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Are Dubai’s regulations sufficient to secure its position as a crypto-friendly economy

This article is written in light of Dubai, a city of approximately 3 million people located in the United Arab Emirates announcing its openness to the world of crypto currencies. From the local emCash stablecoin that acts as a method of payment for government services to Financial Free Zones where crypto entrepreneurs are legally protected and able to conduct certain activities, the UAE made its stance clear. In fact, the UAE announced related initiatives years prior, communicating its position as a first adopter. The Dubai Blockchain Strategy that focused on transforming Dubai into the first city fully powered by Blockchain by 2020 was announced in 2016, the Smart Dubai Initiative was launched in 2013, and the UAE Blockchain Strategy 2021 was launched in 2018.

Despite the eagerness of the city towards cryptocurrencies, there are specific challenges that must be addressed in order to reach a point of wider adoption of this form of currency throughout business transactions and social understandings of wealth. Therefore, this article compares the city and national level crypto asset policies of Dubai and the UAE with the recommendations set out by the World Economic Forum’s community paper, Navigating Cryptocurrency Regulation: An Industry Perspective on the Insights and Tools Needed to Shape Balanced Crypto Regulation.

Regulation: key topics that must be addressed

To accommodate the adoption of cryptocurrencies, sufficient regulation must be put in place to overcome significant issues when thinking about using cryptocurrencies as a store of value, or as a viable means of exchange.

There are four key themes which cryptocurrency regulation must resolve: macroeconomic risk, ensuring fair market conditions, taxation and customer protection. Once clarity is established within these four themes, barriers to the wider adoption of cryptocurrencies will be lessened. As with any novel innovation whose risks and opportunities haven’t been thoroughly experienced, the World Economic Forum advises in adopting “agile frameworks” that support continuous monitoring and updates to improve approaches (World Economic Forum, 2021).

Macroeconomic risk:

Under macroeconomic risk, the greatest threat to countries, and therefore a crucial theme that must be addressed is the decrease in a government’s ability to control and influence the financial condition of a country. Firstly, in the case that the majority of the local population uses less of the local currency and replaces it with cryptocurrencies- the monetary sovereignty of the country could suffer. Monetary sovereignty refers to the ability of the government to use monetary policy to mitigate and limit the negative repercussions as a consequence of a microeconomic, macroeconomic or international event. With cryptocurrency, “shocks to the supply of cryptocurrency are not mitigated by a monetary authority that could otherwise affect demand to stabilize the price” (World Economic Forum, 2021). Although the principles of DeFi, in essence, do not necessitate any centralized influence, until this critical mass of adopters has been reached, consideration should be given to the non- adopters that would then be living in a country without effective monetary policy. Additionally, with some regulators classifying cryptocurrency issuers as bank-like entities, it is yet unclear whether these issuers would also have access to national Central Banks as lenders of last resort- if not, there may be a higher intensity of economic downturns during bank runs (World Economic Forum, 2021).

I will now briefly discuss the macroeconomic environment in the UAE. The UAE is a young country which was formally established on the 2nd of December 1971 as a largely oil-based economy that gradually diversified into other industries like aviation, tourism, I.T,space and renewable energies. It also has a population of 8,8 million people, 90% of whom are expatriates. Through its establishment as a hydrocarbon economy, the UAE boasts the 4th largest sovereign wealth fund in the world with USD 649 billion Assets Under Management (AUM) by the Abu Dhabi Investment Authority (SWFI, 2021). With that said, the local currency, the UAE Dirham, is pegged to the US Dollar (1 US Dollar is equivalent to 3.67 UAE Dirham) to facilitate oil trade which is conducted in the US currency (Salama, 2018). Also, currently 30% of the country’s USD 350 billion GDP is based on the oil and gas industry (Opec, 2021). With such economic cushions and diversification attempts, the UAE achieves a sort of buoyancy from certain factors that would result in an economic downturn. Yet, the UAE’s economy is still influenced by world oil prices, international trade transitioning through the regional hub and human capital driven by expatriates living in the country. For example, when oil prices reached their lowest price during the initial stages of the Covid-19 pandemic, coupled with the temporary halt of tourism and travel, this combination resulted in a contraction of 10.9% from Q1 2019 to Q1 2020 (Alfaham, 2021). In relating this to cryptocurrency and its macroeconomic risks, regulations should specify the extent of inclusion of cryptocurrencies within the national sovereign wealth fund, as well as clarify the speed of transition into a crypto economy whilst maintaining the multiple checks and balances currently in place by the government.

Ensuring fair market conditions:

Next, regulations must tackle the borderless nature of cryptocurrency to overcome any discrepancies, regulatory arbitrages or advantages resulting from varying institutional attitudes across borders. The core consideration under ensuring fair market conditions relates to financial punishments such as embargoes and sanctions, which are difficult to enforce when there doesn’t exist an overarching entity in charge of punishing undesired behaviour (World Economic Forum, 2021). To overcome this, national cryptocurrency regulation places the responsibility on financial institutions offering crypto- assets within their national borders, where these institutions are required to upkeep customer due diligence (CDD), monitoring, and recording necessary information (World Economic Forum, 2021).

To provide an example of the consequences of cross- border arbitrages, I will refer to the 2019 paper Regulatory arbitrage and cross-border syndicated loans by Asli Demirgüç-Kunt, Bálint Horváth and Harry Huizinga. This paper focuses on the gap resulting from national policies applied to banks with increasing amounts of foreign subsidiaries and cross-border loans. The consequences of this arbitrage are that more loans originate in countries with less- stringent regulations, prompting a “race-to-the-bottom” that weakens financial stability in a system which has wide- reaching effects across the world. When applying this example to the world of cryptocurrencies, it is clear that the role of centralized entities like banks are not relevant. Despite the fact that criminal activity using cryptocurrencies fell from 2.1% in 2019 to <0.5% in 2020, there must be an oversight board across the globe that strives to standardise KYC regulations to continue cryptocurrencies’ positive impact on transaction security (Chainalysis 2021 Crypto Crime Report, 2021).


To begin with, regulations interact with taxation in a manner that is unequal; within the US different states have different taxes on income and capital gains, with capital gains on cryptocurrencies only realised once the asset has been sold at a profit (Haar, 2021). In terms of government regulation, the government must expand the legal definition of a brokerage to include cryptocurrency exchanges that, in turn, would be responsible for reporting their trades, gains, losses and “mining and disposition of tokenized assets” and therefore tax information to the relevant authorities such as the Internal Revenue Service (IRS) of the USA (Haar, 2021).

I will now briefly describe the tax environment in the UAE. On an individual level, there is no income tax and no capital gains tax; but there is an excise tax of 50-100% on items like energy drinks, tobacco, and carbonated drinks items and a Value Added Tax (VAT) of 5% on goods and services. On a corporate level, there are corporate taxes on oil companies and foreign banks not located within the Financial Free Zones. As a result, the country attracted foreign individuals and large multinationals, with 138 Fortune 500 companies setting regional headquarters in Dubai (Business Chief, 2020). On the other hand, one possible disadvantage of this approach is that individuals and corporations are highly influenced by national and international changes. According to the International Monetary Fund (IMF), some investors actively search out tax havens like Dubai or Switzerland for their reduced security granted by no monitoring of activities to be taxed. As a result of this secrecy of activities and transactions, there is reduced supervision, which could yield negative repercussions if action is not taken to overcome it (Casanegra de Jantscher, 1976). Although Dubai’s regulations need not mention rules associated with cryptocurrency taxation, they must encourage periodic supervision of activities in line with established security measures.

Customer protection:

Financial institutions such as brokerage firms are under obligation to protect their customers from privacy breaches and crimes such as money laundering. To firstly ensure that cryptocurrency issuers are formally under the same consumer protection obligations, regulations can expand the definition of banks to include these issuers -such as stablecoin issuers- so that they are monitored and investigated by the necessary authorities (Haar, 2021). Within privacy protection, financial institutions including those working within the realm of cryptocurrencies, must authenticate the identity of their customers, as well as how well- suited they are to the institution’s risk outlay and characteristics. Therefore, regulations should specify how Know Your Customer (KYC) cryptocurrency guidelines differ from the usual guidelines, then ensure that these differences are applied throughout the world. Furthermore, since consumer protection aims for the “prevention of unfair, deceptive or abusive practices, and the reduction in harm to end users, including the loss of assets, fraudulent behaviour and cybersecurity risks”, cryptocurrency regulation should emphasize depositor protection to prevent customers losing their assets in the case of extreme volatility with price drops of over 100% or the loss of a private key which prevents the customer from ever accessing their assets again. For example, regulation must differentiate between wallets held by the customer themselves and wallets held by the financial institution (World Economic Forum, 2021). Finally, oversight regulation must focus on the financial institution’s compliance with Anti-Money Laundering (AML) and Counter Terrorism Financing (CFT) through regular certification of the “operational, security and technology practices” of the firm as well as transparency on their insurance policies, audit practices internally and externally, due diligence processes and how they plan to improve their systems as technology progresses within the field.

Dubai’s regulatory environment: who are the key players and what are their policies?

Dubai’s regulatory environment is one that operates in two spheres: regulations that apply to the Emirate of Dubai, and regulations set by the federal government of the United Arab Emirates (UAE) that apply to all seven emirates. Doing business in the UAE, or specifically in Dubai as a foreign business, likely entails the registration of these foreign businesses with one of the city’s thirty Financial Free Zones, which allow 100% foreign ownership, repatriation of profit and capital, and a tax-free environment.

Three different authorities have been identified as key players in Dubai’s cryptocurrency regulatory environment: the UAE Securities and Commodities Authority (SCA), the UAE Central Bank (CB) and the UAE Financial Services Regulatory Authority (FSRA). In the following paragraphs, this article will outline the regulations set by each entity, their scope and their respective articles.

UAE Financial Services Regulatory Authority (FSRA):

The first set of cryptocurrency regulations was released in 2018 by the UAE Financial Services Regulatory Authority (FSRA): The Regulation of Crypto Asset Activities in ADGM. This regulation was established to clarify crypto asset activities conducted by exchanges, custodians and intermediaries for applicants wishing to operate a crypto asset business from the ADGM financial center located in the capital city of the UAE, Abu Dhabi.

Figure 1 below illustrates the scope of the digital assets that are covered by the regulation. Figure 1:

The document begins by stating the main risks associated with cryptocurrency- related activities, as well as outlining various mitigation strategies. The risks explored include: money laundering, terrorist financing, tax reporting standards, consumer protection, exchange activities and transparency, technology governance and custodianship. Following the risk outlay, the regulation moves on to define crypto assets within limited conditions. In fact, accepted crypto assets only include those with a market capitalization above US$ 4billion. Additionally, crypto assets must be able to fulfil the following criteria:

  • To demonstrate the origin and destination of the crypto asset, and determine whether transactions are entirely monitored and recorded

  • To map the exchanges that support the asset as well as their regulatory environment and security risks

  • To outline processes to manage the price volatility of crypto assets

  • To disclose the type of distributed ledger technology and whether it has been sufficiently stress tested

  • To comment on the practical application of the crypto asset, including its real world functionality

Once the asset has been accepted, customer protection policies are put into place, such as that of the capital requirement equivalent to 12 months worth of operational expenses with an additional capital buffer for applicants with increased size and complexity (Regulation of Crypto Asset Activities in ADGM, 2018). Notably, the FSRA regulations feature extensive conditions relating to Anti-Money Laundering (AML) and Counter Terrorism Financing (CFT), mainly through “systems and controls, 'Know-Your-Client’ (“KYC”) and ‘Client Due Diligence’ (“CDD”) processes, and build[ing] policies and procedures to be risk focused and proportionate to [their] activities” (Regulation of Crypto Asset Activities in ADGM, 2018). KYC and CDD processes include building an expansive risk profile on each customer, whilst AML controls include appointing an independent Money Laundering Reporting Officer, the provision of relevant data to the FSRA when required, meticulous improvements and annual audits of technological infrastructure and architecture, and maintaining a list of tainted wallet addresses (Regulation of Crypto Asset Activities in ADGM, 2018).

Securities and Commodities Authority (SCA):

Later on, the SCA released regulation in 2020 approving crypto assets trading and granting the SCA specific responsibility to monitor related companies involved in the Financial Free Zones to protect investors as well as cryptocurrency issuances, listings and tradings. Specifically, this regulation applies to any person “offering, issuing or promoting Crypto Assets”, “conducting Crypto Custody Services”, “operating a Crypto Fundraising Platform”, “operating a Crypto Asset Exchange” or conducting other related financial activities. The regulation doesn’t apply to crypto assets used by government entities or virtual currencies already approved by the Central Bank (SCA, 2020). Throughout this document, crypto assets are defined as “A record within an electronic network or distribution database functioning as a medium for exchange, storage of value, unit of account, representation of ownership, economic rights, or right of access or utility of any kind, when capable of being transferred electronically from one holder to another through the operation of computer software or an algorithm governing its use”. Crypto assets are also segmented into two categories: security tokens and commodity tokens (SCA, 2020). It is interesting to note that the regulations specify that commodity tokens may be redeemed in the form of consumer goods and services if they were issued by an employer to their employee, or by a company to their customers.

Within the disclosure requirements of this regulation, companies are required to provide “details of all material risks” resulting from the technology used by the company, accompanied by a statement with a description of the computer software used, a link to the source code if the software operates on open-source, the involvement of external software providers and an explanation of the repercussions to investors in the case of future changes made to the software, protocols, functionality or operations. Next, in line with protecting the customer, the regulation requires that custody arrangements are detailed with the process for an investor to access, hold, transfer and control their crypto asset to be explicitly stated, as well as clarifying on whether the investor holds their portfolio information, or if it is held on behalf of the investor by a third party (SCA, 2020). Furthermore, custody arrangements include the procedure on how cryptographic keys are created and stored, as well as the due steps in case the private key is lost, or fraudulently transferred.

In continuing with the theme of consumer protection, the SCA regulation requires explicit mention on whether investors have “the right to have their contribution refunded if any funding requirement is not met at the end of the Offering”, as well as a description of the process of obtaining this refund and by when (SCA, 2020). Furthermore, the company must offer details on disaster recovery if the offering fails, with explicit mentioning of insurance and guarantees. Next, the crypto asset custodian is obliged to “Hold at all times amounts of Crypto Assets equal to the aggregate amounts to which the Crypto Asset Custodian is obligated to all clients, in each case in the form of the same Crypto Asset.” In fact, the custodian is not allowed to transfer, hypothecate or grant a loan to a third party that would run the risk of doubt on the holder of the underlying asset. In any case, the SCA regulation ensures investors are fully aware of the risks associated with cryptocurrency trading as through disclosure requirements and due diligence procedures.

Although the SCA put in place many checks ensuring consumer protection in the case of a failure, it must be made clear that according to Article (11), “Crypto Assets are not considered Securities under the laws applicable in the State and are not afforded any protections under such laws”, the crypto assets aren’t considered a legal tender (it can’t satisfy debt repayment) and that “investors must be willing to lose the entirety of their invested capital and accept that they may have no recourse in the event that purported rights or benefits of the Crypto Assets are not received” (SCA, 2020).

UAE Central Bank (CB):

In 2020, the Central Bank released its Stored Value Facilities (SVF) regulation which clarified “how crypto and other digital assets may be used as a stored value when purchasing various goods and services” (Jagati, 2021). The SVF regulation applies to companies incorporated in the UAE aiming to provide SVF in the UAE outside of the Financial Free Zones, although companies within Free Zones may provide SVF through another license granted by the Central Bank (Stored Value Facilities Regulation, 2020). Similarly to the SCA regulation, the Central Bank also does not recognize virtual assets as a legal tender, although the SVF regulation aims to facilitate connections between FinTech and entities that offer payment services. With an entity hoping to conduct SVF activities, they can exchange their crypto or virtual assets for the value agreed, as well as use these assets as investment due to the SCA regulations. Overall however, this regulation is limited in its specificity to cryptocurrencies, other than following general principles on asset valuations, technological security and data privacy- no explicit mention is made to resolve the volatile value of crypto assets in the short term.

To begin with, the SVF reduces macroeconomic risks by rejecting applications where the customers’ funds paid in exchange for the crypto asset are under 500,000 AED (approximately 120,500 Euro), or where the total count of customers do not amount to more than 100 people. Continuing along the theme of risks, the applicant must have an “effective risk management framework” and a team of experienced professionals to control internal processes and risk management practices; additionally, an annual risk assessment must be conducted by an external auditor or an internal risk management team. With regards to consumer data protection, the SVF mandates that customer data such as their identification must be limited to the customer themself and the Central Bank, with any other data sharing permitted only through court order (Stored Value Facilities Regulation, 2020). Although no explicit mention is made of various cryptocurrencies’ fluctuating values, the SVF states that the customers’ funds paid in exchange for the crypto asset must never become insolvent, as customers must be able to “redeem their values stored on the facility at all times” (Stored Value Facilities Regulation, 2020).

Commentary on the regulations: are they sufficient?

The 3 regulatory frameworks explored above lead to one final question: are they sufficient to secure Dubai’s position as a crypto- friendly economy?

In brief, present regulations support the use of crypto assets as a form of investment, not as a form of money, where money has three economically-defined functions: as a store of value, a unit of account, and a medium of exchange. Despite tackling some of the crucial issues outlined by the World Economic Forum’s working paper, Dubai’s regulations remain unclear in the interaction of these crypto assets with the broader economic network- this is highlighted by the fact that the national currency, the UAE Dirham remains the only legal tender. Furthermore, although some articles in the Central Bank’s SVF regulation state the requirement that a customer must be able to redeem their values stored at any time, this ambiguous statement doesn’t clarify the nuances of a fluctuating currency. Without acknowledging this, the regulation fails to support the use of cryptocurrency as a recognized form of money since it doesn’t hold a stable value that would allow it to function as a medium of exchange. In combination, the three regulatory frameworks explored score high in their customer due diligence, AML and CFT controls through clear instructions on the frequency and scope of what is required for compliance. This is indeed sufficient for mainstream investment and recognition of cryptocurrency as a store of value.

By Myriam Bekkoucha


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