Due to the rapid rate at which the global financial system is changing, the UAE Central Bank has been making a number of bold decisions recently in order to safeguard the country’s monetary interests. For instance, it recently capitalised on the low gold rate, deeming this particular precious metal a safe asset regardless of future market fluctuations.
However, in January, the UAE Central Bank appeared to take action to ban the use of all virtual currencies – a move that drew big headlines and caused concerns that it would put the breaks on growth of the fintech sector in the UAE.
Yet it now emerges that this isn’t the case, with the bank confirming that there is no such ban on virtual currency.
So, what exactly is the position on virtual currency – and what is the debate on digital tender?
Why did people think the UAE had banned virtual currency?
The stories of a ban on the likes of Bitcoin came from a new framework on digital payments that was published by the UAE Central Bank on January 1.
That framework stated ‘all Virtual Currencies (and any transactions thereof) are prohibited’ and defined these virtual currencies as ‘any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value’.
People took this to mean that Bitcoin and other digital currencies were banned by the bank and this prompted a statement from governor Mubarak Rashed Khamis Al Mansouri on February 1.
He clarified: “These regulations do not cover ‘virtual currency,’ which is defined as any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value. In this context, these regulations do not apply to Bitcoin or other digital currencies, currency exchanges, or underlying technology such as blockchain.”
He added that new regulations for digital currencies will be reviewed and issued at a later date.
Why are some people worried about virtual currency?
Some commentators feel that virtual currencies are unsafe. They are not created within the central bank’s system and they are not subject to supervision or follow-up and could therefore facilitate money-laundering efforts.
Despite the fact that other countries allow the circulation of currencies like Bitcoin and have even installed specially designed ATM machines to deal with transactions, there is a fear that the money could vanish at any time, lead to massive losses, and adversely affect the overall financial system.
Issues with virtual currencies
One of the biggest stumbling blocks with virtual currencies is that their developers and dealers are often unknown, while the process of purchasing and selling takes place behind closed doors. As a result, valuations and transactions may turn out to be fake.
To give an example, the price of Bitcoin has been known to jump from $300 to $1,200 rapidly, before plummeting to under $700 and then settling at around $1,000. This would cause huge losses for some customers and massive gains for others.
With some virtual currencies, there is no way of knowing who controls the market either and any attempt to find out could prove unsuccessful. Therefore, unless you have an in-depth understanding of how transactions take place, you are at the mercy of uncontrollable factors.
The future for digital currencies
This is an issue being discussed in countries right across the globe. Sweden’s plan to introduce the “ekrona” comes straight from the country’s central bank Riksbank and would give consumers direct access to their own money, only in virtual form.
However, some of the same issues exist, with Riksbank’s deputy governor Cecilia Skinglsey stating that things like traceability, delivery method, and interest on e-money will all need to be examined before any project is launched.
Despite the recent confusion in the UAE, it actually wants to play a key role in the development of blockchain – the digital ledger in which transactions with the likes of Bitcoin take place. Indeed, it actually wants to be the first government to complete all of its transactions with this technology.
Although there is a debate about this technology, there are also hopes that it will play a big role in the future of currency – especially since it could be seen as an environmentally friendly alternative to printing notes and making coins.
With this technological case in mind, it would be wrong to assume that the UAE is going to turn against digital currencies any time soon – quite the opposite in fact.