Understanding the state of cryptocurrency in the UAE

This year began with the UAE and the Kingdom of Saudi Arabia signing an agreement to test out cryptocurrency and blockchain for money transactions between the two countries. The digital currency, called Aber, is being tried to see whether it can be leveraged to reduce remittance costs.

Since then, we’ve seen major financial institutions backed by the country, invest in cryptocurrency. A few weeks ago, Mubadala Investment Company, backed by the Abu Dhabi government, invested a seven figure amount in MidChains, a digital cryptocurrency trading platform. This news came on the heels of Bahrain Central Bank giving complete license to Rain to operate in the Kingdom, making it the first licensed crypto trading platform in the Middle East.

The interest and investments in crypto and blockchain-backed companies is on the rise, as governments and corporations see the benefits of decentralised systems. UAE’s Blockchain Strategy 2021 aims to have 50 percent of the government transactions on blockchain platforms.

However, the regulation of cryptocurrency remains in knots. This is largely because the volatility of cryptocurrency and the reason it is majorly used today — to gain profit on the rise and fall of their value — goes against Islamic religious teachings.

So can we have one without the other? The answer to this is tricky. It depends upon the use of blockchain and the way it is set up. It is theoretically possible. However, removing the incentive of cryptocurrency reduces the interest of “miners” to authenticate and confirm transactions. Hence in practise, it is more difficult.

This isn’t hindering the UAE, which is looking into regulating the entire sector. In December 2018, The National reported that the UAE plans finalise initial coin offering regulations in 2019. We expect to hear about these new regulations soon.

However, having a sharia compliant platform or crypto asset would go a long way in addressing the issue at hand. Companies are already on this. ADAB Solutions from the UAE announced last year that it is developing the First Islamic Crypto Exchange that will operate “according to the principles of Shariah law.”

In fact, the UAE itself plans to launch a sovereign coin that might be backed by a hard asset. Gold as a backing is gaining international attention as well. In fact, Forbes chairman wrote an open letter to Mark Zuckerberg to back Libra with gold.

Regulating cryptocurrency isn’t easy. Leaders around the world are struggling with this. The World Economic Forum set up a special council to support and look into the regulation of cryptocurrency a few months ago. First, they need to understand how it works, the implications it can have, and then establish rules and regulations concerning multiple aspects — from cybersecurity to finance and exchange.

In the UAE, until the regulations come in place, startups like MidChains and others who deal with crypto assets can still set up in off-shore free-zones, such as the DIFC, DMCC, ADGM, etc. Entities set up in those zones are also free to invest in such companies, as we have seen recently with Mubadala investing in MidChains.

In fact, there is a Digital Asset Kiosk Machine that started operating at The Galleria Mall, on Al Maryah Island, coming under the ADGM zone. Using the vending machine, people can buy cryptocurrencies such as Bitcoin and Ethereum using their credit cards or even cash in UAE’s capital.

Hence in practice, with the different off-shore and on-shore regulations, one is technically free to invest and use the platforms — at least once they are fully licensed or open to use via these financial centres.

Here is the “Regulation of Crypto Asset Activities in ADGM” by the FSRA — the most detailed guide to crypto regulation in the UAE in light of no existing law:

According to the paper, companies using crypto assets must:

• “Hold capital resources equivalent to 6 months’ operational expenses” (12 months’ equivalent for crypto exchanges) in fiat currency, i.e. dollars, dirhams, or others.

• Prevent fraudulent activities

• Have risk management policies in place, with full disclosure

• Use the allowed range of crypto assets, which are based on market capitalisation, security, price fluctuation rates, traceability, etc.

• Only some crypto assets are allowed. The decision about particular crypto assets is made based on market capitalisation, traceability, security, price volatility and other factors;

• Keep the funds as well as all information properly secured through “code version control, implementation of updates, issue resolution, regular internal and third party testing”.