The Legality of Bitcoins and other Cryptocurrencies
The terms Bitcoin & Cryptocurrency remained unfamiliar to the rest of the globe before Satoshi Nakamoto, the unidentified founder of Bitcoin, revealed the Electronic Cash System in late 2008. The idea swept the world's markets like wildfire, and investors all over the world created a cryptocurrency platform for purchasing and selling.
Nevertheless, with one of the world's first cryptocurrency deep "cold storage" firms based in Dubai, it is apparent that the winds have changed, and the United Arab Emirates cryptocurrency is strongly participating in this global trend.
Bitcoin is a new technology and digital currency that employs cryptography, a process that converts valid information into an impenetrable code in order to trace buyers and sellers. With the help of a stable online network, the need for such secure connectivity emerged and grew in the modern age. In comparison to fiat money, which is governed by a single authority, this currency is governed by blockchain technology. Cryptocurrency needs approval from a decentralized mechanism through which a user involved in the network may obtain confirmation. Nakamoto, in particular, benefited from the process of blockchain technologies and developed the popular Bitcoin.
Bitcoin – its Legal status
A key factor in determining bitcoin's legal status is if it is listed in a country as an asset - for example, gold or a currency in terms of Dirhams or Euros. There is currently no strong universal position on this issue – in the United States, bitcoin is classified as an asset by the Commodity Futures Trading Commission, while in the European Court of Justice, bitcoin is classified as a currency for the purpose of taxes.
The legal status of this is of great pertinence because-
- If bitcoin is regarded as an asset, it will come under the regulatory jurisdiction of the United Arab Emirates Securities and Commodity Authority, while if it is classified as a currency, it will fall under the legal framework of the UAE Central Bank.
- From a tax standpoint, since bitcoin is considered an asset, it will be subject to state taxes such as VAT, but if it is considered a currency, it would not be subjected to such taxes.
- From the standpoint of property rights, if bitcoin is an asset, it is a type of property to which legal ownership can be claimed and exchanged, and if bitcoin is a currency, a bitcoin represents a claim to the value expressed by the bitcoin, but it is not a property in itself. This differentiation can seem insignificant on the ground, but it poses serious problems concerning how bitcoins can be handled in cases of trust obligations, intestate succession, sales of property, debt, and bankruptcy.
Regulation in the UAE
The United Arab Emirates has unveiled the UAE Blockchain Strategy 2021 in an effort to become a leader in blockchain technology, with the aim of seeing 50 per cent of government transactions completed using blockchain technology by 2021. To bolster its vision, the government released legislation governing the use of crypto properties, particularly cryptocurrencies.
According to this guideline, the FSRA will decide whether a proposed coin token is a security or an asset on a specific instance basis. Whether the FSRA determines that the token is the former, the Initial Coin Offering will be governed by the Financial Services and Market Regulations; if the token is the latter, the Initial Coin Offering will be unrestricted.
Furthermore, the FSRA adopted a supervised practice of "operating a crypto asset enterprise" on June 25, 2018, via the introduction of the Regulation of Crypto Asset Activities in ADGM regulations, which involves the functioning of cryptocurrency exchange houses but prohibits the issuing ICOs.
The FSRA-ADGM (Financial Services Regulatory Authority of Abu Dhabi Global Market) was the first one to publish rules and regulations governing the purchase and sale of cryptocurrency. The recommendations were for the oversight of Initial Coin Offerings (ICO) and virtual coins in which the general public can buy and trade Cryptocurrency. The specific commodity will be determined on a case-by-case basis by the Financial Services Regulatory Authority of Abu Dhabi Global Market. The aim of the ADGM rules is to improve transparency, limit money-laundering practices, and tackle monetary terrorism.
Influenced by ADGM regulations, DMCC (Dubai Multi Commodity Authority) has created an incentive for investors to integrate a cryptocurrency trading firm. Businesses, on the other hand, will only be permitted to deal on their own behalf. As a result, certain businesses will construct the globe's first deep "cold storage" vault for cryptocurrency.
Prior to the issuance of ADGM rules, the Central Bank of the UAE issued a legal framework about the Electronic Payment System in 2017, banning all virtual currencies and transfers, raising concerns in the UAE economy. However, after an unsatisfied analysis, the governor of the Central Bank explained that the rules would not apply to cryptocurrencies.
As of 2021, we see that The United Arab Emirates government has successfully implemented blockchain technologies in the administration of its affairs and has unveiled the Emirates Blockchain Strategy 2021 and the Dubai Blockchain Strategy. The Emirates Blockchain Strategy 2021 anticipates reaping the benefits of blockchain technology by putting a vast number of federal operations on a blockchain platform. The Dubai Blockchain Strategy aims to make Dubai one of the first cities to truly embrace blockchain technology and& incorporate it into government efficiency.
In order to adopt the most recent advancements and development practices on a global scale, the Dubai Future Foundation established the Global Blockchain Council to examine and discuss existing and future blockchain technologies and transfers. The Council intends to collaborate with and support various monetary and non-monetary industries in order to improve performance, competitiveness, and reliability in these sectors. The Council is made up of many leading private companies from the telecommunications, business, and financial industries, as well as government agencies.
The Present Scenario & Illustrations
At the moment, there is no clear indication of when the different operations of Dubai authorities will adopt blockchain technology. Regardless, the RTA has stated that it is currently implementing a vehicle lifespan management program using blockchain technologies. This initiative seeks to provide a clear record of the vehicle's lifespan from manufacture to scrap, with the ultimate goal of increasing trust and accountability in those dealings and, as a result, reducing lawsuits and operating costs.
Furthermore, the Dubai Land Department intends to use blockchain technologies to turn itself into a fully digital and paperless effective entity. The Dubai Land Department is currently collaborating with utility service companies to allow renters to make payments remotely and to allow property documents to be sent online to the Dubai Land Department (DLD).
The UAE has also progressed in various initiatives that may increase blockchain technology acceptance in the region. For example, the United Arab Emirates Banks Federation's Advisory Council has discussed blockchain adoption among its stakeholders. According to the Smart Dubai Government Establishment (SDGE), "the blockchain system currently has been in working in sectors such as banking, school, property development, hospitality, trade, healthcare, transportation, and security," and Smart Dubai has deployed the Hyper-Ledger& Ethereum technologies on its system.
Since blockchain technology automates contracts, a relation to UAE legislation on smart contracts provides that it accepts blockchain-powered smart contracts, and Article 12 of Federal Law No. 1/2006 regarding Electronic Transactions and Commerce expands to include smart contracts by stating that contracts among 2 or more electronic systems, that have already been planned and configured shall be considered legitimate irrespective of whether or not the human activity was involved.
Challenges and Progress in the Country
The main challenge that regulatory authorities face is determining what kind of financial or economic instrument cryptocurrency should be listed as. Some governments view bitcoin like any other asset and treat it similarly to a fiat currency, although others consider it to be analogous to shares or resources, as mentioned in the aforementioned paragraphs.
For example, before an Initial Coin Offering is made available to the public, the regulator's perception of the Initial Coin Offering can be influenced by the prospectus, which contains financial statements of the cryptocurrency on bid. The cryptocurrency on offer may be equivalent to a fiat currency, or its distinguishing features may attract similarities to securities/assets.
The UAE government is committed to moving beyond and beyond by developing its own digital currency. In October 2018, Dubai launched its own digital currency, EMCASH, which can be used to pay tuition fees and public services. In addition, another form of cryptocurrency was introduced in December 2019 for cross-border trades with Saudi Arabia.
We can conclude that…
While there is progress in the field in order of how they can govern cryptocurrency, particularly because certain regulations are needed to reduce the possible threat that cryptocurrency may bring due to its decentralized status, there are significant pitfalls related to legislation, licensing, and regulating crypto-assets related companies.
A solid regulatory structure should solve concerns such as the instability of cryptocurrency exchanges, the cross-jurisdictional environment, market abuse, frauds and threats linked to laundering money, illicit trafficking of various goods, piracy, data theft, bribery, and unauthorized business practices, among others.
Addressing investor questions about crypto assets by creating a legislative structure for crypto asset-related operations that mitigate future risks is the first step toward creating a regulatory environment for such cryptocurrencies. The Abu Dhabi Global Market Financial System is one of the few jurisdictions in the world to officially issue licenses & regulations expressly for cryptocurrency exchange and operations, and the UAE Securities and Commodities Authority plans to publish its own crypto asset regulations shortly.
The UAE environment seems advantageous for blockchain, smart contracts & cryptocurrencies, and as a result, the regulators are vigorously considering coordinating those business practices in order to meet industry demands while still preserving the interests of companies, customers, and crypto-investors.