Fintech: A panacea for economic growth?

The UAE: Pioneering Tech-Innovation via Blockchain applications

The United Arab Emirates (“UAE”) has proven to continuously build efforts to be a global frontrunner in innovative technology, endorsing its economic growth through its diversification policies. The government of Dubai proclaimed all government-related activities to be blockchain induced by 2030. Instigating tech initiatives such as Smart Dubai, a program aiding the public sector, the UAE authorities are focused on implementing innovative technology into their future affairs. Another initiative is the Dubai Metaverse Assembly, this business-driven global scheme represents the futuristic revolutionary vision by His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum and His Highness Sheikh Mohammed bin Rashid Al Maktoum. Hosting over 25 high-profile workshops and conferences, the Assembly showcased the implementation of the Dubai Metaverse strategy directed and approved by his Highness in July 2022, intending to transform Dubai into a global metaverse economy.

The immersive innovations and upscale trends in technology play a major role in improving human interaction, social transactions, and efficient communication. With continuous tech-pioneering, a pervasive computing paradigm, the ‘Metaverse’, is designed to transmute and significantly impact aspects such as education, entertainment, and remote work. Formulated to signify a perpetual and multi-dimensional universe, the Metaverse acts as an ensemble merging reality with immersive virtual spaces. A meticulously designed digital framework, it will translate as a parallel virtual equivalent, ramifying physical reality and providing inimitable experiences.

Technological backbone

In this modern-day digital world, the regulation and administration of the economic, legal, and political structures are advancing via Blockchain. Being a segment of the fourth industrial revolution on technological innovation and advancement, the imperative infrastructure required to modernize the operational processes is the application of blockchain technology. Paving the necessary structure for a flexible network, enabling numerous sectors to exchange information securely, efficiently, and without exploitation from third-party interference.

Being the technological foundation behind Bitcoin, the original cryptocurrency founded by Satoshi Nakamoto in 2009, blockchain can be considered as a digitized public ledger enabling secure and direct transactions without the interference of an external source – a shared peer-to-peer (P2P) network between various parties. Blockchain is described as an open-source, cross-border technology, offering a public history of all digital transactions categorized by blocks in a decentralized system. With each transaction being encrypted, time-stamped, traceable and immutable, blockchain dispenses the intrusion of intermediaries in the transaction process.

With the implementation of blockchain technology, the advanced applications of digital contracts, financial transactions, government benefits, regulatory and compliance, as well as healthcare processes are stored and protected in shared and transparent databases. It also assists anonymous financial transactions and decentralizes the network to allow digital currencies to be immutable and traceable. Individuals and institutions that have adopted a cryptocurrency payment gateway benefit massively, considering the absence of an intermediary such as a bank, or any financial institution.

Global applications

One of the most fundamental financial technologies (“fintech”) applications emerging from blockchain is cryptocurrency. Functioning as a type of digital currency, cryptocurrencies are used in digital transactions between users in an online market of goods and services. Albeit their correlative relationship, the mechanism of blockchain is incomparable to the speculative nature of cryptocurrency. It is essential to note that blockchain technology has proved to be successful in many sectors, offering various solutions that are safe, traceable, efficient, and transparent.

Blockchain has further advocated the use of smart contracts, offering organizations and institutions the ability to execute legally binding agreements via computer software. Enabling autonomy, smart contracts eradicate the necessity of a legal intermediary to facilitate the execution. The application of smart contracts allows complex multiparty transactions between parties, significant time and cost efficiency, and a range of sectors to utilize automation processes.

Another advancement in blockchain technology is Non-Fungible Tokens (NFTs), exemplifying digital assets representing material or creative work, or intellectual property. With digital assets such as music, digital art, and games – each digital token is categorized as non-exchangeable with another, representing a unique entity. Introducing NFTs opens new online gateways for artistic businesses to establish, creating a digital-based online market. To date, the most successful global application of NFTs can be traced back to digital artist Mike Winkelmann, with a profit of $69.3 million after the sale of his digital work in 2021. NFTs allow individuals to obtain exclusive ownership of digital assets, thereby generating revenue, convenience, and security. Dr Richard Smith, executive director of the non-profit Foundation for the Study of Cycles comments, ‘That might seem confusing to the rest of us who don’t value those things, but what it’s really demonstrating is that you can have a digital economy with digital property rights. It gives you the ability to uniquely say – I own and control this piece of the digital economy.’

Aside from the finance sector, global organizations from various fields are exploring the enhancement of processes through blockchain. In the healthcare sector, blockchain’s worth is projected to reach over $5.61 billion by 2025. For instance, the blockchain-based platform Docademic was adopted in over 20 countries and is used by both doctors and patients, offering free artificial intelligence (AI) doctor-assisted video services. In the energy sector, Grid Singularity is a blockchain-based platform optimizing the sale and purchase of energy through an energy trading portal.

Blockchain will continue to evolve. With its widespread applications in various industries, blockchain could create trust between different entities and facilitate transaction proceedings or data sharing. Another leading benefit is its security-enabled systems, creating an immutable record of transactions with end-to-end encryption, disabling activities of fraud. Blockchain could cut costs for organizations, enabling the efficient and aggregate amendment of data and auditing processes.

The legal framework

It is important to appreciate that the technical complexity of blockchain in correlation to its quick evolution poses potential legal challenges and disputes due to its innovative and decentralized nature. The UAE has initiated a regulatory framework in recognition of the utilization of blockchain in global trade and commerce. To ensure fostering and increasing cross-border transactions, the UAE has been a pioneer in conceptualizing and establishing the Virtual Assets Regulatory Authority (VARA). The VARA will regulate crypto Asset services provided in Dubai, including financial free zones and special development zones – excluding the Dubai International Financial Centre.

Another key regulatory body in the UAE is the Securities and Commodities Authority (“SCA”), an independent entity which regulates financial markets subject to Federal Decree No. 4 of 2000. The SCA offers a regulatory regime to any individual wishing to offer crypto assets in the UAE, including crypto exchanges, marketplaces, custodian services, and financial services. Any provider who wishes to offer crypto assets in the UAE must obtain a license from the SCA, ensuring compliance with counter-terrorism financing and anti-money laundering laws, data protection regulations, and cyber security compliance.

Furthermore, the development of a regulatory framework concerning businesses within fintech is essential towards testing and developing innovative technologies and business models globally. A regulatory fintech framework, also known as ‘Sandbox’, was developed in different jurisdictions per the respective criteria regarding the correlated financial market. With the greater shift toward tech-based applications, the concept of Sandboxes has developed to increase global cooperation and facilitate cross-border trade.

To be at the forefront of innovation in the Fintech space, The Dubai Financial Services Authority (“DFSA”) in DIFC issued an extensive regulatory framework regarding security tokens. As part of its efforts, DFSA launched the Innovation Testing License Programme (“ITL”), administering two cohorts a year to draw interest to a variety of global firms. Firms that have made part of the ITL Programme consist of robo-advisory and tokenization of equities and debt. Similarly, The Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market (“ADGM”) granted its fourth unit of firms into its Sandbox, ‘The Regulatory Laboratory (“RegLab”). The cohort highlights application programming interface (“API”) economies and sustainable finance. The FSRA additionally initiated regulations regarding the operation of crypto-assets activities, including exchanges and investment activities.

Accordingly, the correlation between the revolutionary prospective and implementation of blockchain technologies and established law and regulations may be challenging. Given that blockchain is an ongoing innovative technology, it is necessary to ensure its innovative space is calibrated, whilst applying the necessary regulations to protect individuals and institutions that utilize its applications while supporting the business in question to innovate and grow.

It is thus imperative for the relevant authorities leveraging these technologies to adopt a rigorous regulatory approach, emphasizing principles and elaborative guidelines to abide by. It is fundamental to ensure that no breach of limitations is tolerated, whilst safeguarding the UAE as a forefront in technological advancement and innovation.

This article was written by Senior Partner Abdulla Ziad Galadari , Senior Associate Naji Khairallah, and Intern Yara Hifni

For more details, please contact:

Abdulla Ziad Galadari 043 778100 abdulla@galadarilaw.com

Naji Khairallah 054 3564443 naji@galadarilaw.com