Blockchains are digital ledgers which show proof of transactions that are duplicated and distributed across a network of computer systems on the blockchain. This system of recording renders it difficult or impossible to make changes to, or hack the ledger. Blockchains can essentially be considered as the corridor or the platform for transactions, as the internet is for information. It is arguably one of the most important elements of those current technological advancements which have the potential to bring about evolutionary changes to society. It is also of considerable importance as it would have a significant impact on relations between persons (whether legal or natural), globally. This includes relations among governments, international organisations and any legal national or international entity. Despite the fact that blockchain technology originated with the cryptocurrency bitcoin, it can be used in many important activities that go beyond a decentralised cryptocurrency system.
Rapid advancements in the development and use of blockchain technology and cryptocurrencies are presenting both challenges and opportunities for society. With the potential for these technologies to become evolutionary and disruptive, it is important that the law also keeps informed on progress in these areas. The law can be considered as a set of rules regulating and governing relations, and it is therefore crucial that it is not left isolated to the technological changes that appear to be forthcoming. Legislators need to be prepared for the fast-paced changes that are being brought about by blockchain technology. The development of the Internet and GAFA (Google; Amazon; Facebook and Apple) technology was many times proven to have taken place too quickly for legislators.
Central Banks also generally appear to be resistant to the use of cryptocurrencies, with governments likely to resist any changes, instead issuing warnings or placing restrictions on use. Nonetheless, some countries have taken a more liberal approach. Switzerland, for instance, has demonstrated flexibility in allowing start-ups and established companies in the field of finance to incorporate blockchain technology in their operations. The financial regulator has adopted an open ‘sandbox’ approach, with both contract and company law recognising a wide autonomy to parties. The establishment of a ‘crypto valley’ is a prime example of this policy in action.
Blockchains present the notion of a world where citizens can directly interact with each other without intermediaries and without permission of the centralized authority of national state jurisdictions. They present many important opportunities such as:
(i) Payment methods which facilitate online, peer to-peer payments. This enables payments to take place in a secure manner, without a bank account, as well as without being subject to multiple fees and monetary limits.
(ii) New avenues for allowing businesses to raise funds. Blockchain development has enabled businesses to raise funds through new finance methods such as Initial Coin Offerings (ICOs) and Token Generating Events (TGEs). These methods of financing present the advantage of quickly receiving money from investors without relying on an intermediary bank or a Venture Capitalist (VC). At one point, this type of financing bypassed VC financing and to a certain extent has challenged the rules of banks and financial institutions active in the field of VC.
(iii) The development of new organisational structures. Blockchains and the use of smart contracts have allowed for the formation of a novel organisational structure known as the Decentralized Autonomous Organization (DAO) or Decentralized Autonomous Corporation (DAC). The organization is decentralized as the organisation’s rules, such as its charter and articles of association are incorporated into the blockchain in the form of smart contracts, where there also implemented and executed. It is autonomous from the moment it is deployed on the blockchain, since at this time it becomes disconnected from its creators. The DAO or DAC then becomes regulated by the rules which are written into the smart contract. The legal personality of such entities still remain to be determined by law.
Blockchains are expected to have an important impact on human relations and how businesses are organized, as well as in the conduct of their activities. One of the most significant challenges facing blockchain technology is that of regulation. States and governments, including those in
the Arab world would need to determine how they regulate blockchains and their associated digital assets.
At present, most Arab countries follow a hardline approach in their treatment of cryptocurrencies, putting forward arguments which include the following:
(i) Cryptocurrencies are extremely volatile and offer no protection to investors;
(ii) The use of cryptocurrencies can lead to the financing of illegal activities such as terrorism and money laundering.
(iii) The global financial system can be interrupted greatly through the use of cryptocurrencies.
(iv) Bitcoin can be used for financial crimes, and electronic hacking, and there is the risk of its value suddenly decreasing.
These above perspectives have been reflected in the laws of several countries. Article 117 of the 2018 Algerian Finance Law for example prohibits the purchase, sale and use of virtual money, with any violations of this provision being prosecuted under the
applicable laws and regulations.
Morocco has also banned Bitcoin since 2017 on the basis of there being security risks associated with the use of ‘hidden’ payment systems. Trading cryptocurrency is also punishable by a fine. The Central Bank of Morocco has declared that “Financial transactions with foreign countries must be carried out through authorised intermediaries and with foreign currencies listed by Bank Al Maghrib.”
The Saudi Arabia Monetary Authority (SAMA) has published a notice to financial institutions, warning against the use of bitcoin. In Qatar, the Central Bank has announced that it is illegal to trade bitcoin within the country.
Although the official position of the United Arab Emirates (UAE) does not appear to be quite clear, the Central Bank of the UAE issued a notice which warned that transactions using virtual currencies are prohibited. Other countries in the Arab world have adopted similar positions or
kept silent, as is the case with Libya and Yemen.
On the contrary, in Europe and the United States of America (USA), perspectives on the legal status and acceptance of virtual currency continue to develop. The European Union (EU) has stated for instance that Value Added Tax (VAT) and Goods and Service Tax (GST) are not applicable to the conversion between traditional fiat currency and bitcoin. The Court of Justice of the European Union has held in the Skatteverket v David Hedqvist Case C-264/14, for example, that the services of a Bitcoin exchange relating to the exchange of bitcoin for traditional currency is exempt from VAT on the basis of ‘currency’ exemption since bitcoin should be treated as a means of payment. The European Central Bank has also advised European Banks to not treat with virtual currencies such as bitcoin until a regulatory regime is in place. In the USA, Canada and Mexico, bitcoin is viewed as a legal instrument, with cryptocurrencies being classified as convertible, decentralised virtual currency, and as individual property, which can also be used as part of a community.
Despite what appears to be a cautious approach towards blockchain adoption, there are still signs of interest being shown in the technology. In January 2019, ‘Project Aber’ was initiated between SAMA and the Central Bank of the UAE, with the intention to establish a ‘proof of concept’ designed to contribute to the body of knowledge in relation to Central Bank Digital Currencies (CBDC) and Distributed Ledger Technologies (DLT). Essentially, inquiry was made into the feasibility of domestic and cross border payment settlement using CBDC. This joint effort represents the first instance that two Central Banks have entered into a collaborative relationship for such a purpose. Following the conclusion of the project, a report was issued in November 2020 which concluded that a dual issued CBDC for cross border payments were technically viable and demonstrated a “significant improvement over centralized payment systems in terms of architectural resilience.” The project was also able to achieve high levels of performance without compromising safety or privacy.
Saudi Arabia has also established the NEOM project, which is a planned cross border city which will function as a ‘smart city’ and tourist destination. One of the key technologies which will be used in this environment is the Internet of Things (IoT) technology. The IoT typically involves the interconnectedness of physical objects which are embedded with censors, software and other technologies and have the ability to exchange data in real time over the internet. The project is part of a wider plan for economic diversification, public service development and reduction on the reliance of oil. Aspects of the NEOM smart city include it being powered by wind and solar energy as well as the use of robotics for logistics, deliveries, security and care giving. The use of blockchain technology together with the IoT, particularly in a smart city, would allow for the creation of a new economy and the use of Financial Technology (Fintech), which is geared to play an important role across multiple business sectors. Recognising the growing importance of Fintech, blockchains and Artificial Intelligence (AI), the UAE Ministry of Finance (MOF) has also signalled its intention to be among the world leaders in smart government organizations. With the assistance of Fintech startups, the MOF recently issued an electronic wallet which allows their customers to pay charges using their smartphones.
In the context of cyber security, it is also important for Arab countries to embrace blockchain technology. This is crucial for those policy makers tasked with ensuring the cyber security of a digital Arab world. The use of blockchains for security activities such as device authentication, identity verification and validation and record keeping on a secured ledger are all mechanisms which can be used to combat cyber threats. Policies, procedures and processes would need to be adapted to keep pace with an evolving cybersecurity environment. In this regard, workforce training and familiarisation with the use of blockchain technology and how it can be employed for cybersecurity would be essential for a secure and resilient framework.
The regulatory views on blockchain technology and digital assets are likely to considerably evolve in the future, and regulators in the Arab world appear to be several steps behind other countries in their approaches. The Arab regulatory position tends to be more conservative and hostile towards these technologies, and seem to favour the approach of restriction and prohibition. It should be said that regulation does not necessarily need to be understood in the context of restrictions and limitations being placed on the use of cryptocurrencies and blockchain technology. Instead, in considering a broader meaning of the regulatory process, blockchain regulation should be regarded as a positive development in that it requires certain conditions which allow for genuine projects to be promoted, while fraudulent ones would be punished for fraud and violations of regulatory provisions.
Arab states need to determine whether they wish to promote blockchain technology in a pragmatic way to secure a share in the market, and be important actors in the development of a ‘smart’ world. Failure to do so presents the risk of falling behind long term and opening a competitiveness gap which would be difficult to make up for in the long run, as was the case with the emergence of the internet. Ideally, Arab countries should move away from reactionary polices, and more focus on long term policies which promote technologies such as blockchain
and Artificial Intelligence (AI). This is critical as these technologies are reshaping the world, and at the moment, Arab states have the choice of being either a participant or an observer during this process of evolutionary change.