regulatory Framework raised an alarm in the UAE crypto-market. Following uncertainty among market players as to the extent of the prohibition, the Governor of the UAE Central Bank published a statement clarifying that the regulations do not apply to cryptocurrencies, crypto exchanges, or underlying technology such as blockchain technology. The Governor added that virtual currencies were under review by the UAE Government and that appropriate legal regulations would be issued in due course. This statement was a step in the right direction. However, regulators, other than FSRA, are yet to publish any regulations. Thus, there remains concern among UAE crypto-traders as to the legality of the activity. From a strict legal perspective until the Regulatory Framework is amended, or new regulations are issued to deal with virtual currencies, the Regulatory Framework still remains valid and technically speaking the UAE Central Bank can take action against existing (and proposed) businesses (save for businesses licensed to carry out the Regulated Activity in ADGM) dealing in virtual currencies.
The Securities and Commodities Authority (SCA), the securities regulator of the UAE and Dubai Financial Services Authority (DFSA), the financial regulator of Dubai International Financial Centre, have recently announced that they have not issued regulations to govern ICOs and establish cryptocurrency exchange houses in the UAE. In their respective statements, both the financial regulators emphasised the high risk associated with trading in cryptocurrencies and that investors who carry out these investments do so at their own risk.
UAE Market Players in this Sector
Despite having limited regulations, entities in the UAE have incorporated the use of blockchain technology in their operations. UAE Exchange, a leading UAE exchange house, recently partnered with San Francisco based Ripple to enable real-time cross border payments using Ripple’s blockchain technology. By reducing the requirement to have third-party foreign exchange handlers, UAE Exchange has managed to cut its administrative costs.
We have also observed a rise in cryptocurrency exchange houses such as BitOasis which offer services to the UAE public. We understand that BitOasis currently operates as an entity established in the British Virgin Islands. Further, with the introduction of the ADGM Regulations, we anticipate that there will be a rise in the licensed cryptocurrency exchange houses operating from the UAE.
Future of Blockchain and virtual currencies in the UAE
The Government of Dubai has sought to promote the use of blockchain technology by introducing the ‘Dubai Blockchain Strategy’. Upon successful implementation of this strategy, Dubai aims to become the first ‘blockchain powered Government’. Following on from this, the Dubai Land Department (DLD) is developing its own blockchain system to record all real estate contracts and link DLD with utility companies such as the Dubai Electricity & Water Authority. Further, the blockchain system will allow tenants to make payments electronically resulting in such transactions being paperless and therefore, cost efficient. The DLD aims to push all boundaries by allowing transactions to be completed without requiring parties to appear in person before any Government entity. Interestingly, certain property developers in the UAE have announced that they now allow buyers to invest in their projects using One-Gram, the Shari’ah compliant cryptocurrency.
Financial institutions such as banks are also turning to blockchain technology to not only improve efficiency (including reduced processing time and costs) of their Know Your Customer (KYC) processes but to also assist in complying with anti-money laundering requirements. The ADGM has launched an e-KYC utility project with a consortium of UAE financial institutions which aims to develop a governance framework to set out the requirements of the e-KYC utility using distributed ledger technology.
The legal sector may also witness another interesting development, smart contracts. A smart contract is a digital contract which automatically verifies fulfillment of conditions and then executes agreed terms. For instance, in a supply contract, it is usual for the supplier to pay the price of goods upon delivery of the same. A smart contract in this area may therefore be programmed to automatically pay the supplier upon receipt of goods without involvement of either party to the contract. This will in turn contribute to achieve Dubai’s aim to have paperless transactions.
Update on KSA
With the recent deal between Saudi Arabian Money Authority (SAMA) (the Central Bank of KSA) and Ripple, banks in KSA are set to use Ripple’s xCurrent blockchain technology for instant cross border payments, making it clear that KSA too is in the race to become a hub in advanced technology. However, it should be noted that SAMA is still amidst developing regulations and therefore, at present no regulatory framework exists in relation to this digital space in KSA.
Keeping in line with its vision, FSRA is the first and only regulator to publish regulations relating to operating a crypto business. However, as the ADGM Regulations have been issued only recently, we are yet to see how they will be used and implemented. Also, with talks of the UAE and KSA jointly working towards creating a cryptocurrency for cross-border transactions, it is evident that the UAE and KSA seek to be forerunners in this field of technological advances. While the UAE Central Bank and SAMA are yet to issue any regulatory framework to govern this sector, it is foreseeable from the initiatives taken by UAE and KSA that regulators in these jurisdictions will soon break their silence and issue relevant regulations in order to enhance their bids to become the regional hubs for blockchain development and innovation.