Where do we stand with Cryptocurrency regulation?

Blockchain and cryptocurrencies have immense potential in advancing the way our world works today. However, with the many stipulations and risks associated with its digital and borderless aspects, there is a growing need to understand the technology better, so as to implement it correctly. Here is what UAE is doing to learn, experiment, implement and regulate them.

Over the past few years, the benefits of blockchain and cryptocurrencies have been debated at length, and the UAE is continuously looking to implement the cutting-edge technology in the country. ADGM setting up the sandbox in 2018, and the launch of government backed cryptocurrency to facilitate cross border payments between banks in UAE and Saudi Arabia, are two of the most popular steps taken by the UAE to better understand the implications of the technology, to then implement it correctly across the board.

Back in October 2016, Dubai launched a city-wide Blockchain Strategy in order to become the first blockchain-powered city by 2020. Not only that, just 2 years later, in May 2018, the nation’s Blockchain Strategy 2021 was revealed, which showed even more ambitious plans to become the world’s first blockchain-powered government.

With the initiative, the government aims to conduct 50% of all federal transactions on blockchain by 2021, which would mean paperless documentation of visas, bills, licenses and more. Once implemented successfully, this would save an estimated 77 million work hours and AED 11 billion transaction costs annually – a significant improvement in efficiency.

In order to make this happen, the UAE government announced a partnership with the leading conglomerate IBM, to create a blockchain business registry to ensure businesses operate under its jurisdiction. The initiative will “streamline the process of setting up and operating a business, roll out digital exchange of trade licenses and related documentation for all business activities, and ensure regulatory compliance across Dubai’s business ecosystem.”

However, due to the cutting-edge nature and relative infancy of the technology, there are certain risks that come with it as well, especially for inexperienced consumers that are looking into using the technology without the necessary know-how. Hence, in February 2018, just before it launched the initiative with IBM, the UAE's Securities and Commodities Authority issued a warning to investors against any fundraising done in cryptocurrencies, no matter whether it is in the form of initial coin offerings (ICOs), initial token offerings, token pre-sales or token crowd-sales.

In a public warning statement, the SCA reiterated that it does not recognise, regulate, or supervise any ICO presently and that ICO investments are not offered legal or regulatory protection. The announcement came after the meteoric rise of Bitcoin and other cryptocurrencies in late 2017 and the beginning of 2018, followed by a dramatic drop that left many investors in the cryptocurrency with heavy losses. Below are some of the aspects of cryptocurrencies that the UAE government is looking into for regulation purposes:

Speculation

Due to the new nature of the technology, cryptocurrencies do not have a solid base for valuation, which has led to a speculative bubble. The severe volatility in price of cryptocurrencies has also led to a decrease in the usage and acceptance of the cryptocurrencies, as most buyers choose to hold their coins in the hope of it multiplying in value – the famous ‘hot potato’ effect.

Control and jurisdiction

Not only is speculation a problem for governments, cryptocurrencies present a bigger challenge to them, as they could potentially compete with fiat money such as the Dirham or US Dollar. Once a cryptocurrency gets widely adopted, this will impact their planning and monetary policy, as central banks control the creation of fiat currencies, not necessarily cryptocurrencies. Furthermore, the openness and cross-border nature of cryptocurrency transactions presents a unique problem to central banks and governments in terms of jurisdiction and regulation.

Criminal financial activity

Due to the opacity of most cryptocurrency networks, and the difficulty of tracking transactions on the chains, there are significant challenges for law enforcement authorities. The Financial Action Task Force (FATF) stated that the anonymity and cross-border reach of virtual currencies are particularly concerning, which pose the greatest money laundering and terrorist financing risks.

Hacking

Lastly, something that has been in the news quite often, is a lack of security within the cryptocurrency domain. There have been a number of incidents, such as the infamous Mt. Gox scandal, where hackers have stolen millions of dollars worth of digital currencies.

Hence, in order to bring safety, clarity and certainty to this currently unregulated space, the central bank of the UAE has been looking at ways to regulate cryptocurrencies – something that many governments are looking into, but are having difficulty coping with due to the different dynamics of cryptocurrencies compared to other, more well-known, securities and assets.

Currently, the banking regulator is in the process of finishing a review, which may result in new regulations regarding the use of digital currencies. If everything goes according to plan, the Security and Commodities Authority (SCA) will introduce regulations for initial coin offerings (ICOs) by the end of H1 2019. Through the regulations the government aims to provide companies with a viable and safe alternative to raise capital through crowdfunding, which investors can invest in without having to worry about the risks mentioned above.

“We have signed agreements with law firms to come up with the sandbox and rule books for the issuance of ICOs,” said Obaid Al Zaabi, SCA chief executive. “Legal requirements will be finished by the end of the first half of 2019, after which there will be adoption of technology and development of infrastructure on the side of the exchanges.”

When the UAE set out to become a top crypto hub and the world’s first blockchain-powered government back in 2016, as stated by prime minister Sheikh Mohammed bin Rashid al Maktoum, it had many reasons to do so. With the cutting edge technology, the country looks to save billions of dirhams and many work hours every year, moving into a more digital and paperless world. Of course, there are risky cryptocurrency aspects that have to be overcome on the way, but with the right partnerships and regulatory discussions, the UAE looks prime to achieving its goals by 2021.