Mainstream adoption of crypto assets as legitimate investible assets is surging, and with increasing institutional participation. However, despite the growing adoption of crypto globally, only a few countries have started to formulate crypto tax regulations, and there is little commonality in the position of different countries.
The stunning growth in the crypto market has worried investors, particularly with regard to safeguards. Policymakers have struggled to monitor risks from this evolving sector, in which many activities are unregulated. In an environment of such ambiguity, there is a need, not yet met, for a comprehensive, consistent and coordinated regime.
Law Enacted in United Arab Emirates
Nonetheless, many economies around the globe have been working hard to cultivate an ideal framework for cryptocurrency transactions. Such countries include the United Arab Emirates (UAE) where Sheikh Mohammed bin Rashid Al Maktoum announced on his official Twitter account on March 9, 2022 that the UAE has enacted its first law to regulate crypto assets (Law No. (4) of 2022 Regulating Virtual Assets in the Emirate of Dubai). The UAE has joined jurisdictions like Singapore, the U.S., U.K., and El Salvador that have also introduced laws on cryptocurrencies.
Abu Dhabi and Dubai have also emerged as developing crypto hubs. In December last year, a specialized zone for virtual assets was set up in the Dubai World Trade Center to attract new business as regional economic competition began to grow. Strict punishments for crypto fraudsters have also been announced by the authorities in the UAE. Violators will be subject to a penalty of up to 1 million UAE dirham ($272,000), along with a jail sentence. Meanwhile, on March 9, Dubai’s crypto rules came into force, on the same day as President Joe Biden signed an Executive Order on the U.S. government’s oversight of the cryptocurrency industry (see below).
Tax Regime in UAE
The UAE imposes no tax on income earned by individuals, and corporate tax rates have been restricted to oil companies and foreign banks. However, the Ministry of Finance announced on Jan. 31, 2022 that it would introduce a federal corporate tax regime, and a federal corporate tax law is expected to be issued soon, along with executive regulations. It is expected that the corporate tax will come into effect on or after June 1, 2023.
The UAE does not levy income tax on individuals. It levies corporate tax on oil companies and foreign banks. Excise tax is levied on specific goods, which are typically harmful to human health or the environment.
The new corporate tax will apply to:
- all businesses and individuals conducting business activities under a commercial license in the UAE;
- free zone businesses (but the UAE tax regime will continue to honor the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and do not conduct business set up in the UAE’s mainland);
- foreign entities and individuals, but only if they conduct a trade or business in the UAE in an ongoing or regular manner;
- banking operations; and
- businesses engaged in real estate management, construction, development, agency and brokerage activities.
According to the Ministry of Finance, the corporate tax rates are:
- 0% for taxable income up to 375,000 UAE dirham;
- 9% for taxable income above 375,000 dirham; and
- a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to Pillar Two of the OECD Base Erosion and Profit Shifting Project.
The Federal Tax Authority will be responsible for the administration, collection, and enforcement of the corporate tax.
The UAE believes that the corporate tax will accelerate its development and transformation to achieve its strategic objectives and reaffirm its commitment to meeting international standards for tax transparency and preventing harmful tax practices.
Regulations on Virtual Assets
The law on virtual assets has been established and will be overseen and executed by the Dubai Virtual Assets Regulatory Authority (VARA). The regulation of virtual assets in Dubai will be implemented under the supervision of VARA, which will:
- serve as a dedicated regulator to oversee crypto activities and related service providers;
- be given responsibility for supervising the trading and issuing of virtual assets and virtual tokens;
- be responsible for authorizing and regulating virtual asset service providers (VASPs);
- ensure the highest standards of protection for beneficiaries’ personal data;
- monitor virtual asset transactions to prevent price manipulation;
- authorize and regulate crypto trading platforms that offer exchanges between cryptocurrencies and fiat currencies and between one or more cryptocurrencies; and
- monitor companies offering crypto transfer, custody, and management services, which will also be regulated by the new law.
The new law will apply throughout Dubai, except for the state-owned financial free zone, Dubai International Financial Center (DIFC). The regulator of DIFC, Dubai Financial Services Authority, is working on its own cryptocurrency regulation.
The UAE’s securities regulator will be the sole authority in the UAE mainland for licensing, supervising and overseeing the virtual assets activities and services issued for investment purposes. This will not include virtual assets issued for payment purposes.
Recent Developments of Crypto Framework Globally
The cryptocurrency framework and ecosystem is evolving rapidly. It has become dynamic and volatile in nature, and is subject to developments in national economies and global markets. Below are some of the key recent developments in the cryptocurrency ecosystem.
President Biden signed an Executive Order on March 9, 2022, outlining the first ever whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. The order (as set out in the accompanying White House Fact Sheet) lays down a national policy for digital assets across the following key priorities:
- protect consumers and investors;
- protect financial stability and mitigate risk;
- mitigate illicit finance;
- promote U.S. leadership in technology and economic competitiveness and the global financial system;
- promote equitable access to safe and affordable financial services;
- support responsible innovation; and
- explore a U.S. Central Bank digital currency.
The ongoing Russia-Ukraine war has had a significant impact on the crypto market. Within 24 hours of the announcement made by the Russian President on a military invasion in Ukraine, the Bitcoin price dipped to $35,000 and the crypto market’s global capitalization dropped to as low as $1.57 trillion. However, conversely, the Bitcoin price jumped to over $44,000 as the war intensified. One of Ukraine’s ministers stated on March 9 that almost $100 million worth of crypto had been sent from around the globe to support Ukrainians over the past few weeks.
Even Russia, which has been facing sanctions from all fronts, including a SWIFT ban, is considering adopting Bitcoin as a measure of exchange for international transactions. Canada, the U.S., the U.K., and the EU collectively agreed to disconnect Russian banks from SWIFT, which has caused the Russian ruble to plunge in value. Such sanctions do not appear to be lifting soon, and it is thus probable that Russia may look for an alternative in the form of crypto currencies to evade the restrictions. Though the crypto transactions do not go through the traditional financial route of being issued/controlled by a central institution, they are traceable. It will be interesting to see how crypto may be used in Russia.
In September 2021, El Salvador created headlines when it officially made Bitcoin legal tender. President Nayib Bukele, when first announcing the new Bitcoin Law in June 2021, made a promise to his citizens, stating that adopting Bitcoin would digitize the economy and decrease dependence on the U.S. dollar.
However, a survey released by the Chamber of Commerce and Industry of El Salvador in March 2022 reported that 86% of the businesses contacted said they had never conducted a transaction using Bitcoin. It has also been reported that “Interviews with dozens of Salvadoran citizens, economists, and technology developers reveal cracks in the project. Since launching, the initiative has been plagued with technical glitches, while tensions have arisen from the mismatch between Bitcoin’s decentralized ethos and El Salvador’s authoritarian government.”
Some forecast that the plan to make Bitcoin legal tender will crumble, possibly due to poor policies and their execution. It is too early to comment, but the next few months are crucial to assessing how Bitcoin fares as legal tender in El Salvador.
The Road Ahead
The Financial Stability Board, which consists of regulators, central banks and finance ministry officials from the G-20 economies, is looking at what needs to be done with crypto assets such as Bitcoin and stablecoins. Regulators may not have been proactive in respect of the fast-evolving cross-border world of crypto assets, but they could come up with the first global framework of rules within months, according to a statement by a senior official.
Although we may still have to wait for the regulations to be presented to the general public, the International Monetary Fund has laid down some key elements that the framework must have:
- A framework of licensing, registering and authorizing of crypto-asset service providers that deliver critical functions should be developed. Licensing and authorization criteria should be crystal clear, the responsible authorities should be clearly designated, and coordination mechanisms among them well defined.
- Requirements should be tailored to the main use cases of crypto assets and stablecoins. For instance, services and products for investments should have requirements similar to those of securities brokers and dealers, overseen by the securities regulator. Services and products for payments should have requirements similar to those of bank deposits, overseen by the central bank and/or the payments oversight authority. Regardless of the initial authority for approving crypto services and products, all overseers should coordinate to address the various risks arising from different and changing uses.
- Authorities must provide clear requirements on regulated financial institutions concerning their exposure to and engagement with crypto. For example, the appropriate banking, securities, and pension regulators should stipulate the capital and liquidity requirements and limits on exposure to different types of these assets and require investor suitability and risk assessments.
Cryptocurrency defines a new phase of technology-driven markets that have the potential to disrupt conventional market strategies, longstanding business practices, and established regulatory perspectives—all to the benefit of consumers and a broader macroeconomic efficiency. It carries the groundbreaking potential to allow consumers access to a global payment system—anywhere, anytime—in which participation is restricted only by access to technology.
The discussion is no longer one of whether cryptocurrency will survive, but rather how it is going to evolve—and when it will reach maturity and finally become “Digital Gold.”
It is clear that crypto is here to stay and economies across the world need uniform, clear, and progressive crypto tax regulations. The road is long and winding, but one thing is certain, we will continue to see further developments in the crypto world from key economies.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Anshu Khanna is a Partner with Nangia Andersen LLP, a member firm of Andersen Global.
The author may be contacted at: email@example.com