Eternity Law International News Cryptocurrencies in the UAE

Cryptocurrencies in the UAE

Published:
July 3, 2018

Investors, traders and cryptocurrency issuers face an ambiguous regulatory climate in the United Arab Emirates (UAE).

On the one hand, the UAE, in particular Dubai, is pursuing a state policy of introducing new industries and innovations, and the promotion of distributed ledger technology (including Blockchain) is a priority for the government.

At the same time, the UAE Central Bank, the Securities and Commodities Authority (SCA) and the financial regulators of the Dubai International Financial Center (DIFC) and the Abu Dhabi Global Market (ADGM) have published guidelines, white papers, circulars and clarifications on cryptocurrencies , some caveats and other innovations to promote virtual money.

This article describes the current state of affairs.

Virtual currencies

In January 2017, the Central Bank of the UAE issued regulations to govern the operation of electronic payment systems (“Rules for the storage of valuables”).

It contains only a brief mention of virtual currencies and the definition of electronic money as “a digital unit used as a medium of exchange, account creation or storage of value.” The rules recognize the cryptocurrency, but it is confusing that its use (and any operations with it) is prohibited.

In February and October 2017, the UAE Central Bank made statements published in the media. They clarified that trading in bitcoins, other cryptocurrencies and altcoins is not regulated by the “Rules for the storage of values”.

According to the UAE Central Bank, trading in virtual money was a “trial practice”.

Also, noteworthy reports have been published about transactions and investments available in Bitcoin. One Dubai marketplace has announced that it will be trading its own units in Bitcoin.

In January 2018, the National Bank of Dubai announced that it would stop processing “suspicious” bitcoin transfers to account holders of cryptocurrency trading platforms.

The bank later clarified that it does not prohibit customers from transacting with digital asset trading platforms, but restricts prohibited suspicious transactions that are financial crimes.

Cryptocurrency exchanges and trading

BitOasis is the first cryptocurrency exchange in the UAE. The platform, originally operating in the Dubai Silicon Oasis (DSO) free zone, is now operating as an organization established in the British Virgin Islands due to an ambiguous regulatory climate. At the same time, DSO provides her with technical and operational support.

In February, Dubai Multi Commodities Center (DMCC) licensed Regal RA DMCC as the first company in the DMCC free zone to trade cryptocurrencies. The DMCC clarified that it considers digital currency a commodity. Therefore it operates within its jurisdiction.

DMCC offers cryptoasset holders “frozen storage” by providing its vault at the Dubai headquarters where the company stores its gold. Thus, the cryptocurrency is protected from hacking and theft from the wallet (the main problem of most cryptocurrency exchanges), since it is not stored online.

Mining Cryptocurrency

Mining, in relation to cryptocurrencies, is the confirmation of a transaction, with the help of which a miner, using computer potential, successfully solves a cryptographic hash function, that is, a mathematical puzzle.

It is encouraged by the payment of a reward in the form of digital money issued. It allows cryptocurrency networks to keep transaction fees low.

The computing power required to validate transactions increases in proportion to the number of people coming to work in the virtual currency world. A solving mathematical puzzles successfully has become very difficult over the years.

Most home miners are losing money, and mining is currently done in large data centers using specialized hardware, mainly in jurisdictions with low electricity costs such as China or Iceland.

In the case of Bitcoin, special integrated circuits (Asic) are used, which are designed for the sole purpose of mining BTC.

Energy consumption is a major concern in the growing production of cryptocurrencies, compared to the easy mining of bitcoin in Costa Rica and Ethereum in Namibia.

Recently, “minerless” and “blockless” e-currencies have emerged, based on less power-consuming methods of verifying transactions, including the directed acyclic protocol “Tangle” used by IOTA. They are also said to be resistant to encryption hacks thanks to the use of quantum computers.

There are no rules yet regarding the mining of virtual money in the UAE. In its October 2017 circular, the ADGM FSRA clarifies that it does not consider spot trading or crypto mining as regulated activities.

For detailed advice on registering a cryptocurrency business in the UAE, please contact our specialist.

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