Cryptocurrency Regulations, Spot Bitcoin ETF, and the UAE’s Leadership in the Industry
Ward Ferraye
Managing Director and Governance Risk and Compliance Advisor at Artemis Consultancy - ACAMS Certified Member
The US Securities and Exchange Commission (SEC) has been the only regulator in the world to use enforcement and litigation actions against companies as a way to regulate cryptocurrencies in the country, rather than creating new rules, regulations, and guidelines for the market to follow.
At first, in December 2020, the SEC sued companies such as Ripple Labs Inc. which it accused of selling unregistered securities. The fact is that the company sold a digital asset called XRP, which does not even satisfy the four prongs of the Howey Test, the 1940s precedent laid down by the U.S. Supreme Court[1], which defines what a security is. [1] These prongs are:
1.?????? It is an investment of money.
2.?????? There is an expectation of profits from the investment.
3.?????? The investment of money is in a common enterprise.
4.?????? Any profit comes from the efforts of a promoter or third party.
Later, on June 6 2023[2], the SEC began hunting the bigger fish and sued Coinbase, the largest cryptocurrency exchange in the United States by trading volume. The SEC alleged that the- “cryptocurrency trading platform was simultaneously operating as a broker, an exchange and a clearinghouse for unregistered securities”[2] namely, 13 different cryptocurrencies the SEC alleged met the requirements of the Howey Test.
What is astonishing is that both Ripple Labs and Coinbase had approached the SEC previously to try to get a clarity about the cryptocurrencies they would want to transact in, especially after the SEC had invited investors to “come in and register”[3] with it. However, both companies did not get any response from the SEC, and what they got instead were class action lawsuits filed against them.
Due to that lack of clarity by the SEC, investors have been leaving the USA to operate in other jurisdictions that have already established clear crypto rules and regulations, such as Asia, the Middle East, and Europe. These regions have taken the initiative to create an environment that is seen as emerging “as the next destinations for crypto to thrive, due to their progressive regulatory frameworks and real support for the digital asset industry” [4], as Calvin Shen from Blockworks noted.
The Dubai Financial Services Authority (DFSA), the regulator for the Dubai International Financial Centre (DIFC) a long-established common law financial freezone in Dubai, has published several consultation papers about crypto tokens and collected information and feedback from the DIFC community to enable the DFSA to issue clear guidelines, rules, and regulations. Currently, according to the DFSA’s rulebooks, the crypto tokens rules are clearly differentiated from securities or other types of investments [5]. The regulatory transparency, clarity, and assurance have provided encouragement and confidence to increasing numbers of crypto investors and firms who have established in the DIFC. Moreover, to respond to the cryptocurrency global demand, the UAE authorities have built Dubai’s Virtual Assets Regulatory Authority (VARA), which has issued its Virtual Assets and Related Activities Regulations 2023. Like the DIFC, Abu Dhabi Global Market (ADGM) has been a leading jurisdiction worldwide for the regulation of virtual asset activities. Its comprehensive framework facilitates the operation of industry leading virtual asset players in a business-friendly environment. The regulatory framework of ADGM addresses the full range of associated risks, including those relating to market abuse and financial crime, consumer protection, technology governance, custody, and exchange operations.
To show how different the UAE’s approach towards cryptocurrencies, in Dubai, instead of the approach of the regulation by enforcement and causing investors to lose their money, after a continuing study of the digital currencies, on November 2nd, 2023, the DFSA has published a “NOTICE OF CRYPTO TOKEN RECOGNITION” declaring XRP as a Crypto Token; in accordance with GEN Rule 3A.3.4 of the DFSA Rulebook, that recognition comes into effect from that date [6]. The Regulator and its government did not sue companies, individuals, or investors. Instead, they followed the simple and right approach of building a crypto framework and instilled its global leadership.
Similar to the lack of crypto regulatory clarity situation in the USA, crypto companies in India “flock to Dubai to escape overbearing laws at home”[7]. As the CEO of CoinDCX, Sumit Gupta said, what is making crypto firms leave India and go to Dubai is the “stark contrast in regulatory environments” [7]. The reality is that a good substitute is provided by Dubai's forward-thinking attitude and advantageous location as a global centre. The city continues to create an atmosphere that is favourable to the expansion and innovation of the cryptocurrency sector.
2023 and 2024, the light at the end of tunnel in the USA
Finally, and after nearly three years of litigation, the 13th of July 2023 marked the end of that infamous lawsuit between Ripple Labs Inc. and the SEC and gave the first ever win to a crypto-related firm. The US district judge Analisa Torres ruled that 8“XRP is not in and of itself a contract, transaction, or scheme”. Further, Judge Torres said that sometimes, when applying the Howey test, one could have [3] “intangible assets [that] can serve as the subject of an investment contract even when that asset was not itself inherently an investment contract.” What that means is that a certain product could be non-security, like an orange, but could be packaged and sold by a company in a way that meets the definition of an investment contract. Nevertheless, that wouldn’t make oranges themselves securities. Also, the court’s ruling of deeming XRP to not be a security included all [8] “Programmatic sales, where XRP was offered to public buyers, and Other Distributions, where people were given XRP for free”. “Programmatic sales” are the selling of a digital asset on exchanges and “other distributions” are the ones given to employees and grantees. The end of this lawsuit has reigned in a cautious the beginning of a new era for the US cryptocurrency industry, filled with optimism.
As a result of the global cryptocurrency victory, [9] XRP jumped 96% reaching as high as 93 cents at one point. With that price recovery, many cryptocurrency market participants recovered the losses of their lifetime savings which had been wiped out by the SEC actions; the same SEC whose objective is to protect investors. ?
What is more crucial is that the victory has triggered the congressional committee to successfully pass a crypto bill on Wednesday, July the 26th. The crypto bill is a [10] “bipartisan bill that aims to develop a regulatory framework for cryptocurrencies, a milestone for Capitol Hill in its efforts to codify federal oversight for the digital asset industry”, as reported by Reuters. The House Financial Services Committee passed a bill that would help distinguish whether a cryptocurrency is a security or a commodity. The bill also helps the CFTC expand its supervision and oversight of the crypto industry, while clarifying the SEC jurisdiction, “as many crypto advocates complain of the agency’s perceived overreach” [10].
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Further, on January 10, 2024, and after a much-awaited period of time, the SEC approved a spot Bitcoin ETF (exchange-traded funds) for BlackRock, Fidelity, and [11] other applicants [11]. As this is also backed by Wall Street, this approval is considered to be a “key regulatory step expected to drive significant investment in the digital currency”. The spot ETF will give investors an exposure to Bitcoin without the need to hold it. It is now therefore, expected that billions of dollars will pump “into the digital currency by making it easier and less intimidating to invest” [11].
That said, the change of the appetite for crypto in the USA is quite noticeable. That will in turn impact the whole world since the US economy is the largest. With the SEC approving the spot Bitcoin EFT along with the clarify of the crypto regulations that the UAE offers, the sky is the limit.
8 SDNY Issues Split Decision in SEC v Ripple Labs, Potentially Complicating Analysis of When Crypto-Tokens Will Be Treated as Securities | Morrison Foerster ( mofo.com )
9 Ripple’s XRP Token Price Surges 96% After Court Rules XRP Sales Aren’t Investment Contracts ( coindesk.com )