What are the chances of the UAE becoming a “free crypto world haven”?

    24 Jun 2021

    The United Arab Emirates is a country of unique business opportunities. Lenient taxes and a free trade zone allow for deriving maximum profits. However, only a couple of years ago the attitudes towards cryptocurrency projects here were conflicting. Now a lot is changing and the region is becoming more and more attractive for crypto companies.

    Jesse Powell, the CEO of the Kraken crypto exchange, recently told Fox Business that the company could leave the United States due to the tightening of cryptocurrency regulations. According to him, the management of the platform is considering the UAE, Great Britain and Japan as possible alternatives.

    The United Arab Emirates are rapidly becoming known as a highly business-friendly place. Relaxed taxation, no income or corporate taxes (except for 5% VAT on a number of domestic transactions), proper conditions for fair competition, a single tax and customs space of the Gulf countries, free capital investment and withdrawal, investment protections and much more attract businessmen from all over the world.

    However, the cryptocurrency business has its own specifics, and the attitudes towards it vary – they strongly depend on the technical and financial literacy of officials from different countries. So a good place for business overall isn’t always a good jurisdiction for a crypto company.

    Just a few years ago crypto businessmen in the OAE really had to act with caution.

    On the one hand, the UAE declared the introduction of new industries and innovations, including blockchain technology, to be a state policy. His Highness Sheikh Hamdan Bin Mohammed Al Maktoum launched the Dubai Blockchain Strategy back in October 2016, hoping that by 2020 Dubai will be the first city to fully implement blockchain. The project included three main elements: government effectiveness (creating a paperless digital space for operations such as applying for visas, paying bills and renewing licenses), creating an industry (a system that would allow citizens and business partners to create new businesses in various sectors), global leadership (Dubai opening its blockchain platform to international partners).

    On the other hand, the Central Bank of the UAE, the Securities and Commodities Authority (SCA) and the financial regulators of the Dubai International Financial Center (DIFC) and the Abu Dhabi Global Market (ADGM) were all wary of the very phenomenon of virtual money.

    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”). They recognized the cryptocurrency, but prohibited its use and any transactions with it. However, later the Central Bank of the UAE said that trading in bitcoins and other cryptocurrencies is not regulated by the “Rules for the storage of valuables.”

    In January 2018, Emirates NBD Bank announced that it would stop processing “suspicious” bitcoin transactions to account holders of cryptocurrency trading platforms. Then it was clarified that it does not prohibit clients from dealing with the platforms that trade in digital assets, but restricts those transactions it considers suspicious.

    This is where it is important to understand, that in the UAE the financial regulation limits can essentially be divided between financial free zones (Abu Dhabi Global Market (ADGM) and Dubai International Financial Center (DIFC), as well as the rest of the UAE, including outside the free zones and in non-financial free zones. Financial free zones essentially have their own laws, courts and jurisdictions, and are subject to only a few federal regulations, such as the criminal liability and anti-money laundering laws.

    The financial free zones have their own regulators: the Dubai Financial Services Authority (DFSA) in the DIFC free zone, and the Financial Services Regulatory Authority (FSRA) in the ADGM free zone. They are the ones deciding how cryptocurrencies are classified and regulated.

    In the rest of the UAE, if cryptocurrencies are considered a commodity (such as oil or gold) or securities (such as shares in a company), then they may fall under the purview of the UAE Securities and Commodities Authority (SCA). Alternatively, if cryptocurrencies are viewed as currencies (such as the dirham or the dollar), then they may come under the regulation of the Central Bank of the UAE. Moreover, there is always the possibility that the instructions of the two regulatory bodies may partially duplicate or contradict each other.

    Overall, it can take a long time to analyze cryptocurrency rules and practices in the UAE – you would probably need to read a whole book on it: in different places and at different times, separate rules were established for the ICO, crypto exchanges, etc. Some won’t like such a variety of laws and regulations, while others, on the contrary, will find new business opportunities in it.

    Generally, it can be said that the Dubai Multidisciplinary Commodity Center (DMCC) is currently the most lenient to cryptocurrency companies – this is also a free economic zone. They decided to view digital money as goods – therefore, they can be freely traded, produced, etc.

    Back in 2020, the DMCC administration began working together with the Swiss company CVVC to create a special sector in the UAE for the benefit of blockchain- and cryptocurrency-related businesses. Several collaboration facilities and training centers for IT specialists in the field of blockchain will be built in Dubai’s crypto valley.

    In March 2021, it was announced that DMCC will provide business licenses to companies that work with cryptocurrencies. However, within the framework of the memorandum signed with the Dubai government, prior to that a regulatory framework for cryptocurrency companies must be established. Regulation of the cryptocurrency companies’ work will be handled by the Securities Office. According to the DMCC director, the joint work with the Office will contribute to centralized control over the cryptocurrency market within the economic zone and strengthen its reputation as a center for cryptocurrency assets.

    So let’s try and answer the question, whether the UAE could become a “free crypto world haven”. On the one hand, we see that business here enjoys the most comfortable conditions. On the other hand, the fact that centralized control over the cryptocurrency market is mentioned at the highest levels of government is concerning. After all, many people and businesses enter the crypto world specifically in order to avoid this exact “centralized control”.

    So far, though, the development of the crypto industry in the UAE can be looked at optimistically. The United Arab Emirates plans to double its GDP by 2030 through cryptocurrencies and blockchain. Large crypto projects are already emerging in the region, such as DeFi Arabic Cash with its own ABIC coin.

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