Cryptocurrency is going mainstream. In the UAE, the Securities and Commodities Authority (SCA) issued a decree that came into effect early last year that mandated providers to be incorporated in the UAE or within one of its financial free zones. Other regulators across the country are also moving ahead, with the establishment of the Dubai Virtual Assets Regulatory Authority, while Abu Dhabi Global Markets has recently issued a consultation paper looking at regulation of the non-fungible tokens (NFTs) markets.
The worldwide popularity of cryptocurrencies calls for closer attention, by individuals, businesses, and governments. We saw total transaction value grow to $15.8tn in 2021. That was a 567 per cent surge from 2020’s activity. People everywhere have felt the allure of the decentralised, 24-7, rapid transfer of funds. Yet, as with any new technology, some concerns remain over cryptocurrencies. Many of these anxieties are largely based on misconceptions, either around the day-to-day nature of transactions, or about the technology behind them. In reality, the transparent design of blockchains – which are the foundation upon which every cryptocurrency is built – allows government agencies, financial institutions, and cryptocurrency businesses to deliver more robust transaction ecosystems. They can guarantee rights of ownership and security while also being better able to detect and prevent illicit activity.
But misconceptions persist. So, let’s debunk the three most common ones.
There is a tendency to think that cryptocurrencies float from untraceable owner to untraceable owner in transactions that evaporate as soon as they are closed. Nothing could be further from the truth. Every unit of cryptocurrency retains a complete history of creation, ownership, and movement, stored on public, immutable ledgers known as blockchains. The blockchains are community-owned, in an architecture designed for transparency, with access to the entire transaction history made available for anyone that wants it. Arguably, this transparency cannot be found in most traditional forms of value transfer, including standard fiat currencies such as dollars, euros, and yen. However, it is also true that determining which individuals lie behind crypto transactions can be challenging because it is technically possible to conduct a transfer of funds without providing any personal information. But since every transaction has a real-world beneficiary, the crypto addresses permanently stored on the blockchain can often be linked to services such as cryptocurrency exchanges, and those often reveal the individual behind the deal.
Many governments around the world are moving quickly to remedy regulatory uncertainty, and 2022 is shaping up to be the year of crypto regulation. Already this year, Dubai approved the Dubai Virtual Asset Regulation Law, which establishes an independent authority to oversee virtual assets. Decentralised finance (DeFi) regulations are likely to receive more attention this year, with the UAE ranked in the top third of countries in the Chainalysis’ DeFi Adoption Index. Other regulation in crypto spaces that we can expect in 2022 is greater consumer protections, given that consumer adoption of crypto was up by 880 per cent in the 12 months leading to June 2021. Already, the UAE’s Article 48 of the Online Security Law doles out prison terms and fines between $5,000 and more than $135,000 for unofficial or unlicenced cryptocurrency dealers. Meanwhile, stablecoins are set to become increasingly popular and are, by their very nature, regulated. Many central banks are exploring the possibility of a Central Bank Digital Currency (CBDC) and the UAE recently announced its own roadmap to have a CBDC in place by 2026.
While criminal activity is a problem across all world currencies, and will remain so, the story in cryptocurrencies is more nuanced. Criminals are drawn to new technologies, particularly those that have apparent anonymity. Today, however, data, technology, and greater cooperation between public and private stakeholders has made cryptocurrency traceable. Criminals continue to use it for the same reasons people use it for legitimate purposes: it is instantaneous, cross-border and liquid. But the transparency of blockchains means it is no longer the guarantee of facelessness it used to be.
Let the myth-busting continue
As the crypto world matures, cryptocurrencies will resemble real-word fiat currencies more and more. They will be regulated, difficult to launder, with greater clarity for consumers. But unlike their fiat cousins, they will actually be more transparent and traceable. In the meantime, we should continue to bust the myths and spread the word – cryptocurrencies have so much to offer mainstream consumers.
Michael Gronager is the co-founder and CEO, Chainalysis
Read: How blockchain analytics can help combat cryptocurrency crime in the UAE