The UAE did not get to where it is today by being timid. Bold, strategic, out in front – these are the descriptors that characterise the nation on any one of several policy issues – fiscal, economic, social, cultural.
The UAE’s attitude to crypto assets has been much the same as many emerging trends – to ride the wave rather than erect dams and levees against it. Thus far, the government’s regulatory framework around all things crypto has been enabling rather than curtailing, seeking to protect legitimate participants in a way that allows innovation to occur at scale.
And as with many other strategies initiated by the UAE government, its crypto policy is bearing fruit. The country is third in the Middle East for cryptocurrency influx according to a Chainalysis review of regional transactions between July 2020 and June 2021, when the UAE received around $25bn in incoming crypto funds.
And American cryptocurrency exchange Kraken is eyeing a Middle East “release” in which it will open a regional headquarters in Abu Dhabi. Meanwhile, the UAE’s first virtual asset service provider (VASP) BitOasis launched an instant-deposit service and is on the fast track to become a leading light in the region’s crypto craze.
The problem with anonymity
But crypto currencies and their supporting services are a double-edged sword. As a general rule in finance, any breakthrough service or technology that is welcomed for its anonymity is, unfortunately, subject to abuse by non-legitimate entities.
We must move with a blend of haste and care to ensure that these undoubtedly useful tools cannot be hijacked by dubious actors. We must build trust and a foundation of oversight and regulation to administer the rise in popularity that crypto assets have inspired.
For example, the UAE Central Bank recently issued an AML (anti-money-laundering) mandate to the nation’s banks. Given the government’s established cryptocurrency regulations, including the need for asset and service providers to be incorporated onshore and be licensed by the Securities and Commodities Authority (SCA), it can be inferred that the government sees anonymity as a risk when it comes to AML and is intent on enforcing robust know-your-customer (KYC) standards.
Cryptocurrencies are, in fact, not as inherently anonymous as the public perceives. The blockchain ledgers on which they are built serve as complete, permanent, open records of transaction history. And they can be mined by authorities, when necessary, to track funds with a reliability that simply cannot be found in backstreet, dollars-in-a-suitcase deals.
The other side
Of course, there is another side to the anonymity issue. Many law-abiding buyers and sellers are attracted to it as well. The lifting of Covid restrictions worldwide was accompanied by a crypto-rush and a skyrocketing of profits, but large-volume transactions led to value crashes that once again led to a deterioration in public trust.
And when one considers the uncertainties that also surround the security of funds along with the fraud scandals around the world, it is not hard to understand how traditional centralised financial systems were subsequently redeemed in the eyes of the average consumer.
However, such consumers have not lost all faith in crypto. Decentralised finance (DeFi) and its anonymity still live in the imaginations of many as part of a future that is just over the horizon.
Our challenge is to establish regulatory frameworks for cryptocurrencies – such as Dubai’s Virtual Assets Regulatory Authority (VARA) – that work with central banks, finance ministries and other agencies to oversee cryptocurrencies and the emerging NFT phenomenon.
Countries such as El Salvador and the Central African Republic have seen fit to declare bitcoin as legal tender, while others such as China, India and Egypt either ban cryptocurrencies explicitly or restrict their use through financial licensing laws.
Open discussions on the trade-off between anonymity and security may not be possible everywhere, but in forward-looking societies such as the UAE, all signals point to a regulatory system that is determined to deliver the best of all worlds.
This means finding ways to protect cryptocurrency from e-thieves as it is being traded and when stored in exchange wallets, but also leaving the door open to pry into transactions that may be unlawful. The legitimate consumer and the lawful business should be assured that transaction data is private, and that irreversible payments will reach the right recipient.
Security costs vs security concerns
Once regulatory compliance in crypto businesses catches up with that in the rest of the finance sector, we should see greater acceptance among consumers. Exchanges that outmanoeuvre hackers to an acceptable degree will gain ground, but such exchanges will need to factor in the cost of cybersecurity alongside their hunger to rapidly roll out new services to the market.
There is reason for optimism among crypto firms. Every sign suggests there is widespread enthusiasm for anonymity among consumers and businesses.
But the downsides must be addressed. Successful crypto enterprises must brace for the kind of security investments made by traditional banks – measures that do not just deliver compliance but go beyond to reassure consumers that their hard-earned currency is safe.
Meanwhile, regulators must accommodate crypto currencies and assets by extending their frameworks to allow for decentralisation while protecting consumers. They must make crypto exchanges accountable while enabling anonymity and privacy in transactions.
A new status quo
A digital economy all but guarantees that whatever new service proves its value and becomes popular will prevail. Regulators must adjust to these trends. And the UAE’s authorities have done just that, recognising that since the crypto exchanges and other latticework is here to stay, the economy should take advantage of them. If they strike the right balance between security and anonymity, crypto can thrive.
Francis Souza, Partnership Director – Real-Time Payments, ACI Worldwide