Legality and regulation of Bitcoin and other cryptocurrencies in United Arab Emirates

Cryptocurrency is a decentralized digital cash system which has no central entity. Unlike the traditional banking systems, a transaction made using cryptocurrency is stamped as legit and shared across the whole network. Whereas in a centralized system, all the transactions and balance records are stored in central server so as to prevent different entities spending twice.

The legalities around cryptocurrencies have been a major question by various countries. United Arab Emirates (UAE) is one of the countries which has apprehensions about the actual use cases of cryptocurrencies. The country has released controversial statements pertaining to cryptocurrencies as the statement(s) contradict their own previous statements.

The government of UAE had publicated a regulatory framework which openly stated that all the virtual currencies and transactions made using the cryptocurrencies will be prohibited. However, following the publication of the framework, the UAE and Saudi Arabia jointly announced their plans to release their own cryptocurrency.

The UAE and Saudi Arabia’s statements explained their interest in creating regulations for cryptocurrency. The plan was make their countrymen use their own cryptocurrency whilst regulating it themselves in their regions. However, the Financial Services Authority of Dubai, the largest and the most populous city in the UAE, denounced the use of cryptocurrency. The authority declared that it doesn’t regulate virtual currencies and also its stance on them as “high-risk investments”.

The series of announcements made by the government and various agencies of the UAE clearly suggests that there is no unanimity among the officials tasked with currency works. One instance clearly shows lack of collaboration between the officials: following the announcement of the country’s virtual currency prohibition statement, a UAE Central Bank official said during an interview that, the regulations do not cover virtual currencies and also specifically mentioned bitcoin while stating that all crypto-service don’t fall under the regulations.

Many analysts agree that the lack of strict regulations and a clear goal with cryptocurrency is one of the issues that the UAE faces. The country is yet to decide whether it should treat Bitcoin as an actual currency or as a commodity. If it is to be treated as a commodity like gold or as a currency alongside the dirhams, USD, etc. Bitcoin isn’t subjected to any international regulations - meaning every country has rights to define their own regulations.

The government of US decided to treat bitcoin as a commodity, meaning bitcoin will be subjected to taxes and it will regulated by the Commodity Futures Trading Commision. Whereas, the European Court of Justice has decided to treat bitcoin as a currency for reasons related to VAT. The US and the EU having already decided the nature of bitcoin in their regions does help the UAE, as it can choose the better model by studying the outcomes of the two.

If the UAE decides to treat Bitcoin as a commodity then it will be subjected to sales tax (VAT) and will be regulated by the UAE Securities and Commodity Authority. Whereas, if the UAE decides to treat Bitcoin as a currency instead, it will not be subject to taxation and will be regulated by the Central Bank of UAE.

The UAE is spending huge amount of its energy and resources to define a common regulatory framework. Similar to the efforts being made the US and the European Union regulators, the UAE too is using its huge talent pool to understand the realities of virtual currencies at the moment.

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