Type: Process Essays
Sample donated: Bradford Cole
Last updated: May 25, 2019
Blockchain, developed in response to the emergence of cryptocurrencies, is an ever growing list of records that irreversiblystores all details of transactions, once a transaction has been completed itforms part of the blockchain permanent database. The blocks are linked andsecured using cryptography, ensuringthat they remain tamper-proof and safe from hacking: The data can be easilydistributed, but neither duplicated nor modified; thus these transactions areimpenetrable and inerasable.Blockchain serves as an opendistributed ledger managed by a peer-to-peer network that records transactionsbetween two parties on a connected system of registers. Such transactions donot necessarily need to be of the financial variety as the system is capable ofrecording any transaction of economic value. This system is decentralized andthe records are public and easily verifiable, allowing for transparency andincorruptibility.
Efficiencies resulting from distributedledger technology can simplify business operations and save on costs making itpossible for businesses to streamline internal operations, hence dramaticallyreducing expenses, mistakes, and delays caused by traditional methods forreconciliation of records. Additionally, greater transparency and ease ofauditing should lead to decreased AML regulatory compliance costs.Unlike traditional banking, Blockchainrequires minimal human involvement in processing and is not controlled as asingle entity with the records existing in a shared and continuously updateddatabase. Furthermore, Blockchain systems can set up smart contracts orpayments triggered when certain conditions are met.
Interestingly, Blockchaintechnology is virtually incorruptible, as any attempt to alter the recordswould require an enormous amount of computing power to gain access to everycomputer on the Blockchain network in order to successfully override thedatabase.1- What are Cryptocurrencies and Bitcoin? Cryptocurrencies are a type of digital currency with a value dependent on people agreeingto trade goods and services in exchange for a higher amount of the currencyunder their control, and believing others will do the same. Blockchaintechnology was developed in response to the emergence of cryptocurrencies andacts as a database that records and contains evidence of all transactionsbetween users.
The unprecedented success of cryptocurrencies can be attributed to the securityand anonymity it provides to users. Bitcoin, considered the originalcryptocurrency, has paved the way for an emergence of cryptocurrencies sinceits release in 2009. To date there are over 900 different types ofcryptocurrency that can be used for buying or selling with othercurrencies, purchasing goods andservices from providers who are willing to accept digital currency as payment, investingin various assets or retaining the currency as an investment in itself.Bitcoin (BTC), synonymous with the word cryptocurrency, is perhaps the mostwell-known of all virtual currencies. Itallows users to exchange online credits for goods and services for a minimalfee. The blockchain technology behind it is a public and transparent ledger ofall Bitcoin transactions. Bitcoin, the original cryptocurrency, was firstcreated by an unknown person operating under the alias of Satoshi Nakamoto.When first introduced, the idea of a digital currency was a completely foreignconcept with many people feeling that a non-physical currency not regulated bya central bank or government entity was doomed to fail.
Bitcoins are traded from one personal digitalized ‘wallet’ to another. Thewallet consists of a small personal database that you store in your system,phone or your tablet. Globally, there are dozens of online Bitcoin exchangesand brokers.
2- Blockchain operations inUAE.The GCC in general, but more specifically the UAE, is moving towards amore technology based economy. Regional governments have already started toexperiment with blockchain technology and its potential use in both the publicand the private sectors.
a- Block Chain Council In an effort to stay ahead of the curve, the Global Blockchain Council wasestablished in Dubai to adoptthe latest technologies and innovation practices on a global scale. The councilis composed of 46 members, all of whom have the potential to become key playersin the Blockchain industry. Council members include a host of governmententities, international companies, leading UAE banks, free zones, and other internationalBlockchain technology firms, including Microsoft, Du, SAP, IBM, Cisco, TECOM,Dubai Holding, Dubai Multi Commodities Centre, EmiratesNBD, Smart Dubai Officeand Dubai Smart Government.
b- Dubai BlockchainStrategy The Dubai Blockchain Strategy,launched by His Highness Crown Prince Sheikh Hamdan, was the result of collaborationbetween the Smart Dubai Office and the Dubai Future Foundation with the missionto continuously explore and evaluate the latest technology innovations in aneffort to further improve the lifestyle of the city’s residents.The strategy’s aim is to give aneconomic edge to all sectors and position Dubai as a leader in globaltechnology. In fact, the city ofDubai is, somewhat ambitiously, aiming to become the world’s first economy tohave and operate with its own cryptocurrency by the year 2020. The Dubai Blockchain Strategy isbuilt on three pillars: 1. Government Efficiency2.
Industry Creation3. International Leadership. 1. The new strategy will contributeto increased government efficiency by promoting widespread digitalizationincluding, a paperless digital layer for all city transactions. Official documentssuch as visa applications, bill payments and license renewals will betransacted digitally under the new strategy thus reducing carbon emissions, processingtimes and costs. 2.
The Dubai Blockchain Strategywill introduce a system for enabling citizens and partners to create newbusinesses using the shared ledger technology. Industries expected to benefit include:real estate, fin-tech and banking, healthcare, transportation, urban planning,smart energy, digital commerce and tourism. 3. Dubai will open itsBlockchain platform for global counterparts to enhance safety, security andconvenience on a global level.
Many Government entities in Dubaihave already begun to test the water and roll out blockchain technology includingthe Dubai Land Department, the Dubai Department of Economic Development,Department of Naturalization and Residency and the Dubai Municipality.c- EmcashEmcredit, a subsidiary of DubaiEconomy, and the UK-based Object Tech Group Ltd will work together to developand implement emCash, an encrypted digital currency operating with blockchaintechnology, which people can use to pay for various government and non-governmentservices in Dubai. d- DLDThe Dubai LandDepartment (DLD) has achieved another technical milestone by becoming theworld’s first government entity to adopt Blockchain technology. Thefirst-of-its-kind initiative in the global real estate sector, was launchedunder the slogan “Simple, Secure, Fast”. The Blockchaindatabase records all real estate contracts including lease registrations, andlinks them with the Dubai Electricity & Water Authority (DEWA), thetelecommunications system, and other property-related bills.e- DNRDThe Department ofNaturalization and Residency Dubai (DNRD) aims to facilitate procedures forresidency using biometrics systems and Blockchain technology. f- DEDThe Dubai Economic Department (DED), meanwhile,signed memorandums of understanding with Otonomosand MarketIQ to produce an innovative licensing procedure using the Blockchaintechnology and Big Data, in an effort to reduce processing time forapplications by 80%.
g- Smart DubaiAgreements were further signed between SmartDubai, Avanza Solutions and Consensys to standardize government servicespayment gateways using Blockchain, and to create a cryptocurrency for Dubai. h- Dubai Municipality Dubai Municipality has signed memorandums ofunderstanding with Renca and Winnow to legalize 3D printing building materialin order to promote 3D printing in construction, and to encourage thedeployment of the Internet of Things (IoT) to reduce food waste across thehospitality sector.3- Cryptocurrencies and Bitcoin operations in UAE.In the region, Bitcoins canbe bought and exchanged through Dubai based BitOasis, a secure platformoffering the trade of cryptocurrencies and storage services for the MENA region.Bitcoin is often purchased as along-term investment, which you bought and held in the hope that its value willincrease dramatically over time.
Early adopters have been well rewarded, butthere remains plenty of volatility.An attractive feature of onlineexchange platforms like BitOasis is the option to buy fractions or “bits”instead of a whole Bitcoin, with investment from as little as $10 on somesites. Transaction fees typically range from 0.2 to 1 per cent of the currencybought, plus bank transaction charges. Fees of up to 1 per cent can apply onsales. Bitcoins are stored in a “digitalwallet”, either in the cloud or on computers, which can be directly linked to apurchaser’s bank account facilitating payment via bank transfer, mobilepayments or with a Visa or MasterCard, or at Bitcoin ATMs such as one based atDubai Media City.Bitcoin supporters claim thatbecause it is not controlled by any central bank, the currency is not subjectto any inflationary pressures.
However, Bitcoin cannot be considered afool-proof investment, recently it suffered a 12% decrease in value as SouthKorean, Finance Minister Kim Dong-yem announced government plans to consider aban on cryptocurrencies. Many exchange houses are looking to bitcoin to helpreverse a decline in global remittances, for instance, UAE Exchange invested intwo blockchain-based companies, Loyyal and Bankchain, in the first half of 2017and is in talks with a third.4- Are there other cryptocurrencies improving andinnovating the system in UAE?In the UAE, there are sometrading platforms and cryptocurrencies of significance that are having animpact on the market, these include:ArabianChain.The ArabianChain, a localcryptocurrency to enable secure payments and money transfer, was founded inFebruary 2016 and began trading in the market in April 2017. ArabianChain isthe first company in the region to develop a public and decentralized platformfor smart contracts on blockchain.
The platform is particularly innovative asit also delivers workshops and educational sessions in an effort to increaseblockchain competency within organizations and aiding companies in the MENA tosuccessfully integrate blockchain technology. Onegramcoin.The Dubai-based OneGram jointlywith GoldGuard, a gold trading platform, launched a sharia compliant cryptocurrencythat is completely backed by gold. The company has already launched an InitialCoin Offering (ICO) offering, which aims to raise more than US $500 million incapital. This new type of cryptocurrencyuses blockchain technology to create a digital currency that is intrinsicallylinked to one gram of gold. The idea being that the currency, backed byphysical gold, guarantees safety and transparency for the buyer.
The coin willbe listed on a few digital currency platforms and some analysts have saidOneGram is the closest coin that has ever come to knocking bitcoin off itspedestal because unlike Bitcoin, the coin always has a base price bring atleast equal to the current price of gold. Once the coin is listed, 1 percent of every trade is the typical fee within blockchain.Money Trade Coin.
Money Trade Coin, has taken stepsto position itself as the propagator of the ‘cryptocurrency correct knowledge’,launching its coin, the Money Trade Coin Trading platform and exchange, andincluding the Cryptocurrency E-Academy, aiming to educate the young generationsabout the benefits of using and trading digital currencies along with an OnlineService E-Portal. The management is aiming to set-up other businesses such asE-commerce and E-travel desk all based on the Money Trade Coin.Money Trade Coin, coupled with anultra-secure wallet, claims to be first fully secured cryptocurrency, whichimplements the highest standards of compliance with relation to the KYC and AMLonce onboarding its new investors and following the international directivesissued by the central banks and other regulatory agencies being able to keepthe records of all transactions for more than ten years.
5- Which are the areas of concernabout Blockchain and cryptocurrencies?The challenges to the wideradoption of these technologies include: cyber security; regulatory uncertainty;lack of physical representation of the coin; mistrust of bitcoin relatedtechnology due to dark-web and criminal connotations; high energy consumptionneeded to complete transaction; questionable capability for smart contracts to accuratelyexecute complex instructions; fear of disruptive potential that can often leadto adoption resistance; privacy and data-security on public blockchains andsoftware compatibility issues.These innovating technologies are an attractive investment vehicle, butit comes with high risks because at the moment it is an unregulated marketoffering no protection.6- Legal Aspects in the UAE. a- Cryptocurrencies As Bitcoin is not screened by any governmental agencynor does it pass through any bank or financial institution, this createssignificant challenges concerning government regulators and current laws.Bitcoin’s “monetary policy” is written into its code:New money is issued every 10 minutes, and the supply is limited, a hard money rule is appliedsimilar to the gold standard.
The UAE Central Bank published the”Regulatory Framework for Stored Values and Electronic Payment Systems” onJanuary 1st, 2017 to promote consumer protection and financialstability. However, on February 1st 2017, the Governor of the UAEcentral bank issued a statement clarifying that “these regulations do not applyto bitcoin or other cryptocurrencies, currency exchanges, or underlyingtechnology such as Blockchain,” as well as adding that virtual currencies are currentlyunder review by the Central Bank and new regulations will be issued asappropriate based on evolution of concepts and adoption rates. Whilewaiting for new regulations to be issued addressing cryptocurrencies, one key questionthat needs to be addressed, is Bitcoin a currency or a Commodity?If bitcoin is deemed a commodity, then the UAE Securitiesand Commodity Authority hasjurisdiction overlocal bitcoin exchanges while if it is deemed a currency, it would fall underthe regulatory authority of the UAE Central bank. Further, and if it ends upbeing considered a commodity, it may become subject to VAT.
The UAE authoritieshave yet to clarify their position on the matter.b- Blockchain.The launch of the Global Blockchain Counciland the adoption of the Dubai Blockchain Strategy demonstrate the position ofthe Dubai Government in recognizing the potential of the Blockchain basedtechnology.The Dubai Supreme Legislation Committeefurther stated that the UAE “should be among the first in the region and theworld to establish a legislative framework and a financial and organizationalstructure for this technology.”c- Smart Contracts Amongst the various applications of the blockchaintechnology are smart contracts. Smart contracts probably have the mostpotential to alter the way companies do business.As Blockchain can process transactions, not just simply store transaction information, they can serve as aplatform for “smart contracts”.
These contracts are electronically drafted,executed and performed, eliminating the possibility of fraud or downtime byeither party. It is a self-executing agreement and once created it produces itsoutputs autonomously. The more sophisticated the code, the more automated,self-executing, and smarter the contract.Traditionalform of legal agreements suffer from several imperfections such as the inherentambiguities in legal prose, the time-consuming process of signature pagesbetween parties, possibility of being slowed down by human effort, the costs ofcreating contracts or performance where third-party input is required and theinefficient storage of legal documents. Blockchaintechnology may provide much needed relief to some of these problems. However,some difficulty still lies in the fact that smart contracts cannot be easilyrectified. In a scenario whereby a bug gets in the code or incorrect detailsare entered at the time of submission it is unclear how it can be rescinded.
Traditionally, contracts are rescinded in court but in the case of smartcontracts it remains to be seen how it can be rescinded or if it must beperformed regardless of the irregularities. UAEThe UAE Federal Law No.1 of 2006 on ElectronicCommerce and Transactions appears to allude to “smart contracts” in itsArticle 12 as it states that “Contracts between confidential electronic mediumsthat include two or several electronic information systems, designed andprogrammed in advance to perform so, shall be deemed valid, enforceable andgiving its legal effects even in the instance of no personal or directinterference of any physical person” adding that “conclude contracts between aconfidential electronic information system in the possession of physical orjuristic person and another physical person is further allowed should thelatter know or is supposed to know that the system shall conclude the contractautomatically”. This is a very important first step towards the regularizationof these technologies in the UAE that complements the UAE Governmental strategyin becoming pioneers in adopting innovative technologies.Nevertheless, and as an emerging technology promising self-executingcontracts with little human intervention, smart contracts give rise to someentirely new legal challenges and any attempts to subject smart contracts to existinglaws may create challenges and raise enforceability questions which need to beaddressed by the development of a legal framework under which Blockchain can beproperly adopted. 7- What is the situation withInitial Coin Offerings and the DFSA position regarding them? A numberof organizations around the world have taken to digitally raising funds through”Initial Coin Offerings” (ICOs), whereby investors pay usingcryptocurrencies or conventional currencies in exchange for a newcryptocurrency created and issued by a company (real or virtual). This companythen uses the currency raised to hold assets and fund projects allowingcryptocurrencies to be treated as an equity investment.The DFSAStatement.
OnSeptember 13 2017, the Dubai Financial Services Authority (DFSA), issued a”General Investor Statement on Cryptocurrencies,” stating that ICOs shouldbe considered high risk investments due, in part, to the complex systems andtechnology that support them. According to the General Statement, “they havetheir own unique risks, which may not be easy to identify or understand; suchrisks may increase where offerings are made on a cross-border basis.” Itfurther added that, “these offerings should be regarded as high-riskinvestments.”The DFSA further made clearthat it does not currently regulate these types of product offerings or licensefirms in the Dubai International Financial Centre (DIFC) to undertake suchactivities.
Accordingly, before engaging with any persons promoting suchofferings in the DIFC, or making any financial contribution toward suchofferings, the DFSA urges potential investors to exercise caution and undertakedue diligence to understand the risks involved.