By Carlos Marcos, Associate, United Advocates
The practice in the cryptocurrency trading in UAE
The year 2017 started with a shocking surprise for those (individuals and companies) participating in cryptocurrencies trading in the UAE due to the UAE Central Bank’s unforeseen Regulatory Framework for Stores Values and Electronic Payment System, which stated that “[a]ll virtual currencies are prohibited”.
On 1st February 2017, the Governor of the UAE Central Bank stated in an interview with Gulf News that such regulation had no effect on cryptocurrencies whatsoever and that therefore, their trading was not banned as per the UAE legal system.
Due to this uncertainty, the UAE Central Bank took the initiative and announced, after assessing cryptocurrencies’ impact on the GCC economy, the need for the issuance of new regulations on cryptocurrency trading in the UAE. In this regard, the UAE Central Bank’s first conclusions on this hot topic were finally issued on 23rd October 2017.
2. UAE Central Bank view on cryptocurrencies
The UAE Central Bank Governor, Mubarak Rashed Al Mansouri, warned against the use of bitcoin due to the lack of a proper legal framework and sufficient supervision.
The Governor added that “”some nations have announced that they are not using Bitcoin, and consequently its value sharply plummeted. In addition, it can be easily used in money laundering and in funding terror activities”; making a clear reference to China’s policies against cryptocurrencies and ICOs.
3. Legal status of cryptocurrencies in GCC
Despite to the Governor’s words, there is no law expressly banning cryptocurrencies neither in the United Arab Emirates nor in any other country of the GCC.
As an example Saudi Arabia’s government has publicly said that it is not considering regulating bitcoin at the moment due to its infancy, which prevents from assessing the influence that cryptocurrencies may have on the regional economy.
Abdulmalik Al-Sheikh, senior advisor at the Saudi Arabia Monetary Agency, said at the Fintech Abu Dhabi event that “cryptocurrency is still at its infancy, its pilots, trials, here and there. I don’t think that there is something strong where we need to jump into it currently”.
Mr. Al-Sheikh added that “I think all the central banks … are observing, trying to measure the impact of that. I think it is about another five years before we can really see whether there is a real impact on the currencies in general (and) what will be the future operating model of … cryptocurrency”.
Therefore, as per his words, one may deduce that GCC countries are waiting to see how cryptocurrencies are regulated in other more mature markets before deciding to promote this kind of assets.
4. The real problem: Banks
Cryptocurrencies are thus in a sort of legal limbo, leaving traders without a legal framework to rely on. Due to this uncertainty, banks in UAE have been refusing to work with individuals and corporate traders doing business with cryptocurrencies.
Hence, we have been witnessing some UAE banks closing bank accounts just after noticing that their customers were trading with cryptocurrencies and receiving money from notorious cryptocurrency exchanges, due to the banks being reluctant to assume any risk.
After proceeding with the bank account closing, banks usually issue a manager cheque in the account’s amount and under the account holder’s name.
If it is shown in bank statements a record of cryptocurrency trading during the months’ prior to the bank account’s closing, it may become a challenge when applying to open a new bank account in the UAE. This challenge comes up when the new bank requests the customer to provide with the personal or corporate bank account’s statements. Upon review of the bank statement, banking entities may request for information regarding the bank transfers received from cryptocurrency exchanges, refusing to proceed with the bank account opening.
In this regard, if the closing of the account occurs before the opening of the new one, traders may get stuck holding a manager cheque but being unable to encash it anywhere due to banks refusal to open a new account. A solution that some traders have put into practice is to open two accounts in different banks, which would allow them to transfer the funds easily from one account to the other once bank entities start raising questions about cryptocurrency transactions. However, this is not a long term solution which provides certainty and it is definitely not a recommended way of trading. In furtherance to that, traders run the risk to be reported to the UAE Central Bank.
A more feasible alternative is to open an account in countries in which, despite the fact that cryptocurrencies are not regulated, the banking sector is open to receive funds from individual traders operating in the cryptocurrency market. Some of these bank entities are very reputable and previous experience working with them have been proven satisfactory.
Once traders have credited their cryptocurrencies in a bank account abroad where funds are safe, those may be transferred into a proper UAE licensed company’s account in order to benefit from the 0% income tax applicable in this country.
Currently there are no regulations governing the trading of cryptocurrency in the UAE and other GCC countries and thus banks are not open to facilitate cryptocurrency transactions; contrary to what it is happening in some of the European countries, USA or Japan.
Therefore, we could conclude that the GCC presents an immature market not only for the trading on these assets but also for the encashment of those. However, UAE may be considered as an attractive financial center from which cryptocurrency traders may handle the profits of this new and profitable business.
If you require future assistance on the matter, please do not hesitate to contact us at United Advocates.