What is a crypto asset?

A Crypto asset, or cryptocurrency, is digital or virtual currencies, cryptographic algorithms, and a protocol called blockchain to ensure the reliability and traceability of transactions. Cryptocurrencies are entirely virtual; they can be either stored & secured in a digital wallet by a secret code. And this secret code specifically belongs to one owner. Exchange platforms are available ( such as Coinbase, Binance, Bitstamp, etc.) are used to buy and resell cryptocurrency online.

If you want to know more and understand the procedure for buying cryptocurrencies, you can visit Cryptoast. The first crypto-currency to emerge, and arguably the most famous of them all is Bitcoin.

Created in 2009 by an enigmatic programmer using the pseudonym Satoshi Nakamoto, it propelled the blockchain principle and led to the creation of many other cryptocurrencies, called "altcoins" by crypto-traders. Typically, cryptocurrencies are designed to create a known and limited number of tokens. In the case of Bitcoin, 21 million tokens are expected to be generated by 2140. New tokens are automatically allocated to miners: the nodes of the blockchain that confirm blocks of transactions by solving cryptographic algorithms.

During the first years, the number of bitcoins created was significant: 50 per block. This volume decreases by half every 4 years, during an event called "Halving". This process gradually increases the scarcity of cryptocurrency, making it increasingly difficult to obtain by mining. It aims to mimic natural resources such as precious metals and protect the virtual currency from hyperinflation. The legislation on cryptocurrencies varies greatly depending on the country. Central banks do not recognize them in the same way as national currencies and their legal status does not yet exist on the global level.

The challenges of cryptocurrencies

We can mention several problems and challenges related to the use of cryptocurrencies:

  • Cryptocurrencies are not actual, recognized currencies: Theoretically and legally, cryptocurrencies such as bitcoin are not a currency in theoretical and legal terms, notwithstanding what people may think.
  • A currency serves three functions: It is a medium of exchange, a unit of account, and a store of value. There are very few goods and services that are priced in bitcoin (or other cryptocurrencies) and paid for with it. Bitcoin is not globally accepted as a means of payment. Many cryptocurrency payment applications have indeed been created in recent years to promote its use. However, none of them has established themselves at the heart of everyday transactions and payments worldwide;
    1. Except for behavior on-ground transactions. Crucially, the value of cryptocurrencies is expressed in dollars (or other fiat currencies). Therefore, they are no different from any commodity that is priced in dollars and whose counterparty in a transaction is money. Mark Cuban, an early Bitcoin investor, summed it up in a few words: "For a cryptocurrency to become a currency, it (bitcoin, for example) would have to be so easy to use that it becomes a given. Above all, it would have to be completely frictionless and understandable by everyone. In fact, so easy that my grandmother could use it”. To qualify as lawful, a means of payment must be granted the status of an official monetary unit by the laws of a country. This legal tender status allows debtors to pay their obligations or debts by transferring them to their creditors, as permitted and provided for by law. For any legal assistance and counsel, it is advisable to approach the best lawyers.
    2.  A recent study found that 80% of the world's central banks were not authorized to issue digital currencies given the laws in place, or the legislative framework around them was ambiguous and did not authorize them to do so.
    3.  However, China passed a law in 2020 allowing its central bank to issue digital currency.
    4.  Resulting in the birth of the world's first official digital currency, DCEP ("Digital Currency Electronic Payment").
    5.  Although digital, DCEP is not strictly speaking a cryptocurrency. Legal tender status is generally given to means of payment that can be easily exchanged and that people use daily. To use bitcoin, or any cryptocurrency, one must have a digital infrastructure that involves computers, smartphones, internet networks, and a connection. This condition makes the idea that cryptocurrencies can become a currency illusory. It echoes the words of Mark Cuban who denies bitcoin the status of a currency.
  • Cryptocurrencies are a blessing for speculation: Those in favor of Bitcoin claim that it is an investable asset. Although it is undeniably investable, the fact that it is supposed to be an asset is not so obvious. A financial asset has an income stream. Of course, there are assets with zero return, such as commodities, but they are traded because they have a practical use (for production or consumption). Crypto-currencies have no income stream and no practical use. The fact that they have a price and are tradable suggests that speculation is their primary purpose. As a result, cryptocurrency prices are subject to violent and random movements. This raises the other issue, that of the store of value.
  • Cryptocurrencies are not a store of value: For an instrument to serve as a store of value, it must be liquid, universally accepted, and have a stable value. Cryptocurrencies, including bitcoin, have absolutely none of these characteristics. Bitcoin trading suffers from illiquidity and manipulation problems due to the existence of "whale wallets" (wallets that hold disproportionate amounts of bitcoins). At the end of 2020, the 100 largest wallets were estimated to hold 13% of the total supply of bitcoins, with most of the owners' identities unknown. Hence, it would only take a few whale wallets to manipulate the Bitcoin market and cause violent price swings. The extreme volatility of prices makes bitcoin and other crypto-currencies unsuitable for use as a store of value.
  • Cryptocurrencies' limited supply is an issue, not an advantage: Contrary to the popular belief that the limited supply of bitcoins and cryptocurrencies is an advantage and protects their value, this feature is a major obstacle to their use as a currency. The maximum number of bitcoins that can be "mined" is 21 million. At the time of writing, 18.6 million bitcoins are already in circulation. All cryptocurrencies have a finite supply, and the rate at which they can be multiplied is both uncertain and uncontrollable.

This limitation on supply makes crypto-currencies unsuitable for use as legal tender, as a static "money supply" would deprive central banks of the ability to conduct countercyclical policy. Nevertheless, cryptocurrency proponents have exploited the widespread fear and distrust of fiat money that was generated by the monetization that followed the global financial crisis. They have cleverly turned this problem of limited supply into an argument for crypto-currencies to protect themselves in the event of a doomsday scenario. This is misleading and could even be considered fraudulent behavior.

Cryptocurrency scams in the UAE

In Dubai in 2021, over AED 80 million were lost to cryptocurrency scams. Tarek Mohammed, Head of the Digital Assets Crime Section at the Dubai Police GHQ, strongly advised investors in the UAE to do due diligence before making any decisions regarding the matter of cryptocurrencies. These scams often take the form of famous unlawful schemes, such as Ponzi schemes.

One of the most important pieces of information Mohamed provided is the following: Firms selling realty against cryptos not authorized. Meaning that any company which accepts payments in cryptos is not doing so with the authorization of the UAE government.

The reason why Mohammed said that is because recently some local real estate companies announced that they were willing to sell their properties to investors against cryptocurrencies. One of the most famous scams related to cryptocurrencies in the UAE was the DubaiCoin scam.

The DubaiCoin scam: In May 2021, a cryptocurrency called DubaiCoin (DBIX) jumped 1000 percent in 24 hours. Although DubaiCoin may sound like the official Dubai's cryptocurrencies regulator. However, it is not related in any way to the Emirate of Dubai and the website that was selling this currency was a phishing scam. DubaiCoin has been around for a while, but it was noticed by the authorities of Dubai only in May 2021. The website portal was pretending the following,

“Consumers can use DubaiCoin to pay for goods and services, both online or in-person... The intent is for the coin to be used in place of regular paper money. The circulation of DubaiCoin will be controlled by the city itself as well as authorized brokers”.

It turned out to be a lie. Although DubaiCoin does exist as a cryptocurrency it has been launched by a UAE-based company called Arabianchain Technology though the latter never made any claims of being officially associated with the city of Dubai. A team of scamsters created a website to phish data and money out of genuine crypto investors. The website worked was quite usual: after filling a form, the website user was told he would be contacted by an agent to exchange his currency with DubaiCoin. The website turned out to be a phishing scam and has since been taken down.

How does the UAE tackle these issues and regulate cryptocurrencies?

The UAE issued new cryptocurrency regulations in November 2020: "The Authority's Chairman of the Board of Directors Decision Number (21/R.M) of 2020 Concerning the Regulation of Crypto Assets." The UAE Securities and Commodities Authority (SCA) has issued a judgment that outlines the SCA's licensing system for anyone wishing to offer crypto assets in the UAE.

The SCA decision defines cryptographic assets as a record within an electronic network or distribution network that serves as a means of exchange, storage, and unitary representation of ownership; usufruct that can be electronically transferred from one person to another through the use of a computer program or algorithm that governs its use. It explains the regulatory framework that applies to both commodities and security tokens. Vendors that want to sell crypto assets (or associated services) in the UAE must register onshore or in one of the UAE free zones (for instance Dubai International Financial Centre). The listing of crypto assets can be 'passported' to one or more cryptocurrency exchanges by licensees.

The SCA requires all providers intending to offer crypto assets in the UAE to be licensed. Applicants must demonstrate rigorous compliance with UAE anti-money laundering and terrorist financing legislation, cybersecurity requirements, and data protection rules as part of the application process. Data residency rules and onshore cloud computing. To locate computer systems (or cloud computing facilities) onshore in the UAE, service providers must adhere to international standards. Service providers (or their subcontractors) will typically be required to demonstrate compliance with the UAE's Federal Government's ISO9001 and ISO27001 and cybersecurity requirements, at the very least.

The SCA's Decision compels service providers who encrypt, store, process, or transfer crypto assets or personal data using offshore servers or public cloud facilities to use onshore cloud computing services for backup and disaster recovery. Subcontractors and employees working for crypto asset providers, custodians, escrow businesses, and other contractors must meet tight requirements in terms of having the necessary skills and experience to perform their duties. Licensees may appoint subcontractors, but they will be responsible for any risks and liabilities arising from their subcontractors' violations of the Decision. As a result, the SCA's Decision compels licensees and their subcontractors to draft a detailed service level agreement outlining the parties' respective duties in terms of cybersecurity and data protection.

The SCA stressed that it has complete authority over licensees and online transactions. If a licensee's right to provide crypto assets is suspended or revoked, the SCA has broad powers to levy fines, suspend or revoke a licensee's authority to offer crypto assets, and publicize the identities of violators.

The SCA's decision established two categories of people to whom crypto assets may be offered: the first category is Qualified Investors, and the second category is others who do not match the Qualified Investor eligibility criteria.

Before marketing crypto assets to Qualified Investors, licensees must file documentation with the SCA. In all other situations, before marketing crypto assets to non-Qualified Investors, licensees must obtain prior clearance from the SCA.

A Qualified Investor is broadly divided into two categories:

  • Institutional investors (banks, financial institutions, or enterprises) with assets of more than AED 75 million or a net turnover of more than AED 150 million, as well as state governments, foreign governments, and international organizations.
  • Individuals with at least AED 4 million in money or AED 1 million in yearly income, and with whom a licensee can verify that they have appropriate knowledge and comprehension of the dangers of investing in crypto assets.

Due diligence requirements

The SCA underlined that all customers must be categorized and assessed as if they were a ‘high risk' customer for the purposes of performing anti-money laundering and ‘know your customer checks on potential investors. This entails conducting "enhanced due diligence" on a customer's source of funds, ultimate beneficial ownership structure, political exposure risks, the potential for customers to be used as money laundering conduits, and any geographical risks posed by customers, their directors, shareholders, and associated suppliers and intermediaries.