The arrival of blockchain and crypto explained: The legal case for UAE
The introduction of blockchain and cryptocurrencies have been momentous and become a threat to the regulated financial system in every facet.
According to the Global Coin Report, this has led to speculations on the probability of some cryptocurrencies such as Bitcoin replacing physical money and blockchain technology substituting central banks in the future.
How Does the Traditional Financial System Work?
The financial system is a web of financial institutions governments use to supply money in an economy.
Physical currency exists as stored data, such as bank balances and records of credit and debit card settlements. Banks and financial institutions are permitted to accept deposits and take loans as long as they have reserves.
According to the Global Coin Report, the deposit liabilities are usually more than the bank reserve making the money supply to be more than the base money. To ensure banks have sufficient money for withdrawals, the central bank is charged with the responsibility of regulating the whole process of the money supply.
Cash is not king
According to many financial experts, the days of the dollar being the global reserve currency are slowly coming to their end. It could be substituted from 10 to 15 years from now.
“From the observation of the market trends and technological advancements being made, we foresee the US dollar falling from being the world’s economic sledgehammer sooner than expected; its fall will be at the hands of virtual currencies such as Bitcoin and Litecoin,” said the global Coin Report.
What is Blockchain?
Michael Page, a recruitment consultancy, in partnership with trends forecasters Foresights Factory, have undertaken research to examine the current trends and technologies shaping tomorrow’s workplace.
Blockchain is a long record of data duplicated across millions of machines and maintained day and night by them. It is a decentralized public or private ledger that records transactions between two or more parties It eliminates the need for a bank to check how much money you have, or the recipient of the transaction, and promises to do store info, authenticate processes quicker, cheaper and more accurately than financial institutions can.
Choose your gig
The ability of smart contracts to enable a pay-as-you-go revolution will further empower the so-called “gig economy” where freelancers only clocks working hours when there is consumer demand.
“If you can wake up, enable a smart contract to monitor your work for the day, based on your specific skill set, then why would you tie yourself to a single employer?”, said Michael Page.
Peer to Peer
EOS, founded in 2017, is an operating system in which multiple applications can be activated through the use of smart contracts, which self-execute according to a pre-determined code.
“Data-driven contracts will start to rely on algorithms rather than people,” said Michael Page.
“The ability to keep a record of activity transparently and securely will lend itself to a world in which intermediaries are under increasing pressure to show their value. Verifying information and being the trusted intermediary will become increasingly obsolete with the proliferation of blockchain. Peer-to-peer relationships will no longer be as risky as they currently can be on the internet.”
Steemit is a social network built using blockchain. Content providers to the network are rewarded “tokens” for creating content on it. The token structure of companies can dictate the revenue of the value creators, allowing people to earn a living in a peer-to-peer environment, without the mediation of a corporation.
From opaque to wide open
Programming will be an increasingly important skill set in blockchain based services.
Code will win arguments and be fed into blockchain without the need for any discussion or in-person decision-making procedure.
The transparency embedded in blockchain solutions such as this means that companies are kept to a higher degree of accountability for their practices.
“New corporate structures will appear that seek seamlessness between the value creator and the beneficiaries of that value. Using token structures, people will have an unprecedented ability to be their own boss,” said Michael Page.
The UAE experience
Cryptocurrency is an encrypted digital currency that operates using the blockchain technology.
Lexology, a source of international legal updates, analysis, and insights for companies says unlike fiat currency, which is regulated by central banks, cryptocurrencies are validated through a decentralized system whereby any party participating in the process can verify the transactions that take place.
Regulatory Framework in the UAE
the UAE has launched the UAE Blockchain Strategy 2021 pursuant to which, 50% of government transactions will be conducted using blockchain technology by 2021.
The Financial Services Regulatory Authority (FSRA) which is the financial regulator of the Abu Dhabi Global Markets (a free zone in Abu Dhabi) (ADGM), has become the first regulator in the UAE to issue comprehensive guidance and regulations on carrying out activities relating to cryptocurrencies, according to Lexology.
The FSRA issued supplementary guidance on the regulation of Initial Coin/Token Offerings and Virtual under which it commented on initial coin offerings (ICO), whereby cryptocurrencies are offered for sale to the general public.
“The FSRA will, on a case to case basis, determine whether a proposed coin token is a security or a commodity. If the FSRA finds the token to be the former, the ICO would be subject to the Financial Services and Market Regulations but if the token is the latter, the ICO would be unregulated,” said Lexology.
“In addition, the FSRA on 25th June 2018, through its publication of the Regulation of Crypto Asset Activities in ADGM (ADGM Regulations), introduced a regulated activity of ‘Operating a Crypto Asset Business’ which includes operation of crypto assets exchange houses (but excludes issuances of ICOs) (Regulated Activity).”
Meanwhile, the Dubai Multi Commodities Centre (DMCC) has introduced a regulated activity known as ‘Proprietary Trading in Crypto-commodities’ suggesting that DMCC views cryptocurrency as ‘commodities’.
“However, businesses in the DMCC carrying this license are only permitted to trade on their own behalf (that is to use their own funds for trading) and the establishment of exchange houses and conducting ICOs is still not covered under this license,” said Lexology.
“Another noteworthy development is the issuance by DMCC of a license to a DMCC company enabling such company to be among the world’s first cryptocurrency deep “cold storage” vaults.”