Legal Compliance & Taxation Outlook of the Middle East - Espay Exchange

2. Introduction Middle East • The industry of Blockchain and Cryptocurrency, after gaining significant impact over the economics of the world, has reached a very crucial point. The global market is not evolving fast enough to deferring large financial for blockchain and Cryptocurrency and preventing major companies to support their claims. Some of the development had made investors progressively familiar with this fact that they must not take any using or buying digital currency decisions for granted. • Undoubtedly, economic experts are confident about the hidden potential and power of this Cryptocurrency. Everyone is aware of the fact that it can bring solutions to many real-time issues and will earn its place in our everyday lives. • However, some popular events occurred in 2018 had turned the global eyes to the Middle East in regards to the development of Cryptocurrency. The event that earned the first place in the list is the launch of Emirates Blockchain Strategy 2021 in UAE in April 2018. This event highlighted the aim of the government – to switch 50 percent of their transactions onto the blockchain. With this significant change, UAE will be capable of saving 77 million working hours every year and 11 billion in transaction costs.

3. Introduction Middle East • Two Popular Jurisdictions in the Middle East • There are two jurisdictions present in the Middle East that have sought to codify regulations of crypto exchanges, white label cryptocurrency exchange companies, crypto assets, and related businesses.  • The Abu Dhabi Global Market (ADGM) – A free zone in the Emirate of Abu Dhabi in the United Arab Emirates • The Kingdom of Bahrain

4. ADGM • ADGM has managed to be the first regulator in the region and has issued Guidelines on Regulation of ICOs and virtual currencies on 9 October 2017. And on 25 June 2018, this jurisdiction has also issued guidelines on Regulation of Crypto Asset Activities. • The ADGM is currently licensing crypto-asset exchanged and has managed to become the first jurisdiction in the UAE to permit such a license. • However, opening a crypto-asset exchange in the ADGM is time-consuming, complicated, and expensive. ADGM aims to set the highest standard for crypto-asset regulation in the Middle East. • The authorization fee for crypto-asset exchange is $125,000. Additionally, license holders have to pay $60,000 per year as a supervision fee. ADGM

5. The Kingdom of Bahrain • Middle East Bahrain has already launched several initiatives, including Central Bank of Bahrain Regulatory Sandbox (launched in May 2017), and Bahrain FinTech Bay – a fintech ecosystem established on 30 Aug 2018. • In February 2019, Bahrain managed to become the first Middle Eastern country that published regulations on crypto assets in the form of a crypto module of the Bahrain Rulebook’s Central Bank. This Bahrain or directive governs matter regarding compliance, licensing, risk mitigation, security, and issues licenses for several regulated crypto asset services.  • Now, let’s discuss crypto regulations in different regions. Bahrain

6. Bahrain • Crypto Regulatory Sandbox– 30 companies are approved by the Central Bank of Bahrain (CBB) for its regulatory sandbox; half of them are Cryptocurrency service providers including exchanges. The Bahraini Regulatory Sandbox permits companies to test their technology-based innovations solutions that are relevant to fintech or the financial sector. • In Bahrain, the governor of the Central Bank has issued a warning against cryptocurrencies like bitcoin. A significance parliamentary session took place in the Shura Council, the governor of the Central Bank announced that the bitcoin is not recognized by any sort of financial institution. He also declared that using bitcoin in Bahrain is not legal; nonetheless, Bharani citizens have the right to make investment in cryptocurrencies outside the limits of Bahrain.  • Trading Ban – No • Banking Ban – NO • Tax Haven Region- No • Best Place for License- No Bahrain

7. Egypt • Crypto Regulatory Sandbox: In January 2018, the Central Bank of Egypt also issued a warning against the buying and selling of the cryptocurrencies, like bitcoin. The major reason behind the issuance of this warning was the highest risk associated with Cryptocurrencies. The Central Bank of Egypt declared an EGP 1 Bill Fintech fund and regulartory sandbox (Innovative Financial Technology Application Lab for new applications). The Central Bank of Egypt also stated that commerce within the Arab Republic of Egypt is limited to the authorized paper currencies permitted by the Bank. • Trading Ban – only allows licensed Cryptocurrency companies • Banking Ban – NO • Tax Haven Region- No • Best Place for License- No since many regulatory laws are still unclear Egypt

8. Iran • Crypto Regulatory Sandbox: On April 22, 2018, The Central Bank of Iran declared that it is forbidden the handling cryptocurrencies by every Iranian Financial Institution, including credit institutions and banks. The Central Bank also banned currency exchanges from trading virtual currencies or adopting measures to promote and facilitate them. • This decision made by the bank cause many difficulties for many individuals or financial institutions who thought virtual currencies can be a solution for the business industry and international sanctions. They also thought virtual currencies can help in shaping the future of banking especially when such currencies are transparently and precisely regulated so that people in the country can be stopped from trading them fraudulently and secretly. • Before the ban was declared, the IT chief of The Central Bank had reported that the Central Bank had considered the adoption of a national virtual currency, either to be made by the Bank or other entities. The major motivation for establishing such a currency was that it could be used as a replacement for the US dollar. • Trading Ban – Yes • Banking Ban – Yes • Tax Haven Region- No • Best Place for License- No Iran

9. Israel • Crypto Regulatory Sandbox: The supervision by Israel on regulated Financial Services Law requires individuals that are engaging in offering services involving financial assets to get a license from Financial Services’ Supervision. Virtual Currency is incorporated in the definition of Financial Assets. • A license will be issued to the citizen of Israel or any resident who has managed to reach the age of majority, is lawfully competent, and has not been announced bankrupt or, is not needed to dissolve in the case of a corporation. • Some additional prerequisites for licensing comprises that the license has a minimum amount of equity and, if a person, has not been condemned of a crime that due to its nature makes the license incompetent to handle financial transactions. • The Bank of Israel also issued a statement on February, 19, 2014, which warned the public against the handling of virtual currencies. This warning was able to lay out the risks associated with buying and selling in virtual currencies, including money laundering, fraud, and financing of terrorism, between others. • Trading Ban – No • Banking Ban – No • Tax Haven Region- No • Best Place for License- Yes, you can easily get a crypto exchange license in Israel Israel

10. UAE • Crypto Regulatory Sandbox: In a bid to become a leader in blockchain technology, the UAE launched the UAE Blockchain Strategy 2021 – pursuant to which 50% of government transactions will be conducted using Blockchain technology by 2021. The Financial Services Regulatory Authority has become the first regulator in the UAE that issued detailed guidance and regulations based on carrying out Cryptocurrency related activities. The FSRA also issued supplementary guidelines to regulate ICOs and virtual currencies. • In 2017, The Central Bank of UAE issued stored value regulations. According to these regulations, all types of virtual currencies and their transactions are prohibited in UAE. All types of currencies and bitcoin that could be used as a medium of exchange are defined as a virtual currency in the regulation of Central Bank. Nonetheless, there is no definition for the functionality of virtual currency as a currency, security, or commodity. • The governor of the Central bank stated that currencies like Bitcoin do not come under these regulations. According to the governor, a digital unit can be used as a medium to exchange and any kind of stored value can be described as Virtual Currency. Therefore, these regulations can not apply to bitcoin or any other cryptocurrencies. UAE

11. UAE • Trading Ban – No • Banking Ban – No • Tax Haven Region- No • Best Place for License- Yes • Currently, Cryptocurrency has managed to gain support in the Middle East and the desire for the innovation of this technology is progressively growing. This region has opportunities and the potential to become a big player in advancement in this technology and to lead the way for its regulation that offers immense benefits to all. • In the Middle East, a strong foundation is laid in the first ten years of blockchain technology and Cryptocurrency. Especially, in the UAE, a skilled workforce and vast resources will be used to drive the future of the crypto. UAE

12. Crypto Taxation Outlook • One of the most significant questions that come from permitting investments in and the usage of cryptocurrencies is the problem of taxation. In this situation, the major challenge arises to be how the cryptocurrencies and specific activities can be categorized for the purpose of taxation. This is important because whether profits made from selling or mining cryptocurrencies are categorized as capital gains or income consistently finds out the application tax bracket. • According to a survey, Israel has categorized cryptocurrencies differently for tax purposes. Israel has managed to tax Cryptocurrency as an asset. • Even though virtual currencies are not acknowledged as actual currency by the Bank of Israel, the Israel Tax Authority has planned that the utilization of cryptocurrencies must be defined as a “means of virtual payment” and should also subject to taxation. • Particularly, for the main idea of income tax and value-added tax prerequisites, virtual currency is considered as “an asset” and is taxed according to the appropriate transaction classifications under the Income Tax and the Value Added Tax Law, 5736-1975. • The Israel Tax Authority needs trade transactions’ documentation including virtual currency to facilitate authentication of their existence as well as scope.

13. Final Thoughts • Whether you are planning for establishing a white label crypto exchange software development company or a centralized trading development in the Middle East, you must know about compliance and taxation outlook in this region. This article will give you a better understanding of legal regulation and taxation in the Middle East.

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