STA Law Firm https://www.stalawfirm.com/en.htmlSTA Law Firm - Court Uncourt (Blog) - Laws Surrounding BitcoinsenCopyright 2024 STA Law Firm All Rights Reserved<![CDATA[Crypto Regulations in US]]> Crypto Regulations in US

In recent years, the landscape of cryptocurrency regulations in the United States has been a complex terrain to navigate for businesses operating in the digital asset space. With multiple federal regulators overseeing various aspects of crypto activities and each state having the authority to implement its own set of regulations, understanding and staying compliant with the evolving regulatory framework is crucial for companies in this industry. Let's delve into the key aspects of US crypto regulations and how businesses can ensure compliance.

Regulatory Authorities

Several federal institutions play a role in regulating digital assets in the US:

  • Financial Crimes Enforcement Network (FinCEN): Regulates digital assets for Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) purposes.
  • Securities and Exchange Commission (SEC): Oversees digital assets considered securities, governing their issuance and resale.
  • Commodity Futures Trading Commission (CFTC): Regulates digital assets qualifying as commodities or used as derivatives.
  • Determining which regulator governs a particular crypto asset depends on its classification as a money transmitter, security, or commodity/derivative, often leading to overlapping jurisdictions for businesses.

    Affected Entities

    US regulations vary significantly from those in other countries due to the diverse nature of digital assets. Entities falling under the Bank Secrecy Act's definition of "financial institutions" are subject to AML/CFT obligations. This includes entities such as money services businesses, securities brokers/dealers, futures commission merchants, and mutual funds.

    FinCEN's guidance extends regulatory coverage to various business models involving the transmission of digital assets, including P2P exchangers, hosted wallet providers, and operators of convertible virtual currency (CVC) kiosks, among others.

    Relevant Laws and Initiatives

    Digital asset activities are governed by laws such as the Bank Secrecy Act (BSA), Commodity Exchange Act (CEA), and Securities Exchange Act. The updated Anti-Money Laundering Act (AMLA) broadened the scope of the Bank Secrecy Act (BSA) by incorporating businesses involved in the exchange or transfer of value as currency substitutes within the definition of "financial institutions."

    The proposed Responsible Financial Innovation Act aims to establish a comprehensive regulatory framework for digital assets, addressing securities, commodities, taxation, customer protection, and more.

    Mining Legality

    Mining cryptocurrency is legal in all US states, but some states may impose restrictions due to environmental concerns. For instance, New York introduced a moratorium on certain types of crypto mining to mitigate energy consumption.

    Compliance Measures

    To stay compliant, crypto businesses must register with FinCEN, SEC, and/or CFTC depending on their activities and implement state-level regulations. A robust Anti-Money Laundering (AML) program is essential, including policies, independent testing, designated compliance officers, and ongoing training.

    Moreover, companies must adhere to Customer Identification Program (CIP) requirements for customer verification during onboarding and transactions. Reporting suspicious activities and complying with BSA reporting requirements are also essential for regulatory adherence.

    Each state may have its own regulations and licensing procedures for digital assets, potentially affecting businesses engaged in crypto-related activities. While cryptocurrencies are generally legal at the state level, differences in regulations mainly impact businesses rather than individual users.

    Conclusion

    The regulatory landscape for cryptocurrencies in the US is intricate and continually evolving. Companies operating in this space must remain abreast of regulatory developments and be prepared to adapt to changes swiftly. Compliance with existing and forthcoming regulations, along with implementing robust verification solutions, is vital for ensuring legality and mitigating risks associated with illicit activities like money laundering.

    As the federal government continues its efforts to establish a comprehensive regulatory framework for digital assets, proactive compliance measures will be indispensable for businesses navigating the complex regulatory environment of the US crypto market.

     

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    Sun, 24 Mar 2024 00:00:00 GMT
    <![CDATA[NFT Regulations in Singapore]]> NFT Regulations in Singapore

    Introduction

    Non-fungible tokens or NFTs are presently one of the most popular technology trends in the world. Non-fungible means that this token cannot be exchanged as it is unique, and every token has a unique code and metadata stored on a digital ledger. The property that makes NFTs so popular and appealing is that these digital assets cannot be counterfeited and replicated. The ownership and authenticity of an NFT can be proved through the digital certificate issued on its purchase, and this digital certificate is generally encrypted on the blockchain.

    However, a grey area exists regarding NFTs as in effect, there is a separation between the digital asset and the NFT. The NFT only signals towards the existence of an asset and may or may not be treated as an asset in itself. Therefore, the legal status of NFTs is ambiguous and unclear as one does not know whether the owner of an NFT would automatically be granted the ownership of the underlying asset.

    The legality of NFTs in Singapore

    In Singapore, no specific laws or regulations currently exist to regulate the sale and purchase of NFTs. The Monetary Authority of Singapore (MAS) is the regulatory body that issues and regulates the currency in Singapore. As MAS does not recognize cryptocurrency or NFTs as a form of legal tender in the country, they are not regulated by the laws issued by MAS.

    In 2020, the Payment Services Act (PSA) was enacted to provide a legal framework for payment gateways, systems, and service providers. The Act defines digital payment tokens under Section 2 as any digital terms of value other than an excluded digital representation of value. These excluded digital representations of value are the digital representations of value prescribed by the Authorities as excluded. Even though NFTs are not explicitly excluded from the purview of PSA, they may be excluded as NFTS may fall under "limited purpose digital payment tokens," which are exempted from the purview of PSA. Furthermore, under the definition of digital payment token, the Act defined such a token as:

  • one that may be expressed as a unit;
  • is not denominated in any currency;
  • is or is intended to be a medium of exchange that is accepted by the public as payment of goods and service;
  • can be stored, traded or transferred electronically and;
  • satisfied other conditions as prescribed by the Authorities.
  • In the case of NFTs, the biggest limitation is that they cannot be a medium of exchange like cryptocurrencies because each NFT is unique and one of its kind and hence, one cannot be exchanged for another. Further, the foremost aim of PSA is to prevent and detect money laundering and terror funding. Therefore, NFTs cannot be logically regulated under the PSA.

    Despite the absence of any legal regulations for NFTs, many Singaporean artists have created and sold their digital artwork as NFTs. The sale and purchase of such NFTs are presently being governed by the smart contracts linked to such NFTs. Smart contracts entail the terms and conditions governing the creation, sale, and purchase of the NFT in question, and the contract is embedded on the blockchain. NFTs are generated through smart contracts, which verify the ownership and regulate the transferability of the NFT. Smart contracts are understood to be automated and enforceable agreements, having the same legal enforceability as traditional contracts in a common law jurisdiction such as Singapore. Therefore, while purchasing the NFT, the buyer should understand both the terms and conditions of the transfer and the terms and conditions enlisted in the smart contract in order to protect their ownership of the NFT.             

    NFTs and Intellectual Property Rights

    The buyer of an NFT does not automatically confer the intellectual property rights associated with the underlying asset. Such rights can only be acquired if an agreement is made in writing. In the absence of such an express written agreement, the intellectual property rights of the underlying asset will traditionally remain with the artist or creator of the NFT and not the buyer. The currently prevailing notion is that the sale of the NFT does not involve the sale of the actual underlying asset or any intellectual property rights associated with the asset.

    For example, in the case of Jack Dorsey's tweet that was sold for over $ 2.9 million, it was clarified that the buyer of the tweet does not own the copyright of the same, and hence, they would have to seek permission before using the tweet itself. The copyright of the tweet would still be owned by Jack Dorsey and Twitter in this case. The platform, Valuables, wherein the tweet was auctioned, also expressly clarified that owning the tweet means purchasing a digital certificate of the tweet. These tweets were only collectibles, and no copyrights were conferred upon the buyer through the purchase of the NFT.

    Therefore, the buyer of NFT cannot claim ownership of the underlying asset, and the buyer also does not own any intellectual property rights associated with the asset. The smart contract essentially only provides the exclusive rights to the digital unique identification code linked to the NFT. Hence, the asset or underlying artistic work will still mostly remain accessible to everyone. Although, in the case wherein a particular NFT is the only digital version of the asset or artistic work, the NFT would prove to be very valuable indeed.

    Conclusion

    NFTs likely continue to grow in Singapore and worldwide, given their popularity. However, the legal issues related to NFTs are complex and are currently ambiguous in Singapore in the absence of any specific laws and regulations to regulate the same. At best, these digital tokens can only be regulated through written, enforceable contracts presently. One may sue for breach of contract if the parties are situated in common law jurisdictions. Therefore, one needs to be mindful when entering the trade of NFTs.

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    Mon, 23 May 2022 12:00:00 GMT
    <![CDATA[NFTs and Intellectual Property]]> NFTs and Intellectual Property

    Non-fungible Tokens (NFTs) have been extremely popular recently, following the significance garnered with the cryptocurrency community in 2017, with some selling for substantial amounts at auctions. They possess multiple uses, from the ability to enhance innovation as well as generate significant proceeds for both creators and purchasers. However, with an increase in creative work entering the NFT market, it is essential to recognize its relationship with intellectual property to keep in mind while associating with the same.

     NFTs or non-fungible tokens are digital assets similar to other currencies in the crypto world, such as bitcoin, etc. These non-fungible tokens cannot be exchanged for another identical substitution. Their legitimacy of genuineness is verified by way of a blockchain which is inherently a distributer ledger technology. NFTs are unique as digital assets and have multiple uses and values for users. They can generate high demand and increase the revenue of the token's initial creator every time the said token is sold on. This adds to the original sale price value of the token.

    NFTs contain software code configured as a 'smart contract' composed of certain intricate information regarding the respective digital or physical assets affiliated with the NFT. It also includes the various rules and rights associated with the specific NFT, such as the percentage of revenue earned by the original creator for resale situations, etc. Unlike fungible tokens, non-non-fungible tokens cannot be substituted or replaced and thus gain their value from being unidentical to other tokens. Regarding fungible tokens, such as crypto-currency or currency that is fiat issued by the government, the units of these tokens are identical to their value. They can thus be exchanged or replaced with each other unit of the respective currency.

    NFTs and Intellectual Property

    Intellectual property includes those creative works of individuals ranging from literature and art to further designs, symbols, names, etc. The creative works of these individuals can be protected for individuality legally by way of intellectual property rights. Intellectual property, at its core, realizes and protects the rights and monopolies of these works. The owner of the patent right of his/her work is enabled to have the sole authority over the use of that particular work. Trademarks allow intellectual property rights to the owner of the trademark to have the privilege of protection over other brands who use similar names or work regarding the original work, which will be considered illegal under the law. This protection should essentially be attained and grasped by business individuals along with other endeavors to enhance growth and innovation.

    Ownership Rights under NFTs

    Considering NFTs, owners can have various creative works and names in the market. However, NFT's do not inherently possess intellectual property rights. There is a significant difference between owning an NFT and owning the underlying intellectual property assets within the NFT. Owners of intellectual property trade their assets and intellectual property in the form of NFT, which potentially undermines the owner's rights over that intellectual property.

    NFTs are blockchain units designed in a manner wherein they are free from the control of third parties, and the assets can subsequently be identically recreated and forwarded multiple times to an unlimited extent. In the case of NFTs, there is a lack of ownership benefits that the purchaser of the NFT may attain as such ownership is questionable, unlike an intellectual property right. At its core, NFTs are maintained to ensure the work's originality and ownership are protected. If a person has copies of the original work, it does not mean they possess the underlying ownership details of that work. Thus, owning copies of work does not ascertain underlying intellectual property rights to that person, which initiates the dilemma for NFT purchasers.

    Therefore, NFT owners need to consider the essential requirement to obtain a license for attaining the underlying rights of the original work or product from the original creator or owner of those rights. Only then can they authentically replicate and forward the underlying work. A significant example of this would be the slam-dunk video of US Basketball player Lebron James, an NFT released by the NBA as part of its highlight clips. These NBA NFTs can be exchanged for buying and selling in the 'Top Shot' market platform. The NFT card for the slam-dunk video can be sold in large amounts. However, the copyrights of the original video are retained by the NBA and are still subject to certain terms and conditions for the license according to the NBA. For example, content and captions cannot be changed for a particular video, and further merchandising can only be done after the NBA provides consent. If NFT purchases breach any of the terms and conditions provided, they are subject to suspension of account or removal of NFT without any prior notice. Original owners of NFTs do not have restrictions in terms of licensing for their work and can engage in its reproduction freely.

    Sale of NFT and Underlying Asset

    NFT sellers can potentially sell the intellectual property rights of the underlying asset to the NFT purchasers. This has to be done by writing, assigning the respective intellectual property. This is not done automatically on the sale of an NFT and has to be expressly clarified in the smart contract or anywhere else respectively.

    Original owners of NFTs can also combinedly sell both the NFT and the underlying asset together. The purchaser of the NFT can then utilize the NFT as a digital verification of the ownership of the underlying asset. These cases are pretty uncommon; however, in the event of one, the purchaser must take up specific considerations regarding who is essentially the owner of the underlying asset and who essentially has possession of underlying assets, especially in cases wherein the investment is a digital file.

    Licensing Intellectual Property Rights with the NFT

    The owner of the intellectual property rights can provide licenses for the authorized use of the intellectual property rights for the underlying asset of the NFT to the purchaser of the NFT, mandating the adherence to terms and conditions provided by the original creator. The owner does not have any restriction concerning the provisions of the terms and conditions and is free to make it as they choose.

    Monetization of Intellectual Property

    The original owners of the underlying assets of NFTs can attain royalties on subsequent sales of the NFTs. NFTs enable original owners to increase their revenue directly from the sale of NFTs by coding the smart contract to direct an automatic royalty payment to the original owner every time a sale of the NFT is made. This option enables original owners to enhance their proceeds by attaining multiple revenue streams.

    In conclusion, NFTs inherently possess multiple opportunities for individuals and businesses along with certain risks that come with them. When selling an NFT, there must be a precise representation and understanding of what is authorized and what is not concerning intellectual property rights when engaging in the sale of NFTs. This will enable businesses and individuals to have authority over their intellectual properties and create revenue from them. Third parties' use of intellectual properties must be supervised appropriately for efficient use and retainment of original rights. Along with the various benefits, there are areas of misuse of intellectual property by way of infringement to copyrights and trademarks, which must be further ascertained and studied to evolve the law in respect to the same. However, it is clear why NFTs are booming in the market.

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    Mon, 14 Mar 2022 02:51:00 GMT
    <![CDATA[Cryptocurrency's Ransomware Problem (USA)]]> Explaining Cryptocurrency's Ransomware Problem (USA)

    Introduction

    A hacker gains access to a company's computer system and encrypts its data, effectively halting operations. The data is then held captive by the hacker until a ransom is paid. If the demand is for Bitcoin or another cryptocurrency, the victim must open a cryptocurrency exchange account, purchase Bitcoin, and deliver it to the hacker's virtual wallet in exchange for the decryption key. The key enables the organization to regain access to its data and resume operations. Meanwhile, the hacker launders the ransom money through cryptocurrency exchanges and "mixers"-services that blend cryptocurrency from diverse sources to disguise its origin.

    The type of malware employed determines how it enters the system, although email phishing attempts are one of the most popular methods. If a company's systems are fully guarded, it may only take one person out of thousands to read the wrong email and click on the wrong link, and faked emails can be quite convincing. Hackers may also take advantage of flaws in a company's systems or launch a brute force assault, in which they guess at access credentials (such as passwords) until they find one that works.

    The pandemic opened up various new attack vectors for hackers. There was an exponential rise in phishing emails that took advantage of the circumstances and collective fear. People were more inclined to click on a link that would infect their computers - and eventually the rest of the system - as a result of the circumstances. Additionally, pre-pandemic personnel did not need remote access, but this year more facilities became internet-connected and remotely operable which increased the attack surface.

    Cryptocurrency

    The ransomware criminals are unable to use traditional banking methods. Even the most transparently corrupt bank would regard ransomware payments as an existential risk. The banks may unbank the perpetrators or be cut off from the financial system. If ransomware attackers tried to employ wire transfers, the same thing would happen. 

    Similarly, cash is not an option. A $5 million ransom is the equivalent of 110 pounds (50 kilograms) in $100 bills or two full-size suitcases. From a physical sense, arranging such a transfer to an extortionist operating outside the United States is simply impossible. The suppliers of ransomware require transactions that do not necessitate physical presence or a hundred pounds of goods. As a result, cryptocurrency is the only tool left.

    Due to its pseudonymous nature, cryptocurrency is perfect for ransomware payments; even if you see the ultimate destination wallet into which the ransom payment is transferred, you can not tell who owns or controls the wallet. As a result, ransomware attacks may now be carried out with relative ease.

     As a result of this impunity, there has been a surge in ransomware assaults, as well as the rise of DarkSide, a ransomware organization that leases its software to hackers in exchange for a percentage of any ransom paid. According to Elliptic, a blockchain analytics business, DarkSide, the recipient of the Colonial Pipeline ransom payment, has received more than $90 million in ransom payments in the last year.

    Ransomware hackers have stolen data in the past and threatened to release or sell it online. More recently, on the other hand, hackers have been increasingly bringing operations to a halt by encrypting files required to continue operations. As a result, attacks are more likely to prove crippling, giving hackers additional power.

    In 2020, the number of ransomware cases reported to the FBI increased by almost 66%, and the average ransomware payment tripled in less than two years, rising from $12,000 in Q4 2019 to $54,000 in Q1 2021. As of May 10, 2021, more than $81 million in cryptocurrency had been sent to ransomware addresses.

    JBS or Colonial Pipeline have recently been in the news because they were victims of ransomware attacks. Insurance giant CNA Financial, the city of Atlanta, elements of the Irish health service, parts of the UK health service, Australian hospitals, Cox Media Group, and so on have all been major victims in recent years. Anyone can be hit and recovering requires a lot of resources - both time and money.

    JBS SA, a meat processor, had to halt operations at its plants in the United States and Australia due to a ransomware attack. Following the hacks of Colonial Pipeline Co. and Scripps Health in San Diego, this incident demonstrated how extortion tactics can wreak havoc on the US economy and disrupt daily life. Businesses like Colonial, which paid $4.4 million in bitcoin to an Eastern European gang known as DarkSide, frequently make similar payments to avoid costly disruptions of their computer networks or the time-consuming task of restoring systems from backup data.

    The health-care industry has been one of the most targeted because the consequences of not paying the ransom in a timely manner can be severe, ranging from the inability to provide health-care services to the leakage of sensitive patient data - or even the blackmailing of patients not to have their data released. Ransomware has also been known to target municipal or government systems.

    CryptoLocker, TeslaCrypt, SimpleLocker, WannaCry, Locky, Leatherlocker, RobbinHood, GrandCrab, and Sodinokibi are a few of the worst ransomware offenders in the past few years.

    Why Not Ban Cryptocurrency?

    Despite fears that cryptocurrencies could be used to facilitate ransomware attacks, many in the sector and the federal government believe that a prohibition would be overbroad, logistically unfeasible, and likely to impair the United States' competitiveness.

    Upon the ban of cryptocurrency, a country would also be missing out on the innovation around bitcoin and other digital assets 

    Additionally, it would be very difficult to stop people from transacting in cryptocurrencies. 

    Instead, the focus should be finding the proper policy balance between allowing for the innovation that cryptocurrencies offer, the benefits they can deliver, and the protections built into the financial system to deal with criminal activity and money laundering.

    Regulatory Solutions

    As regulators seem to concur, de-anonymizing transactions would help achieve both the preventive and punishment goals. If a hacker's identity is revealed, he or she is more likely to be discouraged from undertaking such an assault.

    It is also suggested that we must expect more stringent enforcement of existing Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements and regulations. For example, cryptocurrency exchanges, custodial wallet companies, and crypto payment processors (among others) must register with FinCEN (The Financial Crimes Enforcement Network, a part of the Treasury Department) as money services businesses, implement AML programs that specify the KYC information collected, and appoint a compliance officer to monitor transactions and file Suspicious Activity Reports ("SARs") and Currency Transactions Reports ("CTRs") for transactions above ten thousand dollars.

    These procedures are critical not only for prospective law enforcement tracking in the event of a crime but also for crime prevention and customer trust and confidence, all of which are required for widespread cryptocurrency adoption. New applicants should be aware that criminals will be checked and excluded.

    More stringent KYC and licensing standards, as well as a centralized approach to preventing and responding to ransomware attacks, is required.

    The US government has already stepped up its response. In a letter to corporations and industry leaders, the Biden administration made advice for how they might better secure themselves against threats, as well as an appeal to work on these issues.

    Companies and regulators must also understand how a bitcoin ransom works on a technological level. Understanding how exchanges transfer funds and how mixers work is part of this.

    All cryptocurrency transactions are recorded on the distributed blockchain ledger, making them traceable by analytics firms or other individuals. Since blockchain transactions are easily traceable, the mechanisms to assist mitigate this type of assault are already in place. Exchanges are also beginning to comply with regulatory regimes aimed at identifying users and preventing money laundering, which can aid in the resolution of this problem.

    Additionally, solutions may include ensuring over-the-counter (OTC) trading desks enforce KYC rules, and that KYC and anti-money laundering rules (AML) are kept on bitcoin teller machine kiosks.

    Mitigating Attacks

    Ransomware attacks will prompt organizations to invest in cybersecurity and use the guidance and resources available.

    Better information sharing, cyber hygiene, increased investigative resources, and updated cybersecurity rules to address different components of the ransomware ecosystem are all concrete initiatives that regulators and businesses can do to help minimize the problem.

    Ransomware underreporting obscures the true magnitude of the problem, and it means that law enforcement lacks all of the information needed to prioritize and investigate ransomware incidents. Thus, attacks should be reported.

    International collaboration on KYC/AML rules, as well as the establishment of best practices for cryptocurrency exchanges, is required to ensure that they can provide services to legitimate businesses while excluding illicit enterprises. Like-minded countries should agree to improve certain financial rules and conduct joint investigations or share information so there exists a better understanding of the criminal networks.

    Good security and defensive practices are important to mitigate and prevent attacks:

    • Keep your operating system patched and up-to-date to reduce the number of vulnerabilities that can be exploited.
    • Don't install software or provide it with administrative capabilities unless you completely understand what it is and what it does.
    • Set up antivirus software to detect harmful programs like ransomware as soon as they appear, as well as whitelisting software to prevent unauthorized programs from running in the first place.
    • Make regular and automatic backups of your files. While this will not prevent a virus assault, it can significantly reduce the damage it causes.
    • Multi-factor authentication – this would make hacking etc., more difficult.

    Should ransomware attackers be paid?

    New legislation may make it more difficult to pay and collect ransoms. If businesses are prohibited from paying ransoms and cryptocurrencies are better regulated, this might go a long way toward cutting off the funding source for many of these attacks. Both of these things are, of course, easier said than done. It's not impossible, though:  for example, China's cryptocurrency crackdown. Opinions differ on whether or not ransom payments should be prohibited.

    Paying international criminals could set a dangerous precedent and put a target on the back of critical infrastructure. On the other hand, the company may go bankrupt if it cannot function as a result of the attack.

    Simply prohibiting ransom payments would place a significant burden on victim companies without providing them with extra tools or resources to withstand an attack.

    That said, many firms that are infected with malware rapidly stop thinking in terms of the "greater good" and begin balancing the expense of the ransom against the worth of the encrypted data in a cost-benefit analysis. According to a Trend Micro study, while 66 percent of organizations say they would never pay a ransom as a matter of principle, 65 percent pay the ransom when they are attacked.

    Some ransomware attackers keep their rates low, i.e., an amount that most businesses can afford to pay on short notice. Some highly sophisticated malware will recognize the country in which the infected machine is located and change the ransom to fit that country's economy, asking more from wealthy countries and less from those in poor countries.

    Discounts are frequently offered for paying promptly, to entice victims to pay without thinking too much about it. In general, the price point is set high enough to be worthwhile to the criminal, but low enough to be less expensive than the cost of restoring the victim's machine or reconstructing the lost data. With this in mind, some businesses are beginning to factor in the possibility of having to pay a ransom into their security plans: for example, some large UK businesses that are otherwise uninvolved in cryptocurrency have set aside some Bitcoin specifically for ransom payments.

    When paying attackers, it also has to be made sure that "scareware" is not involved, i.e., fake attacks. Sometimes the criminals simply take the money and run, and the software may not even include decryption functionality. However, because such malware quickly gains a reputation and does not generate revenue, the criminals usually ensure your data is restored in the majority of situations - Gary Sockrider estimates this to happen 65 to 70% of the time.

    Conclusion

    Therefore, ransomware attacks can have significant consequences. However, various actions are being taken to develop policies that can prevent, mitigate, and fix the associated problems. International corporation and better cybersecurity training/measures are also required.

     

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    Mon, 03 Jan 2022 11:49:00 GMT
    <![CDATA[Economic and Fraud Provisions in the Middle East]]> Economic and Fraud Provisions in the Middle East

    "There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

    - Milton Friedman

    Economic fraud is a term that has been repeated over the years, so much so that the consequences it bears do not have any precedence or impact on the ones that hear it. For many companies and capitalist machinery, this term essentially triggers them to explore options to hide their fraudulent tracks and continue operating in the same manner. To have governments help them cover the tracks in certain jurisdictions ultimately defeats the purpose of the assignment.

    Despite the incongruent activities of individuals, companies, and governments from the expected norm of justice in many jurisdictions, other countries are tenacious to implement a regulatory framework that will eradicate such fraudulent activities in the market. This article will discuss the economic and fraud provisions established in the Middle East, their effectiveness, and the scope of reach it possesses about financial crime.

    What are the Economic and Fraud provisions in the Middle East?

    If one area of the economy has seen a steady increase in the past years, it would be the economic fraud prevalent in society. Regardless of the number of provisions that jurisdictions and international organizations establish to combat financial fraud, none of them seems sufficient. The parties involved in economic fraud and other fraudulent practices are constantly evolving to cover their tracks efficiently.

    Infamous scandals like Bernie Madoff and the Ponzi scheme leave one in absolute awe as it remains unclear, what is the culprit: the crime or the criminal? Many innocent parties, including employees and clients, were adversely affected by the ill-doings of these financial schemes. After the outburst of many scandals and its impact on many innocent individuals, jurisdictions are trying to fasten their pace to stay a step ahead of wrongdoers and hopefully eliminate the potential threats in the market.

    The introduction of new anti-economic fraud regulations has paved the way for potential investors to feel a sense of security over their investments within the market, along with the ability of the regulations to enforce justice. Over time, people have understood that the formation and establishment of an anti-fraud legal framework are not sufficient to ensure peace and harmony in the market, an iron fist must be imposed on fraudulent parties and companies to deter them from doing such activities in the future and serving it as a lesson for other participants in the market who bear similar intentions.

    The types of economic fraud can be quite varied and are spread across different industries and the scope of nature. These could include housing benefit fraud, tenancy fraud, council tax fraud, blue badge fraud, social care fraud, business rates fraud, insurance fraud, bribery, and money laundering. These are just a top layer of economic crimes prevalent in an ocean of fraudulent activities in the market. The crimes that are more coherent to the wrongdoings in the market include not declaring the business location, stating that a property is not in use while it is, dishonestly requesting for an exemption to pay for charges that are owed, or any unauthorized movement of money to make ill-gains.

    Often, economic crime is caused not by companies but by customers towards companies. The highest reported crime boost in the Middle East is through customer fraud and procurement fraud, which have proved to be the most disruptive fraud within an economic crime. In a survey conducted on a global platform, the number of customer frauds was comparatively more in the Middle Eastern region.

    In an ongoing effort to combat fraud together, many companies in the Middle East began investing in more stringent controls and implementation of the rules to avoid economic crime, while many others conducted a thorough examination into reasons after the occurrence of a crime in the company. Another issue that stands alongside customer fraud about its prominence is procurement fraud. This fraud entails the practice of favoring associates with vendor and supplier contracts.

    All these efforts are measures taken to mitigate the risks involved and ensure that proper prevention is taken by instilling the right technology and talent to deviate from any fraudulent prone routes.

    However, it is not easy to ensure that accountability will be maintained and transparent feedback is provided. Another limitation of this procedure is that advanced technologies to combat financial crime can be costly, which would further deplete if the company possesses insufficient resources to acquire and install the platform and is not equipped with properly trained employees to manage the technology. The lack of proper expertise to handle the in-place technology could attract various cyber threats, which allows a wrongdoer from any part of the world to infiltrate the company's system.

    With this in mind, companies must equip themselves from the arsenal of defenses to protect themself and the financial and reputational facets of the company. The extent of damage that infiltration of the company's system can cause to the operations is quite unfathomable. It would be better for companies to leave their vault of secrets wide open than installing an IT platform that is managed poorly. The necessity of combating such insecurities is proliferating and must be countered at the earliest. One would like to believe that the efforts of the legal jurisdictions in the Middle East to battle economic crime are practical and promptly applied. However, many of the jurisdictions still fail to provide a proper implementation of the provisions established against economic crime.

    The readiness of companies in the Middle East to confront the indecisive nature of economic crime and report any issues as they arise is still moving at a stagnant rate. The stark increase in cyberattacks and its potential threats is not a mystery to the companies in these regions. Nevertheless, they decide against preparing themselves in defense of such risks and attacks. The firms in the region and the governmental organizations must understand the types of threats that could arise in the economy and the nature of such economic crimes. Although this would seem like an insignificant step, this particular action could help achieve a more profound revelation of the gaps and vulnerabilities of the economy and its protective framework.

    Many would argue that the relationship of the Middle East with economic crime and fraud dates back ages. All the glitz and glamour and the boom of economies are incongruent with the fraudulent activities occurring within the firms and regions. A region's legal systems cannot enforce the regulatory frameworks established to fight against economic crime if the country's government does not implement the rulings.

    To know more about Economic and Fraud Provisions in the Middle East in Singapore Click here 

     

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    Mon, 27 Dec 2021 03:22:00 GMT
    <![CDATA[Guide to Establishing NFT's Marketplace in the UAE]]> Guide to Establishing NFT's Marketplace in the UAE

    Introduction to NFTs

    Simply put, an NFT is a non-fungible token.

    "Non-fungible" basically implies that it's one-of-a-kind and can't be substituted with anything else. A bitcoin, for example, is fungible, meaning you can exchange one for another and get precisely the identical item. A one-of-a-kind trade card, on the other hand, cannot be duplicated.

    An electronic commodity that reflects components in reality like art, music, in-game goods, and movies is known as an NFT. They're acquired and traded digitally, often using cryptocurrency, and they're usually encrypted with the same software as many other cryptos.

    Despite the fact that they've been available since 2014, NFTs are rising in popularity as a more popular means to buy and sell digital art. Since November 2017, a whopping $174 million has been spent on NFTs.

    A big perk of possessing a digital collectable over a tangible collectible like a Pokemon card or a rare, minted coin is that each NFT has unique information that helps it stand out from the others and can be readily verified. As all products can be linked to the authentic seller, the manufacture and dissemination of false collectibles are useless.

    NFTs, unlike other cryptocurrencies, cannot be immediately traded. This is due to the fact that no two NFTs are identical. Consider their festival tickets. Each ticket includes information such as the purchaser's name, the event's date, and the location. This information makes purchasing festival tickets difficult.

    NFT Operation

    Most NFTs are, to a good degree, members of the Ethereum blockchain. Ethereum, like bitcoin and dogecoin, is a cryptocurrency, but its blockchain also enables these NFTs, which hold additional details that allow them to function uniquely from, say, an ETH coin. It's worth mentioning that different blockchains can use NFTs in their own ways.

    NFTs are essentially digital versions of actual collector's artifacts. As a result, rather than receiving a real oil painting to put on the wall, the customer receives a digital file.

    They also acquire exclusive rights to the property. It's true: NFTs can only have one owner at a time. Because NFTs include unique data, it's simple to verify ownership and transfer tokens between owners. They can also be used to hold particular information by the owner or developer. Artists, for example, can sign their work by adding their signature in the metadata of an NFT.

    Contemporary Popular NFTs

    NFTs could have been anything digital (drawings, music, even your brain being downloaded and converted into an AI), but the hype is focused on leveraging the technology to sell digital art.

    Purpose of NFTS

    Artists and content creators have the opportunity to monetise their work thanks to blockchain technology and NFTs. Artists, for example, now do not have to publish their goods through galleries or auction houses. Instead, the artist may sell it as an NFT straight to the consumer, allowing them to keep a larger portion of the profit.

    Additionally, artists may build royalties into their software so that they get a share of revenues when their work is sold to a new owner. This is a desirable feature because most artists do not earn further revenue after their initial sale.

    Snoop Dogg and Lindsay Lohan are among the celebrities who have jumped on the NFT bandwagon, offering unique experiences, artwork, and moments as securitized NFTs.

    The procedure of buying an NFT

    Before beginning, you'll need to possess a digital wallet that can hold both NFTs and cryptocurrencies. Based on what currencies your NFT provider supports, you'll probably need to buy some cryptocurrency, such as Ether, Coinbase, Kraken, eToro, or even PayPal and Robinhood that now allow you to buy cryptocurrency using a credit card. After that, you'll be able to transfer money from the exchange to your own wallet.

    To know more about Establishing NFT's Marketplace in the UAE Click here 

     

    ]]>
    Mon, 01 Nov 2021 01:55:00 GMT
    <![CDATA[Regulations for Issuing and Offering Crypto-Assets in UAE (ICARs)]]> Regulations for Issuing and Offering Crypto-Assets in UAE (ICARs)

    Introduction 

    Over the past decade, the financial technology market has evolved substantially. With the introduction of cryptocurrencies, policymaker and framers of legislations find the need to implement legislation that will help regulate this growing market. Since cryptocurrencies operate beyond the banking system, it tends to present some challenges. Several jurisdictions around the world have embraced the challenges that come along with cryptocurrencies while others have outright rejected recognition thereof. 

    In the UAE, cryptocurrencies and terms associated therewith were somewhat foreign; however, over the years, UAE has become an active participant in this global trend. In keeping with the aim of its UAE Blockchain Strategy 2021, the Government has made several attempts to transform UAE into a crypto hub. The FSRA, being the regulator of securities in ADGM, has issued several supplementary and comprehensive guidance for carrying out activities related to cryptocurrencies, other authorities like the SCA and DFSA have followed suit. 

    The Securities and Commodities Authority (SCA) has recently issued Regulations for Issuing and Offering Crypto-Assets (ICARs). The ICARs aim to regulate crypto-assets right from issuing, licensing, promotion, exchanging and all such other aspects that govern it. 

    Objectives

    The Regulation aims to regulate matters connected with the promotion, offering and trading of crypto assets in the state and related financial activities. The Regulation authorizes the SCA to exercise discretion in the following matters:

  • Protecting investors and other individuals against the risks connected with dealing in crypto assets.
  • Preventing financial crime and ensuring proper application of laws with regards to the prevention of financial crime in the state.
  • Ensuring proper application of laws for the use of financial instruments.
  • Protecting the reputation of the state and maintaining all such protocol that ensures the maintenance of the state's international commitments.
  • Promoting innovation, competition and evolving new means of financing enterprises operating within the state. 
  • In admitting a new licensee under the regulations, examining the suitability and reputation of the applicant and all other parties connected to the applicant.
  • Scope of application 

    The introduction of these Regulations is a turning point for crypto-asset Regulation in the country. The ICARs applies to any person who:

  • Is engaged in promotion, issuance, or offering crypto assets for sale to persons in the UAE or persons who are engaged in such activities. It aims to capture a wider audience through cross border dealing in crypto assets. 
  • It aims to provide services with respect to, custody, operation of exchanges that deal with cryptocurrencies and providing a platform for raising funds for cryptocurrencies that are issued in the UAE. 
  • Any other person who conducts Financial Activities within the territory connected with crypto assets. 
  • Exceptions 

    There are certain exemptions that have been made regarding persons/ entities that fall under these Regulations. Therefore, the scope of application is limited to the aforementioned and does not include:

  • Crypto assets issued by the local or federal governments, institutions, authorities or companies that are wholly owned by the Government. 
  • Currency (virtual or otherwise), units of stored value or any other such items that have been issued in a facility that have acquired or are required to acquire prior approval from the Central Bank.
  • Dematerialized securities in a clearing or settlement system not issued as a crypto asset but administered using an electronic record-keeping method controlled by the issuer or approved registrar, unless it qualifies as a crypto asset due to other connected features.
  • Activities conducted within the financial free zones within the territory of the state. 
  • Listing on a crypto-asset exchange 

    Article 8 of the ICAR stipulates that no crypto-asset shall be listed and made available for trading on a crypto-asset exchange within the state, unless:

  • Where the crypto-asset exchange is limited to accepting on qualified investors following the filing of the offer documentation with the Authority.
  • Where the crypto-asset exchange becomes available to persons other than qualified investors, with prior assent of the Authority.
  • The Regulations further provide that, approval shall be granted to the applicant subject to the satisfaction of the following:

  • All crypto-assets except the ones falling under-recognized cryptocurrencies under Article 19 must comply with the provisions that are applicable to commodity tokens under these Regulations.
  • Further, the Regulations also require the appointment of a crypto asset custodian unless the need for this requirement to be satisfied can be waived due to the satisfaction of custody arrangements in accordance with the requirements of the Authority.
  • Disclosure of all fees and commission paid or to be paid, to the issuer or an offering person must be made to the investors.
  • Any and all such requirements as may be mentioned in Article 17 of the Regulations.
  • Duties and obligations of the crypto asset custodian 

    A crypto-asset custodian is essentially a third-party entity that provides storage and security solutions for crypto assets. The main aim of such crypto asset custodians is to facilitate institutional investors who hold large amounts of cryptocurrencies and hedge funds to manage their funds. 

    Holding such large amounts of funds and crypto-assets presents its own challenges. Therefore, the Regulations impose certain duties and obligations in custodians of such cryptocurrencies, and these requirements may be subject to modifications by the SCA accompanied by certain licensing conditions that may be imposed as it may deem fit.

    The custodian of crypto assets is required to:

  • Create a separate wallet or account for each of their clients that contains information such as details of the holder and the transactions that are conducted on its account.
  • The custodian must maintain all accounts separately from its own assets and property.
  • The custodian must not transfer, pledge, hypothecate, grant security interest, lien or loans to a third party with respect to the customer's crypto assets, and neither should the custodian engage in adverse claims. 
  • The custodian shall be permitted to transfer crypto-assets out of the customer's account only when specifically instructed to do so. No such initiative is permitted to be taken by the custodian on their own accord. 
  • Store cryptographic keys and other such sensitive data that may be subject to an online attack outside the ambit thereof. Further, where rights regarding such cryptographic keys exist, no individual in a company is permitted to authorize or take any action regarding crypto assets held for clients.
  • Certain procedures and policies shall be put in place regarding actions to be taken in case a crypto asset becomes compromised, or any such loss has been caused to a client. 
  • A written agreement shall be entered into by the crypto asset custodian with their client, which lays down all the duties and obligations as per the provisions of the Regulation.
  • In case there is a conflict between the functions of the crypto asset custodian and any other related activities associated thereto, it shall be referred to the Authority is no action can be taken to avoid such conflict, along with information regarding the system that is used and controls that mitigate the issue and must ensure that all such disclosures have been made to the clients.
  • Crypto-asset exchanges 

    The Regulations also lay down certain rules for the operation of crypto-asset exchanges, a broad enumeration of the same is provided below:

  • Ensure that all information regarding trading and transactions are provided to the Authority.
  • Effectively carry out surveillance to identify, monitor and detect any such practices that lead to market abuse or financial crimes.
  • Ensure that the crypto-asset exchange is subject to adequate Financial Crimes Controls and the rights granted to users are protected.
  • Permission to access the crypto-asset exchange is to be granted to specific persons who are able to demonstrate a good track record of regular investment in crypto assets; those persons who access the exchange merely for the purpose of acquiring and selling crypto assets.
  • Ensure fair and transparent rules are put in place which ensures suspension or termination of access to markets in case a person does not meet the obligations imposed with respect to crypto transactions, and all such other rules enumerated under Article 16 of the Regulations.
  • Crypto fundraising platforms 

    Funding is a necessary prerequisite for any type of investment, similarly for any new or existing crypto project funds are required. Any person desirous of starting a crypto project needs to fist raise funds, these funds, however, cannot be raised from just any source. The Regulations lay down certain standards for raising funds in Article 14 thereof. 

  • Fundraising is permitted to be conducted only by such persons who have received the assent of the Authority to conduct such an activity.
  • A cap of AED 50,000 has been imposed on the amount permitted to be invested by customers.
  • The regulations also lay down that, fundraising can be accepted only in those currencies and crypto assets that can be subject to the Financial Crime Controls in accordance with Article 22.
  • All the disclosure requirements mentioned in the regulations are required to be complied with, and the person raising such funds shall be answerable to the Authority for such compliance.
  • The fundraising platform must not permit any trading or exchange activities of issued crypto-assets unless that same has been approved by the Authority.
  • The Regulations also impose certain requirements for operating a fundraising platform. Any person desirous of operating a crypto-asset fundraising platform must obtain a license from the Authority, this application shall be subject to certain modifications by the Authority as per their requirements. 

    The requirements are as follows:

  • The applicant must be a corporate person in any of the forms as prescribed by the Custody Regulations or; a person authorized to operate a crypto-asset exchange.
  • An offering person of crypto-assets where the scope of the proposed crypto fundraising platform is limited to being in respect of the relevant crypto-asset.
  • The applicant complies with all such requirements as mentioned under Article 21 and 22 of the Regulations.
  • Any such additional requirements may be imposed by the Authority in case the customers are exposed to any risk that cannot be adequately covered. 
  • Financial Crimes 

    The SCA takes into consideration the possibility of financial crime and introduces requirements that would help mitigate risks related to these crimes. It lays down various requirements such as business risk assessment, the effectiveness of financial crime controls, monitoring financial crime, carrying out due diligence, assigning a high-risk rating to clients that deal in crypto assets, designating bank accounts through which such transactions can be effected, tracing transactions involving crypto-assets and so on. 

    It is to be noted that, crypto assets which are not permitted to be traced are not permitted for use in order to fund accounts or make transactions through persons authorized through the Authority. 

    ]]>
    Tue, 21 Sep 2021 12:00:00 GMT
    <![CDATA[Bitcoin & Altcoin Mining]]> Bitcoin & Altcoin Mining

    What is Bitcoin Mining?

    Bitcoin mining is the technique of digitally adding transaction data to the blockchain, which would be a publicly distributed database that contains the background of every bitcoin transaction. Mining is a record-keeping procedure that utilizes massive processing power. Each Bitcoin miner across the world contributes to a decentralized Crypto mining computers solve complex mathematical tasks in order to contribute to the block- chain ledger safely. When a solution is found, the most recent block of confirmed transactions is added to the block-chain as the next link.

    Mining for bitcoin is tedious, costly, and seldom rewarding. Nevertheless, mining has a magnetic pull for several crypto investors given the fact that miners are compensated with crypto tokens for their labor.

    Basics of Bitcoin Mining

    Bitcoin may be obtained in three ways:

    • Buy them on an exchange
    • Get them in return for products and services
    • Mine new Bitcoins

    Because it parallels the process of mining for any other resource, the process of discovering new Bitcoin is referred to as mining. Miners explore and dig into the dirt in the hopes of catching gold in mining.

    Miners seek to locate Bitcoin by solving challenging mathematical puzzles. Block-chain is the tech that underpins Bitcoin. It is a publically digital ledger that documents every Bitcoin transaction. It is actually a digital block chain. Each block comprises a collection of Bitcoin transaction data. Miners contribute to the blockchain by solving challenging mathematical problems with computer processing power. By resolving the issues, the block will be successfully added to the chain. The miner that answers the challenge properly receives Bitcoin.

    The preceding is the foundation of the intricate process of Bitcoin mining. It contributes to the payment network's security and dependability. The network is constructed on a peer-to-peer network, which means that every miner on the planet contributes processing power to keep the network running, confirm transactions, and keep them safe.

    • 10 minutes for each block

    Satoshi Nakamoto, the Bitcoin founder, structured the Bitcoin network so that a block could be processed every ten minutes. The level of the mathematics tasks adjusts automatically to maintain this 10-minute pace.

    The level of difficulty will rise as there are more miners and computer power attempting to mine. The level of difficulty will drop when there are fewer miners and less computational power.

    Evolution of Mining

    People interested in mining bitcoin are able to do so using their own computers during the early phases of Bitcoin in the early 2000s. Mining became more harder as its popularity grew.

    Increased computer processing power was required to handle the increasing level of complexity. Soon after, miners attempted to mine Bitcoin using gaming computers. The procedure was repeated, and the mining complexity and processing power demanded grew.

    Computers & chips were later developed specifically for the purpose of mining of Bitcoin. It now necessitates efficient hardware - that is, hardware with great computational capabilities and energy efficiency.

    Solving the Bitcoin algorithm in order to contribute to the blockchain and get Bitcoin necessitates a massive amount of energy. It is critical to keep power prices low in order to make Bitcoin mining viable and sustained.

    • Block Reward

    The amount of Bitcoin awarded for each completed & submitted to the blockchain block is called the block reward. For each and every 2,016 blocks mined, the block reward is supposed to "halve." It is known as the "halving" process, and it occurs in  about 4 years periodically.

    The halving process will be repeated until the last block and currency are mined. With each Bitcoin block taking 10 minutes to mine, the last currency is expected to be produced in the year 2140.

    • Genius Design and Incentive         

    The blockchain network is supported by the whole worldwide mining community. Each one helps to authenticate the validity of the transaction. Mining individuals are rewarded with a block for their efforts as a reward to participate.

    In the blockchain, Bitcoin provides a disruptive technology. The cryptocurrency itself would be decentralized, enabling transactions to take place anywhere in the world without government limitations or delays. Bitcoin miners find benefit in cryptocurrency decentralization.

    Bitcoin mining may be split down using the most recent mining technologies to calculate a stream of revenue depending on the output of mining computers. The following are the most critical criteria in Cryptocurrency mining profitability:

    • Computing hardware

    To compete with the rising requirements for effective mining, miners must own the most up-to-date gear. In a few of years, equipment might become outdated. They require mining-specific equipment, that can be expensive. The most recent ASIC mining setups cost more than $1,500 per computer.

    • Power costs

    The primary running expenditure will be power. Electricity is priced on a per-kilowatt-hour basis (kWh). Mining profitability might range between $0.03 and $0.08 per kWh. A few pennies difference may make or break mining profits. A miner must be able to consume power at the lowest feasible cost.

    • Requirements to Begin Mining Bitcoin
      • Mining computers that are competitive
      • Power supply at a low cost
      • Software for mining
      • Membership in a mining pool

    The concept of Bitcoin mining pools arose in response to the issue of increasing mining difficulty. A group of miners join together to pool their processing resources in order to mine for Bitcoin cooperatively. If the pool satisfactorily solves a block, all miners in the pool will be rewarded in relation to the amount of processing power they provided.

    The odds of a single mining machine obtaining a block reward are minimal, but then those odds jump when 1000s of machines are pooled together. Mining pools are now deemed necessary if one wants to mine Bitcoin effectively.

    Individuals involded in crypto are compensated for their services as auditors. They are in charge of determining the validity of Bitcoin transactions. Satoshi Nakamoto, the creator of Bitcoin, devised this standard in order to keep Bitcoin owners honest. Miners assist to prevent the "double-spending problem" by confirming transactions.

    The case for Altcoins

    Alternative cryptocurrencies to Bitcoin are known as altcoins. They share certain traits with Bitcoin but vary in other aspects. Some cryptocurrencies, for example, utilize a different consensus technique to generate blocks or verify transactions. Alternatively, they differentiate themselves from Bitcoin by offering new or enhanced features, such as smart contracts or minimal price volatility.

    Altcoins is the term referred to cryptocurrencies other than Bitcoin.

    Altcoins represented for 40% of the whole digital currency market in March 2021, with over nine thousand cryptocurrencies & rising. some of the most common forms of altcoins are   utility token stable coins, security tokens.

    In the future, as technology progresses, altcoins may only contain mining-based currencies apart from Bitcoin.

    Since about March 2021, the biggest altcoins by market cap were Binance Coin & Ethereum.

    • Mining-Based Coins

    Mining-based altcoins, as the name implies, are created by mining. To build blocks, most mining-based cryptocurrencies employ Proof-of-Work (PoW), a process in which systems generate new currency by solving challenging challenges. Mining-based cryptocurrencies include Monero, and Zcash, Litecoin,. The majority of the leading cryptocurrencies in early 2020 were mining-based. Pre-mined coins are an alternate to mining-based cryptocurrencies. Such coins are not generated by an algorithm, but are dispersed before being posted on cryptocurrency exchanges. Ripple's XRP is an example of a pre-mined cryptocurrency.

     

    ]]>
    Wed, 07 Jul 2021 12:00:00 GMT
    <![CDATA[Establishing Policies for Blockchain Technology]]> Establishing Policies for Blockchain Technology

    Introduction

    Blockchain can be considered as a breakaway technology and is currently a hot topic that has been the subject of numerous studies across various industries. Blockchain is briefly defined as a shared ledger database that records and shares every transaction that occurs in the network of users. Initially devised for the digital currency Bitcoin, the applications of Blockchain are multifold. 

    In a conventional sales transaction, a user makes a purchase and any payment made towards such purchase is marked as a debit in the user's financial records whereas the seller records the sale as well as the payment in his records as a credit. Both parties have to maintain individual records of the transaction and have to ensure accuracy and confidentiality of such records. This is essentially how the system of double-entry bookkeeping functions. With blockchain technology in the picture, these transactions are radically transformed. 

    In a blockchain transaction, a user sets in motion a purchase, known as the block. This contains transaction data like the date, time and the purchase amount. This information can be seen by both the purchaser as well as the seller, thereby providing confirmation on the fact that the payment was initiated, sent and received. Such a data block is stored and shared in an online accounting ledger involving multiple buyers and sellers within a particular network. Any new transaction automatically gets attached to the previous one forming a chain that documents the transaction history and hence the name, blockchain technology.

    The nature of blockchain technology can be illustrated as follows:

  • All data is distributed and not transferred or copied.
  • The data is decentralized and not stored in one place. Centralized databases are highly prone to attacks by potential hackers.
  • Any data once recorded and stored is permanent and cannot be altered. This will effectively enable companies to tackle the pressing issue of misappropriation of funds.
  • The data is cryptographically stored yet it is transparent. Personal information of the user is kept confidential and hidden. However, any and all transactions are made available publicly.
  • There is no extra transaction cost. Only an initial infrastructural cost to set up the blockchain technology.
  • Faster processing of transactions as third-party verification and processing is eliminated.
  • Blockchain technology seeks to eliminate or rather replace all processes/business models that charge a small fee for transactions. For example, the business model of Apple Music or Spotify. Users have to pay a small fee to purchase/listen to an artist's song. This is essentially a profit cut for the artist and can be avoided with the use of blockchain technology. The music can be encoded and stored in a public database, and any user wishing to buy such music can do so, and the proceeds from such purchase will go directly to the music artist thereby avoiding all intermediaries.

    This very article is being written on Google Docs, which has properties similar to that of blockchain technology. A document shared with multiple users can be modified by all of them, and any such changes will be visible in real-time to the other users thereby obliterating the ordeal of saving the document, sending it across to multiple users, receiving modified documents from the other user, sending across corrections to such modifications, etc.

    In the world of finance, blockchains will completely change the way stock exchanges work or even how insurances are contracted. Financial institutions are modelled on the premise of taking a cut for facilitating a transaction. This will turn Banks into bare advisers as opposed to their long-standing role as the gate-keeper of public money. 

    Blockchain technology finds its primary use in the financial sector. However, there are several alternative business applications for it. 

  • Supply chain auditing
  • The primary concern for any consumer is whether a company's products match up to the claims made by the company. The Distributed Ledger Technology (DLT) or blockchain technology is an effortless way for any consumer to certify that any/all claims made by a company with respect to their product are true. The use of such technology provides users with the time, date and location of every step in the production process of a consumer good. 

  • File Storage
  • Distribution of data throughout the network ensures protection from potential hackers or from getting lost. InterPlanetary File System (IPFS) eliminates the need for centralized client-server relationships. This will enable faster file transfer and quicken streaming times. In a time where the content delivery system of the web is being overloaded, blockchain technology provides an easy solution.

  • Smart Contracts
  • Coding of simple contracts that will execute when the required conditions are met is a technology that is the need of the hour. Smart Contract can be defined as a computer program that is stored and executed in a Blockchain Network, containing business logic which is composed of self-executing functions and has, either partially or fully, the terms and conditions of an agreement between parties written into its lines of code, thereby enabling the digital performance and execution thereof. Ethereum is an open-source blockchain project that was released to satisfy this need. It features a smart contract functionality. 

  • Protection of intellectual property
  • The internet has, in recent times, become a gold mine for free content. Any information can be reproduced and made available to users on the internet. Copyright holders are in agony at the loss of control over an item of their creation and the consequential financial losses. Smart contracts can protect copyright, and automate the sale of such works online, extinguishing the risk of file copying and redistribution.

  • AML and KYC
  • Anti-money Laundering and Know Your Customer applications are highly potential blockchain technology projects. Presently, financial institutions carry out a strenuous multi-step process for every new customer. Use of Blockchain can cut costs exponentially and make monitoring and analysis of data a highly effective process.

  • Governance 
  • A company can make its governance completely transparent and verifiable, especially with respect to the management of assets, equity or any pertinent information. Information made publicly accessible increases the trust that users have in a company which is highly beneficial in the long run. An application called Boardroom enables organizational decision-making to take place on the Blockchain. 

    In the United States, federal agencies are gauging the efficiency of distributed ledger technologies like Blockchain to improve transparency, efficiency and trust in government information sharing. The Department of Agriculture oversees the use of Blockchain in particular food supply chains; the Food and Drug Administration supervises its use in drug supply chains and so on. However, there are numerous legal bodies that will have serious policy implications for a business that is developing and utilizing blockchain technology.

    In India, there is seen to be a clash in the ideologies of two major laws. While blockchain technology is primarily based on transparency (which requires data to be exposed) and immutability of data (which requires the data to be permanent and non-erasable), these requirements are in a major conflict with the data privacy laws prevalent in the nation. The Personal Data Protection Bill, 2019 provides extensive rights to the person from whom data is being collected (Data Principal) with respect to the privacy of their personal data and sensitive personal data. It also states that the person collecting the data cannot retain any personal data beyond the period necessary for processing the data and must then erase the data so collected once the purpose is satisfied.  

    Blockchain technology and regulation in the UAE

    The UAE government has viewed Blockchain as the stepping stone for enhancing productivity and increasing payment efficiency. It strongly backs the use of this technology and in lieu of that has launched the Emirates Blockchain Strategy 2021 and Dubai Blockchain Strategy. The former seeks to maximize the benefits of blockchain technology to transform 50% of government transactions into the blockchain platform by 2021. This initiative has been taken by the Government to make an annual savings of more than AED 10 billion, around 400 million printed documents and almost 77 working hours per week. 

    His Highness Sheikh Hamdan Bin Mohammad Bin Rashid Al Maktoum launched Dubai's blockchain strategy in October 2016. This initiative was to function as a partnership between the Smart Dubai Office and the Dubai Future Foundation. The Dubai Blockchain Strategy will enable Dubai to become the first city to be fully powered by Blockchain. Three strategic pillars are sought to be used - government efficiency, industry creation, and international leadership. 

    To aid adoption of latest technologies and innovative practices at the global level, Dubai Future Foundation established the Global Blockchain Council with the aim to assess and analyze, current and future applications of the technology as well as organize transactions through the blockchain platform. The Council will assist transactions within the various financial and non-financial sectors as well as increase the degree of productivity and authenticity. The Council consists of 46 members, which include government entities, international companies, leading UAE banks, free zones, and international blockchain technology firms.

    With regard to digital transactions, the UAE would use blockchain technology, giving each customer a unique identification number that points to their details on a safety chain. Information 

    and data on a blockchain cannot be compromised or altered, ensuring the digital security of national documents and transactions and consequently reducing operating costs and speeding up decision-making. 

    Taking note from the Dubai Blockchain Strategy, the Dubai Land Department (DLD) is establishing its own blockchain system to record all real estate contracts and seeks to liaison with utility companies like Dubai Electricity and Water Authority (DEWA). This system will allow tenants to make payments electronically, thereby making transactions paperless and cost-efficient. The DLD wants to completely eliminate the requirement of parties to be physically present before any government entity for the completion of certain transactions. 

    The Roads and Transport Authority (RTA) is working on a project using blockchain technology to build a vehicle lifecycle management system. The program intends to provide a comprehensive and transparent record of the vehicle's past from the manufacturer to the scrap yard for car makers, dealers, regulators, insurance firms, buyers, sellers and garages. This blockchain-based system will enhance transparency and accountability in vehicle transactions, avoid conflicts and reduce service costs.

    The sale of cryptocurrencies in the UAE is mainly regulated by the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM). Dubai Financial Regulatory Authority (DFSA), the official regulator of the DIFC states that licenses are not granted to any company to issue cryptocurrencies in the DIFC. In ADGM, a regulatory framework for cryptocurrencies was recently introduced called Operating a Crypto Asset Business (OCAB). With respect to other emirates, there are no express regulations that prohibit or control the sale of cryptocurrencies except the e-payment regulations. 

    Value Added Tax (VAT) was introduced in the UAE only in 2018, and hence virtual currencies have not yet come under the purview of the VAT system. The Federal Tax Authority (FTA) of UAE determines the applicability of tax on cryptocurrencies. This is governed by UAE's Federal Law Number 8 of 2017. If virtual currencies are to be deemed as "goods" or "services" for the purpose of VAT law, it will result in the value of the purchase is taxable under VAT. At present, an individual's personal income tax or any other taxes are not in force in the UAE.

    Dubai Blockchain Policy

    This Policy lays down the rules that are applicable to Dubai Government Entities, Blockchain Networks and Private Sector Participants with respect to the utilization of Blockchain in government transactions. 

    Scope 

    The Policy applies to Dubai Government Entities that intend to use Blockchain or form a new Blockchain Network or join an already existing one, Private Sector Participants that are looking to join a Dubai Government Blockchain Network or a Government-hosted Blockchain Platform, and Blockchain Networks and Platforms that are formed or hosted or joined by a Dubai Government Entity.

    All relevant stakeholders are required to comply with the provision of this Policy. The Smart Dubai city Office (SDO) has to mandatorily coordinate with the Emirate's Blockchain Strategy in order to extend support to implement the Blockchain policy successfully throughout the Emirates. 

    Network Formation 

    Government Blockchain Networks that are formed in Dubai must be approved by the SDO, who will, in turn, ensure that the Blockchain Networks so created are effective and efficient across the Government. 

    The SDO has the authority to perform various functions: 

  • Approve the formation of a new Blockchain Network after assessing the supporting documents required to be submitted and provided by such entities.
  • Supervise the compliance of prevailing Blockchain Networks that fall under the ambit of this Policy.
  • Assign and re-assign, network operators to lead Government Blockchain Networks.
  • Appoint a committee or more of particular sector regulators and important stakeholders to head Government Blockchain Network formation and governance decisions.
  • Intellectual Property Rights 

    Dubai Government Entities and Blockchain Network Operators are urged to address and clearly define ownership, and other IP Rights shared or associated or developed in relation to Blockchain. Data ownership and other data-related IP rights will further be identified and handled in line with the Dubai Data Law and Dubai Data Policies.

    Data Privacy and Confidentiality

    All blockchain networks that are subject to this Policy and their members must uphold the data privacy and confidentiality regulations as prescribed by the Dubai Data Law and other relevant policies. They are required to classify all data that is shared through Blockchain networks in accordance with Dubai Data Establishment's (DDE) Data Classification Framework. Data privacy rules should be strictly observed at all times, and no personally identifiable information should be recorded directly on the Blockchain network. Mechanisms to ensure secure storage of data on these networks should be applied efficiently. Consent must be sought from individuals and private entities in order to share their data through the Blockchain network, which must be done in compliance with DDE's Dubai Data Policies. 

    Communication & Adoption 

    All blockchain networks subject to this Policy must publish and maintain a communication plan detailing the Blockchain network services provided, roadmap and future plans. Dubai Government Entities are recommended to build internal capacity and skill-set for Blockchain and other related technology in order to steer adoption. 

    Smart Contracts 

    Blockchain networks subject to this Policy making use of Smart Contracts for legal application or for automating legal obligations are mandatorily required to ensure that all such Smart Contracts are technically sound and legally reviewed so that they are in compliance with the requirements under the existing laws and regulations. A Smart Contract must be accessible by all the parties to the contract. It must be convertible to Arabic or English and should be readable in exactly the same way by all the parties to the contract. Digital signatures of all the parties must be affixed after identification using Digital Identity, and the parties have explicitly agreed to all the terms and conditions in the Smart Contract. 

    Public Interest 

    The SDO, Dubai Government Entities, Private entities, stakeholders and other members that are governed by this Policy must take into consideration public interest and public security while employing Blockchain in general and particularly seek to:

  • Uphold accountability and transparency;
  • Safeguard public health and safety;
  • Safeguard consumers and other beneficiaries;
  • Nurture the provision of better and efficient government services;
  • Protect public security;
  • Enable inter-government collaboration; 
  • Support and protect crucial economic, academic, and technology sectors from achieving stability, safety and welfare;
  • Prevent crime and protect the safety of individuals; and
  • Maintain the UAE infrastructure as well as tactical and vital services.
  • Conclusion

    In light of technological developments, UAE has strived to be at the forefront globally to achieve the same. Having recognized the potential of such newly discovered technological formats, it can be noted that the country has been quick to pass mandatory regulations in requisite of the same. While an innovative and transparent mode of ledger keeping, blockchain technology is still in its early stages and yet to be implemented as a mainstream source, but having regulations at this stage requires the users to be mindful of the laws and conduct its proceedings with heed.

    ]]>
    Thu, 18 Mar 2021 01:27:00 GMT
    <![CDATA[Crypto Asset Exchange – Bahrain]]> Crypto Asset Exchange – Bahrain

    Introduction

    Cryptocurrencies gained traction all across the world since its inception, considering this growth in popularity and use, industry experts, praise its potential. This digital currency went from being a mere concept to virtual reality. In the Gulf Region, Bahrain and Abu Dhabi are a leading hub for digital currencies, Blockchain and cryptocurrencies. On the other hand, many gulf countries and countries all across the world are skeptical about the integration of cryptocurrencies within their economy. 

    Considering this skepticism, governments are taking steps to regulate crypto assets in order to diversify their economies and attracting cryptocurrency firms. In keeping with this aim of development, it should be kept in mind that, these digital assets are accompanied with a lot of risks; therefore, it becomes important to strike the right regulatory balance so that the risks harmonize with the aim of economic growth. 

    After extensive deliberation, planning and identifying the potential threats that can arise in dealing with crypto assets the Central Bank of Bahrain has emerged with Regulations in order to regulate digital capital markets, more specifically crypto assets.  

    CBB Regulations

    The Central Bank of Bahrain is responsible for regulating the capital markets in the country, now inclusive of cryptocurrency and Blockchain companies. In early 2019, the CBB approved the final rules and regulations in the CBB Rulebook under Volume 6 that would permit cryptocurrency usage in the Kingdom. The Rules cover areas like licensing, capital requirements, risk management, control environments, anti-money laundering/ anti-counterfeiting, countering funding terrorism, business conduct standards, reporting rules and cybersecurity regulations. 

    Despite the growth of this digital currency, banks and financial institutions are still iffy about the advantages of digital currencies and are therefore reluctant to use the same. Studies conducted all across the world have shown the potential that this digital currency holds and the fact that it is capable of impacting sectors beyond the financial sector such as the education sector, supply chain etc. Under the Rulebook, the crypto assets are defined as virtual, digital assets or tokens operating on a Blockchain platform that is protected by cryptography. These crypto-assets are offered by Crypto Asset Platform Operators or CPOs; these CPOs act as a principal or agent that facilitates custody of crypto assets on behalf of their clients.

    Crypto Regulatory Sandbox

    The term crypto regulatory sandbox is very common in the world of Fintech. This term basically refers to space wherein companies that engage in Fintech transactions can test out their code before deploying it globally. This is a sandbox, and the companies are exempt from some regulations so that they can test out their innovations without the fear of breaking the law. 

    In Bahrain, there are about 30 companies that have been approved for the Regulatory Sandbox by the CBB; these companies comprise of CPOs and exchanges. The Bahraini Regulatory Sandbox allows companies to test their technology and innovation solutions in the financial and/ or the Fintech sector. 

    Capital Requirements 

    The CBB Regulations divide types of crypto assets services into four categories according to the capital requirements for each category. Further, it also enumerates the different set of services that the CPO can provide. The categories are enumerated hereunder;

    Category 1 

  • The first category is concerned with entities that act as an investment advisory to potential investors and provide services like receipt and transmission of orders. 
  • The Rulebook also imposes certain obligations on the Licensee:
  • the Licensee is not entitled to hold any money or assets that belong to the client concerned;
  • the Licensee shall refrain from receiving fees and commission from any party other than the client;
  • the Licensee must not operate a crypto asset exchange; and
  • the minimum capital requirement, in this case, is BHD 25,000.
  •  Category 2 

  • Entities that provide; portfolio management services, crypto-asset custody, investment advisory, or are accepted as an agent in that sphere fall under this category. 
  • The Licensee may deal as a principle, which means that the agent may act on behalf of the client and hold and control the assets of the client. However, this does not allow the Licensee to deal from their own account. 
  • The minimum capital requirement, in this case, is BHD 100,000.
  • Category 3 

  • This category involves entities that act as a principal and an agent and trade-in accepted crypto assets, including activities like portfolio management, investment advisory and crypto-asset custody. 
  • In this category, the Licensee may deal in their own account and conduct dealings as a principle, however, these cannot operate a crypto-asset exchange. 
  • The minimum capital requirement, in this case, is BHD 200,000.
  • Category 4 

  • This category is concerned with entities that operate a licensed crypto-asset exchange, including services concerned with custody services for crypto assets. 
  • The Licensee, in this case, may not engage in matched principal trading and must not execute client orders against proprietary capital. 
  • The minimum capital requirement, in this case, is BHD 300,000.
  • These CBB must ensure, at its discretion, the financial integrity of the Licensees considering their ongoing business operations. The capital requirements encompass paid-up share capital, not inclusive of losses, this paid-up share capital must be deposited to local Bahraini banks and evidence thereof are to be presented to the CBB as and when requested. 

    In addition to capital requirements, the Licensee is supposed to maintain professional indemnity insurance at a minimum of BHD 100,000 by an insurance firm approved by the CBB.  

    Licensing Requirements 

    The CBB lays down eligibility criteria for investors who wish to register themselves with the licensees; the applicant must be a legal person either incorporated in the Kingdom of Bahrain or overseas in accordance with the law at the time being in force; a natural person may also register themselves as long as they are above the age of 21. 

    The CBB recognizes and regulates the following types of services with respect to crypto-assets:

  • Regulated crypto-asset services;
  • Execution of orders on behalf of clients;
  • Dealing on own account;
  • Portfolio management; 
  • Crypto asset custodian; 
  • Investment advice; and
  • Crypto asset exchange.
  • The CBB further also lays down the activities that are excluded from regulation:

  • Creation or administration of crypto assets;
  • Development, dissemination or use of software for creation or mining of crypto assets; and
  • Loyalty program.
  • No person is entitled to conduct activities mentioned above, in the market within the territory of Bahrain without obtaining a license from the CBB. 

    Further, the CBB also lays down requirements concerning the legal status of the applicants, as follows:

  • In case of category 1, 2 and 3 – the applicant must be a Bahraini Limited Liability Company; or a branch resident in Bahrain of a company incorporated under the laws of its territory of incorporation; or a Bahrain Joint Stock Company. 
  • In the case of category 4 – the applicant must be; a Bahraini Joint Stock Company or a branch resident in Bahrain of a company incorporated under the laws of its territory of incorporation. 
  • Any person desirous of obtaining a license must duly submit an Application for a License accompanied by a cover letter duly signed by an authorized signatory. This letter is to be submitted to the CBB and addressed to the Licensing Directorate. The documents to be accompanied with the Application for License are as follows:

  • Application for authorization of Shareholders;
  • Application for approved persons;
  • A comprehensive business plan;
  • In case of an overseas company, a copy of the commercial registration, license from a competent authority or any such equivalent document;  
  • In case of an existing Bahraini company, the commercial registration certificate; 
  • Certified copy of the Board resolution, confirming its decision to seek CBB license; 
  • A copy of the MOA and AOA; and
  • Any other such documents that are mentioned in the CRA 1.2 of the CBB Regulations Volume 6.
  • Once all the documents mentioned above are in order and submitted to the concerned authority, the CBB will review the same and duly inform and advise the applicant in writing about either of the following:

  • Granting application without conditions;
  • Granting application with conditions; and
  • Refusal of application, in this case, the CBB is required to clearly state the grounds under with the application was refused. 
  • By law, the CBB is required to announce the decision and inform the applicant about the acceptance or refusal within 60 days of submission of all such documentation required by the CBB. Once approved, the decision to grant license shall be published in the Official Gazette and in two local newspapers, one in English and one in Arabic. 

    The applicant seeking grant of license has to pay a non-refundable application license fee of BHD 100 at the time of submission of the application to the CBB. It is to be noted that an approved person is not required to pay any such applicable fees. 

    Accepted Crypto Assets

    The authority to determine the suitability of crypto assets lies with the CBB. Therefore, only after the approval of the CBB with respect to the acceptability of the crypto assets will the Licensee be able to deal in the same. Further, certain factors are considered by the CBB for approving crypto assets as under-regulated crypto-asset services, as follows:

  • The track record, reputation and technological experience of the issuer and the software developers;
  • The issuer's cybersecurity systems and controls; 
  • Availability of a reliable multi-signature hardware wallet solution; 
  • Protocols and underlying infrastructure;
  • Whether the crypto assets have been traded on any sidechains;
  • Other crypto-asset exchanges on which the crypto asset has been traded; and 
  • All such factors that are enumerated under CRA 4.3.3 .
  •  Ongoing obligations and Disclosures

    In CRA 4.1 to 4.12, the CBB imposes certain obligations upon the licensees, including but not limited to; ensuring fair, transparent and orderly dealings of activities, managing risks associated with the business and operations, providing clients with sufficient information to facilitate decision making, maintain fair treatment of clients and take into consideration the complaints submitted by clients. 

    As part of establishing a trustworthy relationship with clients, the Licensee must disclose any such risk that may arise and may come to the knowledge of the Licensee regarding the crypto assets. This information must be disclosed in a clear and conspicuous manner along with the rights and liabilities imposed on the client, in both the Arabic and English language. 

    Further, the Licensee is required to:

  • Maintain proper records and books in connection with the crypto-assets;
  • Maintain confidentiality of all client information; and
  • Maintain records of telephonic conversations and electronic communications, and all such matters as may be required by the CBB.
  • Conclusion 

    Many countries have banned cryptocurrencies considering its dubious presence. The rationale behind this is that crypto-assets can easily turn into a treacherous scheme to defraud investors. The problem with cryptographic assets is that, since it is in the digital form, once stolen it cannot be traced, one example of such a theft is Coin Check which was the world's biggest crypto theft, thereafter, there have been numerous scams and hacks within the crypto world. Therefore, it is totally understandable where the skepticism against the use of cryptocurrencies arises. 

    On the flipside, billions of people all over the world have benefitted from dealing in crypto-assets and entering the financial market. This market is in a somewhat grey area all over the world; however, countries are striving to regulate the use of these assets through guidelines and regulations that would allow them to make use of crypto-assets to benefit the economy. 

     

    ]]>
    Sat, 12 Dec 2020 12:00:00 GMT
    <![CDATA[Security Tokens and Blockchain- An Edge over other Jurisdictions]]> Security Tokens and Blockchain- An Edge over other Jurisdictions

    The new age of technology and interconnectivity around the globe and beyond has revolutionized the methods in which we carry out the activities of daily life. Communication, banking, shopping, travelling- technology has eased these areas of our lives to a simple touch on a screen or a click of a button, so it comes as no surprise that this technology can innovate the very basic commodity of our society; currency, to a whole new level.

    Capitals, property, and profits are now being digitized as this is cost and time-efficient. But how is this possible? The answer is a cryptocurrency, which is a binary (the computer number system of 0 and 1s) asset which possesses the right to be used.  Blockchain was invented by a person alias Satoshi Nakamoto in 2008 serving as the public transaction ledger for the bitcoin which is a form of cryptocurrency.Thereafter, there has been a proliferation in the entire world with regards to it.

    How does Cryptocurrency work

    The transaction of cryptocurrency is enabled through the help of strong cryptography which consists of blockchain and security tokens. Say that you are transferring money to your friend's account, the bank will retain the information of the transaction and update this information on both sides, the sender and the receiver, this information, however, can be easily tampered with by anyone who knows how the banking system works. Blockchain acts as an 'only read' information sheet. Blockchain is in simple terms a chain of blocks, where each block is a single collection of data, this data once added is difficult-almost impossible to change as the blockchain is not governed by any central body but simply abides by the protocols of cryptography.  Security tokens are the newest category under cryptocurrency, its main purpose is to remove the middle area or middleman that exists between a transaction.  When the middleman is removed it reduces the chances of risk, fees, and delays and leads to lower fees, faster deal execution, free-market exposure, larger potential investor base, automated service functions, and lack of financial institution manipulation

    The Emergence of Blockchain

    UAE is an innovation-led society that aims at integration between leading technologies and everyday activities to create an efficient, productive and leading community. Dubai is always at the forefront of achievement, progression and envisions at becoming one of the first 'smart cities' in the world. The competent and enduring nature of the blockchain technology is expected to make things more secure, reduce operational cost and accelerate decision-making.

    Emirates Blockchain Strategy 2021

    In April 2018, His Highness Shaikh Mohammad Bin Rashid Al Maktoum launched the 'Emirates Blockchain Strategy 2021', a collaboration between the Smart Dubai Office and the Dubai Future Foundation, its aim is to make Dubai the first city fully powered by Blockchain by 2020 which would result in saving AED 11 billion, 398 million printed documents, 1.6 billion kilometres of driving and 77 million work hours annually, this is made possible as the integration of Blockchain will handle 50% of all federal government transaction.  

    The key factors of the strategy are Government Efficiency-increasing efficiency through a digital layer for transactions, Industry Creation- enable citizens and partners to create new business through a technological platform and International Leadership- to open its Blockchain platform for global partners.  

    Furthermore, alongside the development of Blockchain within the city, Dubai has also introduced an essential factor of international Blockchain development by establishing the Global Blockchain Council; founded by the Dubai Future Foundation. The council is made up of 46 members, consisting of government entities, international private companies, leading UAE banks, free zones and international blockchain technology firms. The council aims to explore, discuss current and future applications, and organize transactions through the Blockchain platform. The council will regulate the implications of the new innovation by only allowing transactions on Blockchain to be successful if all members of the council approve, this reduces the risk of fraud and money laundering which in turn leads to the advancement of prosperity of the current and future business and finance sectors, which in turn boosts transactions between financial and non-financial sectors.

    A prime example of a blockchain project in UAE is of Roads and Transport Authority (RTA). RTA is executing a project in order to devise a vehicle lifecycle management system with the use of blockchain technology. The aim of this project is to provide car manufacturers, regulators, dealers, buyers, sellers insurance companies and garages with a clear record regarding the vehicle's history from the manufacturer to the scrap yard. This blockchain executed system would boost transparency in vehicle transactions, prevent disputes and lower the cost of services.

    The Regulation of Cryptocurrency

    Although there is no doubt that blockchain is indeed the future of transactions, the success of blockchain demands the regulation of existing legislation with the introduction of the new technology cryptocurrency, which is essentially the running power of blockchain. The regulatory regime regarding cryptocurrency will be developed in accordance with the new technology as well as keeping in mind the pre-existing financial regulatory authorities. The current digital payment regulation prohibits "virtual currencies" although it was later followed up by a statement in which it was clarified that this regulation does not apply to cryptocurrencies.  In the various free zones around the UAE, only a handful of them has issued licenses to cryptocurrency companies and only one has a specific regulatory regime regarding cryptocurrency. 

    Abu Dhabi Global Markets (ADGM) and Dubai International Financial Centre (DIFC) are the two most popular financial free zones in the UAE. The Dubai Financial Services Authority (DFSA), the regulatory vehicle of DIFC, launched the "Innovation Testing License" for fintechs, allowing firms to test their concepts, largely based on Blockchain technologies within DIFC's territory, whereas the Financial Services Regulatory Authority (FSRA), the regulators for Abu Dhabi Global Markets (ADGM), launched the RegLab sandbox, one of the pioneering licensing frameworks for fintech in the region to test for the same. RegLab is basically designed to proactively develop and anticipate future legislation with regards to the governance of the use and applications of evolving technologies in order to minimize the risk and maximise the benefits. Further, it shall work closely with the lawmakers from local and federal government entities, private sector leaders and businessmen to develop legislations that will be governing vital future sectors which influence humanity and support the region's role as a global incubator of creative and innovative projects.

    In October 2017 a Guidance on the Regulation of Initial Coin/ Token Offerings and Crypto Assets was issued by the ADGM, which provides a framework that ensures the regulation of the system providing reassurance and comfort to individuals, companies, and investors.

    Furthermore, Federal Law Number 1 of 2006 on Electronic Commerce and Transactions appears to allude to 'smart contracts' in its Article 12 as it states that, "Contracts between confidential electronic mediums that include two or several electronic information systems, designed and programmed in advance to perform so, shall be deemed valid, enforceable and giving its legal effects even in the instance of no personal or direct interference of any physical person," adding that, "concluding contracts between a confidential electronic information system in the possession of physical or juristic person and another physical person is further allowed should the latter knows or is supposed to know that the system shall conclude the contract automatically." This shows that precise and detailed structure is being given to the legislation regarding Blockchain.

    Crossing International Borders

    The ability to add a block to a Blockchain creates an interlinking network around the globe leading to the chance to make international connections, the DFSA collaborates with other regulators on technologies and innovation including with the United Kingdom's Financial Conduct Authority (FCA), Bank Negara Malaysia and the Monetary Authority of Singapore (MAS). The nature of the Blockchain integration is such that it cannot be confined within certain geographical boundaries and so cannot be governed by a single jurisdiction. This is because each block of the blockchain arises from different parts of the world. Obligations of various countries differ from each other, this challenge can be overcome by adding a governing clause which would decide the jurisdiction they would be under if any dispute would arise by the parties who enter into transactions and other contractual obligations with each other.  

    The Future is Bright

    The direction of growth and commitment seen over the years as we come closer to 2021 makes it abundantly clear that UAE is a forerunner in creating a highly innovated society that integrates the latest technologies and developments.

     

    ]]>
    Wed, 05 Feb 2020 12:00:00 GMT
    <![CDATA[Cryptocurrency and Asset Exchange in the Abu Dhabi Global Market]]> Cryptocurrency and Asset Exchange in the Abu Dhabi Global Market

    Currency is defined as something, more often than not paper and coins, that act as a medium of exchange for goods and services. This practice of trade has been a constant for humankind throughout its various ages, occurring in multiple forms, yet resulting in the same outcome. While earlier transactions revolved around the exchange of physical forms of currency in the form of legal tenders, at present, with the advancements made in technology, the currency has taken an alternative system that's known as cryptocurrency.

    Cryptocurrency facilitates financial transactions in the same manner currency does, with the exception that it is intangible and acts as a digital asset. The standard currency relies on central banking systems and controlling authorities as a form of regulation, whereas cryptocurrency utilises a form of decentralised control. This decentralised methodology of control is made possible by the use of distributed ledger technology (DLT). The technology is such that digital data is spread across multiple devices in an interconnected network and subsequently synchronised using a consensus of these devices within the network. The lack of a regulatory body overseeing these networks is considered as a significant security threat, but this hasn't stopped multiple variations of cryptocurrency being conceived including Bitcoin, Altcoins, Token, etc. With cryptocurrency gaining major traction and becoming mainstream, countries have looked into the same, and while some have expressed reservations in adopting the system, some have taken it up as an authorised medium of exchange. The United Arab Emirates (UAE) is one such country that has taken an active interest in integrating cryptocurrency into its economy through the Abu Dhabi Global Market (ADGM), an international financial centre and financial free zone in Abu Dhabi.

    Abu Dhabi Global Market

    The Abu Dhabi Global Market was established as a financial free zone in the Emirate of Abu Dhabi by Federal Decree Number (15) of 2013,

    The FSRA conducts and facilitates all financial services in the ADGM. Financial entities registered with ADGM must adhere to the obligations set out by the FSRA, that are in addition to the standard obligations of ADGM. The FSRA seeks to uphold the integrity of ADGM's financial system and acts to deter any such conduct or activity that disturbs the stability of the financial services industry. ADGM also has set up measures to towards prevention of financial crimes by adhering to Countering Financing of Terrorism (CFT) Anti-Money Laundering (AML) guidelines, with FSRA being the competent authority governing the same. The ADGM Courts consists of the Court of Appeal and the Court of First Instance, and function as per the rules and regulations enacted by the ADGM Board of Directors and its subsequent amendments.

    Guidelines related to Cryptocurrency

    In May 2019, the FSRA issued a set of guidelines with respect to Cryptocurrency. The guidelines enacted were:

    • Digital Security Offerings and Crypto Assets Regulations under the FSMR (dated 13th May 2019)
    • Regulation of Crypto Asset Activities in ADGM (dated 14th May 2019)

    According to these guidelines, a Crypto Asset was recognised to be a value of digital representation that could digitally be traded and be utilised as a medium of exchange, but not having any legal tender status in any jurisdiction. The main objectives are to address the risks that arise when trading of crypto assets occur. At present, in the event of a theft or a loss of crypto assets, users do not have a safety net that will enable them to recover their assets. The mere adherence to AML and CFT guidelines is not sufficient enough to quell the broader risks of crypto assets. The issues addressed by the guidelines pertain to the areas of:

    • Consumer Protection
    • Safe Custody
    • Technology Governance
    • Transparency
    • Market Abuse

    Under the regulatory framework, any person (custodian, market operator or intermediary) dealing in crypto assets needed to be approved by the FSRA as a Financial Services Permission (FSP) holder in the business of operating crypto assets, otherwise known as OCAB. Apart from the above-mentioned guidelines, authorised persons must comply with the following additional guidelines:

    • The FSRA Conduct of Business Rulebook (COBS)
    • The FSRA General Rulebook (GEN)
    • Anti-Money Laundering and Sanctions Rules and Guidance under the FSRA (AML)
    • The FSRA Rules of Market Conduct (RMC)

    As per chapter 17 of COBS, there are seven key factors which the FSRA considers while determining whether a Crypto Asset becomes an Accepted Crypto Asset. They are:

    Maturity/Market Capitalisation:

    The volatility, sufficiency and the proportion of Crypto Asset in the free float are assessed. The FSRA does not prescribe a source for the calculation of market capitalisation of Crypto Asset. It instead uses recognised sources, as and when it may be available.

    Security:

    The Crypto Asset is determined if it is able to adapt and improve the risks and vulnerabilities it has and tested on their ability to allow secure private keys the appropriate safeguarding.

    Traceability/Monitoring:

    The ability of crypto assets to identify counterparties in transactions are assessed along with the ability of OCAB holders to demonstrate the origin and destination of such crypto assets.

    Exchange Connectivity:

    The presence of other exchange centres which support crypto assets, their jurisdictions and regulations are investigated.

    Types of DLT:

    The security of the DLT that is used for the purpose of Crypto Assets is assessed to understand if it is stress tested.

    Innovation/Efficiency:

    The ability of the Crypto Asset to solve fundamental problems or create value for the participants or meet a need of the market is determined.

    Practical Application/ Functionality:

    The functionality of the Crypto Asset in terms of real-world quality is looked into and plays an important role in determining if it becomes an Accepted Crypto Asset.

    Anti-Money Laundering and Countering Financing of Terrorism Guidelines

    One of the primary concerns with the usage of Crypto Assets is money laundering (ML) and terrorism financing (TF). The ADGM introduced the Anti-Money Laundering and Countering Financing of Terrorism Guidelines in 2015 with the jurisdiction being exclusive to the Global Market area, and it is independent of any federal anti-money laundering legislation. The guidelines introduced to apply for all those persons who operate from or in the ADGM.

    Under the UAE criminal law, as per Article 3 of Federal Decree Law Number (20) of 2018, a person may be held criminally liable for money laundering if it is conducted intentionally in the name of the person or from their account. The following also constitute offences in relation to money laundering:

    • Failure to report suspicions related to money laundering
    • Assisting in the commission of money laundering

    An inter-governmental organisation called the Financial Action Task Force (FATF) helps develop and promote international standards to fight money laundering and terrorist financing. The FATF has identified certain critical risks associated with crypto assets, such as:

    Anonymous operation of Crypto Assets

    Since crypto assets are traded on the Internet with no face-to-face interactions, anonymous funding and transactions take place. This can result in the failure to identify the source of destination of the funds.

    Increased potential for ML and TF risks:

    The ease of access to Crypto Asset systems (even from a mobile phone) massively increases the global and can enable cross-border transactions, which can be challenging to monitor.

    Complex infrastructure:

    Crypto Asset systems are built on platforms that require complex infrastructures with multiple entities across different jurisdictions being involved. This can cause difficulty for law enforcement agencies to access them. The rapid increase of decentralised technologies which are used by Crypto Asset businesses further aggravates the issue.

    Jurisdictions not having adequate ML/TF tools:

    Since different components of the Crypto Asset system may be spread out across multiple jurisdictions, it is entirely possible that such jurisdictions may not have adequate framework and control over money laundering and terrorism financing.

    On the basis of the risks put forth by the Financial Action Task Force, the FSRA has introduced fundamental principles an OCAB holder should consider, which are:

    Risk-Based Approach:

    OCAB holders must understand the risks associated with the activities involved and should carry out periodic risk-based assessments, which identify, assess, manage and mitigate the risks related to money laundering.

    Business Risk Assessment:

    In accordance with the Anti Money Laundering rules, entities must take appropriate steps to identify and analyse ML risks the business may be exposed to, with importance given to the use of new technologies that can be used. The FATF further recommends that financial institutions must conduct such risk assessment prior to the launch of any new practice, technology or product.

    Customer Risk Assessment and Customer Due Diligence:

    Procedures in relation to Customer Risk Assessment and Customer Due Diligence must be implemented by all OCAB holders and must rate the Clients according to their risk profile. The due diligence must be carried out in accordance with the AML rules as per FSRA. In the event that the ongoing due diligence happens non-face-to-face, the OCAB holders are expected by the FSRA to identify the client as a natural person. OCAB holders must ensure that the process of due diligence is not a simplified one and may use any technology available to them in order to mitigate any such risk associated with verifying the client.

    Governance, Systems and Controls:

    OCAB holders are required to implement the necessary technological governance systems and controls to ensure appropriate ML and TF compliance. Third-party solutions and technologies can be brought on in order to fulfil the regulatory obligations put forth. Effective transaction monitoring systems must be implemented in order to determine the origin and destination of Crypto Assets. A Money Laundering Reporting Officer (MLRO) must be appointed by the OCAB Holder, and this officer will be responsible for implementing and overseeing how the OCAB Holder complies with the AML rules.

    Suspicious Activity Reporting Obligations:

    OCAB holders must establish online connectivity with UAE's Financial Intelligence Unit for submitting such suspicious activity reports and must ensure that transaction monitoring systems are in place to identify any possible breach of domestic or international sanctions.

    Record Keeping:

    The FSRA expects record-keeping practices in accordance with the AML/CFT compliance guidelines, to be followed by OCAB holders. Such data must be kept in an easily accessible format and provided to the FSRA whenever required.

    Conclusion

    It is imperative that for the successful integration of crypto assets, the guidelines that are put forth by the Financial Services Regulations Authority are followed. These guidelines are quite comprehensive in nature and ensure that a safety net is available for those dealing in crypto assets and digital asset exchange. The ADGM has been a pioneer in international financial centres, with its unique outlook and it has certainly paved the way for further inroads in the field of cryptocurrency.

     

    ]]>
    Tue, 10 Sep 2019 12:41:00 GMT
    <![CDATA[ICO regulations in Malta]]> ICOs and ICO Regulations in Malta

    Introduction

    Initial Coin Offering (ICO) is a relatively new player in the financial sector which has paved its way to becoming a principal subject of discussion in the Blockchain community. In essence, ICO stands out amongst the most developed strategies for raising funds from the public and continues to gain popularity exponentially.

    While every other jurisdiction is hesitating from regulating this niche industry, Malta has taken the lead and presented a specific regulatory and administrative framework for ICO's. Malta is the first jurisdiction to take the initiative to regulate ICOs and Blockchain Technology. This article seeks to give an outline of the laws and guidelines related to ICOs.

    The title of "Blockchain Island" was unequivocally earned by Malta in July 2018 for instituting the first ever cohesive framework for ICO regulation. While this sector universally continues to function in a legal vacuum, Malta is the crypto haven for an unambiguous legal framework for ICO regulation.

    Malta comprehended that regulatory clarity is the cornerstone from which this effervescent economy would grow, it set up dedicated government units absorbed exclusively on researching these technologies and ideas to establish Malta as a world's ringleader for transparent and affluent ICO regulation.

    Malta culminated with final Parliamentary approval the following three bills:

  • Malta Digital Innovation Authority Act
  • Virtual Financial Asset Act
  • Innovative Technological Arrangement and Services Act
  • 1. Malta Digital Innovation Authority Act (MDIA Act)

    The MDIA Act provided for the formation of MDI Authority and projected at outlining the Authority's mission to endorse the growth of the blockchain technology sector in Malta. Its aim was to regulate internal governance. The Authority certifies a Distributed Ledger Technology (DLT) platform software, which provides technical, legal and economic certainty to users of these platforms in Malta.

    For clarity, the DLT platform is a digital system that records transactions of assets, through which details of these transactions are recorded at several places at the same time. The motif behind DLT system is to keep transparency amid asset exchanges.

    2. Virtual Financial Assets Act (VFAA)

    The FCAA institutes a supervisory framework to administer entities that work indirectly or directly with VFAs which includes ICOs, nominee service providers, portfolio managers, token exchanges, investment advisors and token exchanges. The VFA Act also establishes a set of necessities and rules for Security Token Offering (STO) and ICO whitepapers to be delivered to the Malta Financial Services Authority. This Act specifies that the token issuer must assign a VFA agent who is approved by the MFSA as the proficient authority who screens and reports on the token offering.

    3. Innovative Technology Arrangements and Services Act (ITAS Act)

    The Act promulgates a regulatory structure for ITAS and also institutes definitional criteria and registration prerequisites for innovative technology arrangements, persons providing innovative technology services and the innovative technology services itself. The Act further provides for auditing and authorization of software and architectures used in conniving and delivering smart contracts, DLT, decentralized autonomous organizations, and also similar innovative technologies as may be nominated by the Minister on the recommendation of the Authority. The language of the Act construes that it is future-adaptive.

    To Whom Does the New Law Apply?

    These rules and regulations apply to anyone who will provide VFA(s) (short for Virtual Financial Asset). VFA is defined in the new legislation, hence, an asset which is not a VFA will not come within the ambit of the legislation.

    The pre-requisites for a person to issue a VFA is as follows:

  • A Whitepaper must be drafted, which must also be registered and approved at the Malta Financial Services Authority (MFSA);
  • To have consistently a VFA Agent who is duly certified by the MFSA.
  • The new legislation applies to anyone who will offer to the public Virtual Financial Asset(s) (VFA) as these are defined in the new legislation. Hence, if the asset that is offered to the public is not a VFA, the new legislation does not apply.

    'Technology First' Approach by Malta

    The blockchain and cryptocurrency Acts abridged above are premeditated to work seamlessly as a triumvirate to provide this niche industry with a comprehensive framework that verifies the veracity of DLT software and consolidates protections for token buyers.

    While other jurisdictions look to merely attest a whitepaper based on the forte of its economic assumptions, Malta looks at the software and knowledge behind the whitepaper, and at the prospective for efficacious execution of the regulations therein. Malta is the only country who has delved into minute detail on the regulation of unsettling blockchain technologies.

    Silvio Schembri, who is the Parliamentary Secretary for Financial Services in Malta, is of the view that flawed technology would deliver blemished results, contrasting what is mentioned in the whitepaper. Hence, he is of the opinion that 'technology first' approach means prudently assessing the technology elucidated in the white papers of those interested in setting up shop in Malta. Hence, Malta's financial ombudsman (the MFSA) concluded a new and mechanically competent body should review and license crypto businesses, which is the MDIA. MDIA decides whether a crypto business is qualified for a license, based on the superiority of the computer code in the white paper.

    The outlook of most countries towards cryptocurrencies is that of an investment asset instead of a legal tender. VFA Act outlines the Maltese Financial Instruments Test which determines the category under which a DLT asset falls. Companies that wish to issue DLT assets abroad but carry out connected activity from Malta, or set up an ICO within the country, as well as other domestically based entities in the field must take the Maltese Financial Instruments Test, which defines all tokens and cryptocurrencies as DLT assets.

    Furthermore, Silvio Schembri added that when he has contemplated the elements that would boost the development and expansion of the blockchain industry, he fathomed early that operators in the digital realm needed legal certainty. Presently, these operators functioning in the jurisdiction of constitutional vagueness fear that a day will come when the government would deem such activity illegal. Malta encompassed the protection and regulation of digital transactions within the three abovementioned Acts, thus creating legal certainty.

    Delving in Technicalities of the Acts

    I. Definition of Virtual Financial Asset

    As defined in the Act, VFA is any form of digital medium recordation that is exploited as a unit of account, digital medium of exchange or store of value, excluding:

    • Financial Instrument: It includes securities which are transferable, like bonds and shares. It also includes market instruments like certificates of deposit and treasury bills. Additionally, it includes instruments which confer property rights, foreign exchange held for investment reasons, derivative instruments for siphoning credit risk, amongst other types of financial instruments.
    • Virtual Token: These are token with no utility, application or value beyond the DLT platform on which it was issued, and also
    • Electronic money: Electronic money refers to the magnetically, including electronically, stored monetary value, which is putative by a legal or natural person other than the financial institutions that issued such money. 

    II. Contents of Whitepaper

    Whitepaper contains the information which is essential to allow the investors to make an informed assessment and valuation of the prospects of the issuer, the proposed project and of the characteristics of the VFA. The whitepaper requires such information to be presented in an easily analyzable manner. The language of the draft in English. Following should be contained in the Whitepaper:

    • Date.
    • Declaration mentioning that the whitepaper complies with the prerequisites of Maltese Law.
    • Summary: It should be brief, and it must provide all the vital information related to the offering, indispensable elements of the VFA, etc. A warning must also be inculcated in the Whitepaper which includes a warning like 'VFA does not comprise an offer to sell financial instruments', 'Any decision to invest must be based on the consideration of the document as a whole' etc.
    • Specific matters like name, declarations, and functions of the persons responsible.
    • The reason behind the VFA offering.

    The whitepaper includes several more information that must be provided to ensure approval from the MFSA and not a penalty of rejection.

    Benefits of Malta as an ICO Jurisdiction

    Below are some of the benefits that ICOs receive for launching in Malta:

    • Incentives: There are several incentives which are associated with the launching of an ICO in Malta, like:
  • Gaining help from staff salaries.
  • Gaining capital contributions equivalent to capital investment.
  • Getting an office space.
  • Being eligible for tax credits.
    • Taxes: Indubitably, taxes is one of the most imperative deliberations to make when selecting a jurisdiction for an ICO. Malta is known for its competitive tax regime that provides favorable conditions to ICOs. According to Malta's corporate tax system, any increment in one's salary is not taxable and one ends up paying only 15% tax on personal earnings.
    • Reputation: Malta is undeniably a renowned investment destination with efficient economic infrastructure. Establishing an ICO in Malta gives offerors better credibility. Consequently, the banks and financial institutions comparatively tend to look more promisingly upon ICOs.

    Conclusion

    The Maltese government, through the conduit of the three bills, has drafted a set of edicts to guide the operations of cryptocurrency companies which is based on the principles of consumer and industry protection, and more importantly, on the values of market integrity. Being the first country to have rules and regulations which comprehensively cover cryptocurrency transactions, Malta now also the most robust outline for monitoring and standardizing a country's burgeoning cryptocurrency industry in a way that invigorates innovation.

    Other jurisdictions like Isle of Man, Bermuda, Hong Kong, Switzerland which branded as a crypto valley, Liechtenstein and Estonia are far behind Malta, which has created regulatory certainty by way of the Acts mentioned above. The other jurisdictions lack behind because they view ICO and ICO regulation from a vantage point of old monetary paradigms.

     

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    Tue, 09 Apr 2019 02:23:00 GMT
    <![CDATA[Decentralized Autonomous Organisation]]> Decentralized Autonomous Organisation

    The promising era of Economic Freedom

    A decentralized autonomous organization (the DAO) is a computer program which is a form of an investor directed venture capital fund.

    The primary objective of the DAO was to provide a new decentralized business model which could help in the operations of both commercials as well as non- profit making organizations. In the year 2016, the crowdfunding of DAO further went on to create history as the most massive crowdfunded campaign. The main plan behind this concept was to put more control in the hands of the investors and to strike off the idea of having a centralized authority, which proved itself to be a more economical method. The DAO further came to be known for establishing itself as the most successful and dynamic concept to be implemented through the Blockchain technology. A blockchain is a decentralized,  digital ledger accessible by the public through which various transactions taking place through multiple computers can be recorded. It ensures that the said record cannot be altered with and also allows its participants to check and audit the transactions taking place in a very transparent, cost-effective and straightforward manner.

    It took birth at the beginning of May 2016, when a few members of the Ethereum community disclosed their creation of the DAO. The DAO during its creation period allowed anyone to send Ether to a unique wallet address in exchange for DAO tokens on a 1–100 scale. Ether is a cryptocurrency which has its blockchain generated by the Ethereum platform.  This period of its creation turned out to be of great success, and it gathered 12.7M Ether (worth around $150M at the time), which now made it the biggest crowdfund ever. There came a point when Ether was trading at $20, the total Ether from The DAO was worth over $250 million.

    It opened the doors and gave the opportunity to anyone who has a project and wanted to display their idea before the community, and in return receive funding towards the same from the DAO. It enabled anyone with a DAO token to cast their vote towards a plan and make a profit if the said plan turned out to be a success. The DAO was proving to be a platform that issued funds in Ether to projects, whereas the investors received voting right with the possession of a digital voting token. It was a successful platform wherein contractors with the project could submit their ideas and plans, which would further be verified and checked by a team of volunteers called the curators. Post scrutinising the details such as identity of the people putting forward their ideas and projects and post having a check on the legality of the said project and idea, the said project was put forward for the investors to vote post which on the success of the project the profits from the investment was then reverted to the shareholders.

    The DAO at no point of time was in possession of the money of their investors, but in fact, it was only through the digital voting tokens that the investors could cast their votes towards a project.

    The fact cannot be ruled out that the concept of the DAO was unique and is the need of the hour in shaping a modern-day organizational structure. This concept gives an opportunity for every individual to display their ideas and also provides the power to the investors to take productive decisions with regards to the same overruling the concept of a monotonous Hierarchy system.

    Furthermore as putting up ideas as well as investing in them requires the investor to spend a certain amount of money, the same now helps in taking a faster decision and in overlooking unproductive ideas at a quicker speed. Further, all the rules to the said concept are laid down to everyone taking part, and everyone herein decides how to spend their money at the same time have easy access towards tracking their finances and also keep a check on how it is spent.

    The Attack that changed it all

    The DAO was proving itself to be a major success until the 17th of June 2016, the day it was attacked by a hacker which resulted in the discovery of a combination of vulnerabilities which included the feature of recursive calls( when a routine dials itself both, directly and indirectly, it is said to be making a recursive call). Soon it was discovered that the hacker had taken control of 3.6 million Either, which was about one-third of the total Either that was committed to the DAO. The Ethereum blockchain was not found to be the cause of the said hack but was an intelligent hacker who had discovered a vulnerability in the said system, which would not have been the case if the coding of the DAO was done rightly.

    The hack of the DAO was a major eye-opener. Having touched the numbers, the DAO had accomplished, despite its failure, it still holds a mark for the accomplishment it had reached. It wouldn't be wrong to say that in an industry with young procedures and developing tools, this was a project which had an early launch for a concept of its magnitude.

    Further having various security checks or test would not make a difference as even though the team, as well as the community, was well acquainted with the resolution of problems about areas such as the Call Stack Depth attack, unbound loops, and various specific vectors. The re-entry attack was something that left everyone unaware during the time the writing of the DAO framework.

    It is still not known whether the said attacker belonged to a particular group or was a single individual, who cleverly made us of the inbuilt split to transfer money into another wallet. The original function of the said split was to allow the investor to withdraw the Either and further to return the token if anyone desired to leave from the DAO. It was, in fact, this function that proved to be a setback for the DAO as it was through this function that the hacker had discovered a vulnerability which was, in fact, an error, and now started repeatedly calling the said split function and each time called a new request before the end of the previous one. It was because of this error that the system could not read the fact that the transaction had already been completed during the last split function. The hacker severely abused the said error and in no time was found to have withdrawn Either running to a sum of US $ 50mn. It caused a significant setback and had created a state of paralysis for the Ethereum community and had brought a massive breakdown in the value of the digital currency. 

    Finding the plan to recovery

    At this time of crises, there were various ideas which were now discussed by the members of the community towards damage control, out of which one was to freeze the money before the hacker could withdraw the said stolen money. The execution of this action would have now enabled the community to take control of the stolen Ether and further direct the same towards the accounts of their rightful owners.  The said idea did receive massive support but was not implemented as the same was found to be associated with having a risk towards market securities.

    The optional ideas that were proposed to take control of the said situation were to conduct a hard fork. By using this method, all the finances would be transferred into a new contract post which the original holders would be able to access the said contract and exchange their DAO token for Ether at a rate which was decided before the announced plan.  After a series of discussion and after taking into consideration various options, it was the Hard Fork method which came to be determined as a weapon to resist the damage that had been incurred due to the said act. The said plan was now implemented before the hacker could withdraw all the ETH from the " DarkDAO." As a result of this, all the funds were soon transferred to the withdrawal contract, and the original owners were now accessing the same to withdraw their Ether.

    Lesson Learnt?

    The said attack was devastating, but it surely taught a lesson that even though the system is stable, the human being remains its most significant challenge and weakness.  Even though the said contract was programmed with precision, it still contained certain loopholes which enabled a hacker to enter into the said system and create a heist. It is a matter of great appreciation that in the situation of crises the community proved their ability to handle the said situation and take control of the same. In spite of the said crises and panicked situation, the community remained calm and analyzed the pros and cons of all the situations, and damage control techniques within a very short period, and further went on to succeed in the step chosen and taking control of the situation.

    Further in an environment where the code is the basis of all functionality, the same needs to be of good quality, reviewed and also developed. Further, the responsibility of code quality in a blockchain should be taken by the entire community. Especially in the case of DAOs, it is the view of many stakeholders in the community that like a contract is read before investing money, in the same manner, all investors should also review the code, and its risk should be assessed. In the short term, it will be interesting to see how the community will be able to adjust to this situation by motivating users who have not yet triggered the exchange of their DAO tokens to do so.

     

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    Wed, 12 Dec 2018 07:21:00 GMT
    <![CDATA[Bit Coins: Decrypting the Currency (Updated)]]> In this interesting Article, Surbhi questions the legal standing of the cryptocurrency Bitcoin and the challenges it has posed for both financial institutions and regulators at large.

    Historically, finance has always been international in character; capital has rarely been mobile. Money has moved freely across borders for all of the civilization with gold and silver being global currencies for millennia. With the passage of time, money has been reverting to its natural state with the removal of capital controls and the gradual re-integration of the national capital and banking markets but now on a global scale.

    Rapid advancements in the field of technology, free movement of capital globally, and need to service an increasingly global clientele have created the opportunity for money to have a virtual form. The Bitcoin was introduced in the year 2009 and is the first widely recognized currency that is not issued by a government. Although Bitcoin and other cryptocurrencies represent a future for money and payments, it has taken the time to get integrated within commercial transactions as there is a range of concerns that have been raised about this new form of currency. What is a cryptocurrency has been discussed in greater detail here. In this article, we are going to examine the legal status of this money and the concerns surrounding its regulation which have prevented it from becoming the currency of the future.

    For this article, we will discuss the legal standing of the Bitcoin as it is the center of attention and contention and be the first and largest cryptocurrency.  The government, the tax authorities and legal regulators across the world are attempting to understand the implications of this 'currency' and how it fits within the existing legal and regulatory frameworks. The Bitcoin is legal, but its legality depends on where you live and what you are doing with the Bitcoin.

    Several countries have restricted the use of Bitcoin and considered it an illegal currency or have taken reasonable steps towards controlling its usage by taxing it as foreign income. Several other sovereign nations have allowed the use of Bitcoin's within their borders as they do not consider it to be legal tender. The growing use of bitcoins in multi-level marketing (the MLM) and Ponzi schemes have raised elevated levels of alert. China, for instance, has barred financial institutions from handling and/or dealing in bitcoins. Within UAE, regulatory authorities have maintained silence till date. The concept of MLM can be traced back to the year 1979 in the matter of Amway Corporation, Inc. Et Al (Docket 9023. The complaint, March 25, 1975 - Final Order, May 8, 1979. Although the understanding of term MLM back in 1979 was narrow and limited, the current precise definition of MLM as defined by FTC reads as under:-

    "In multilevel or network marketing, individuals sell products to the public - often by word of mouth and direct sales. Typically, distributors earn commissions, not only for their own sales but also for sales made by the people they recruit. Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it's not. It's a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money."

    In a recent judgment in the United States, the Internal Revenue Service (IRS) ruled that Bitcoin would attract capital gains tax and would be considered as property for tax purposes as opposed to it being currency. This ruling has clarified the legal standing for the Bitcoin in the US and has given investors peace of mind when investing and reaping profits from Bitcoin as they can now be reported to the IRS for tax purposes. In China, the handling of Bitcoin has been banned. Despite cryptocurrencies being legal, it is illegal to purchase goods with any other currency than in Russian ruble in Russia. In Australia, buying or mining Bitcoins is not illegal, and the Australian government has welcomed Bitcoin usage and has also released tax guidelines for this currency. Several countries that have clarified by various legislations the legal standing of the Bitcoin within their jurisdictions. Countries like Brazil, Norway, Finland, and Germany have followed the direction taken by the United States and attached capital gains and wealth tax to the Bitcoin again establishing it as an asset or a commodity rather than currency. In Bulgaria, it is considered a financial instrument and taxed as thus. The Canadian government has determined that Bitcoin will be heavily regulated by anti-money laundering and counter terrorist financing legislation. Her Majesty's Revenue and Customs (HMRC), UK does not explicitly denounce recognition to Bitcoin as currency, but its tax approach treats it as any other form of payment. In the United Kingdom, VAT is due from suppliers of any goods or services who accept Bitcoin for remuneration. In Singapore, Bitcoin is treated not as a currency, but as either a good or asset. When traded for goods, it attracts VAT or Sales tax. If the Bitcoin is being used as an investment asset, there is no tax levied as Singapore does not have capital gains tax.

    Some nations that do not recognize Bitcoin have quoted several reasons for their stand. Most of these relate to tax evasion, unregulated currency, money laundering. The Reserve Bank of India has cited legal, regulatory and operational concerns and maintained that it violates the Foreign Exchange Management Act and restricts the use of Bitcoin as currency. Other Asian countries like Malaysia, Indonesia, Japan, Lebanon, and Jordan consider trading and mining of Bitcoin illegal. In UAE, the country's first Bitcoin ATM was established in Dubai. The advocates of the currency in the UAE say that this virtual currency has the potential to enable the city's large migrant population to transfer money home at significantly lower rates than those offered by exchange houses.

    The company that set up this Bitcoin ATM in Dubai has had no communication from the Central Bank about the regulation of this ATM. It would be interesting to see how the legal regulators will resolve this and the legality of the Bitcoin in the UAE. It is imperative to note that the UAE has no taxation and its financial industry is still in its youth when it comes to regulation of financial transactions.

    The concerns raised by these nations are legitimate and well-founded. Silk Road, an anonymous online marketplace which was a platform for nefarious activities and allowing the sale of goods and contraband that was illegal in many countries was accepting only one form of currency, Bitcoin. The anonymous nature of Bitcoin means that it is an unregulated potentially dangerous instrument for money laundering. The decentralized character of the 'currency' means that though governments may regulate its use within its borders, a criminal could advantage from the anonymity of unregulated markets.

    Speaking of bitcoins: - there's growing concern with regards to the legitimacy of bitcoin mining. Having discussed MLM and risks associated with cryptocurrencies and MLM, let's review and understand the legalities of bitcoin mining. Bitcoin Mining is the cumulative process of recording transactions into a public ledger covering past and current transactions. This process is done using advanced algorithms and software whereby a block chain of transaction acknowledges and communicates to the network as to the addition of new transaction. Wikipedia offers a unique and interesting introduction to bitcoin mining and is worth mentioning. It reads:-  

    The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

    Regulatory landscape as to bitcoin mining is and continues to be a gray area. At the same time, several Bitcoin miners continue to operate illegally through tax havens and offshore platforms. A typical bitcoin mine comprises of hundreds of computers shelved on rows. Miners or staff are tasked with finding and solving cryptographic problems that can efficiently find, verify and record other bitcoin transactions across the globe using algorithms. That said, a close review of some bitcoin mining websites explicitly calls for caution! An analysis of their location, the missing (or; at times long but deceptive) 'About Us' section, a look at their terms and conditions (including commercial terms, compliance and regulatory clauses, governing law, and several other provisions) raise and pose a serious question. From Spoondoolies to Butterfly Labs and from a recent ruling by Estonian Court (Albert Otto de Voogd) to other bitcoin legal miners (and MLM and Ponzi schemes) - it is evidently clear of a question - Will Bitcoin ever Overcome its Biggest Test? Every great change is preceded by chaos.  The Bitcoin has indeed created chaos for the financial institutions and its regulators. A few decades ago, when millions of people went online, it was predicted that the internet would collapse. As the regulators and financial pundits unravel the predicaments revolving around the Bitcoin, even if it were to break down, it would not be long till another similar system would come forward.

    Note from Editor: This article has been updated on 15 May 2016 to reflect the change in laws surrounding cryptocurrencies, cryptocurrencies MLM, Ponzi promoters, and legal developments. Please feel free to get in touch with our MLM Lawyers in Dubai.

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    Sun, 15 May 2016 09:42:00 GMT