DFSA sounds alarm on cryptocurrency fraud as UAE regulators consult on technology guidelines

Proposed guidelines issued by the four regulators cover everything from cloud server location to potential AI bias and identifying blockchain users

A visitor shakes hands with Pepper the robot in Dubai. The UAE's four main financial regulators jointly published a consultation paper on proposed new rules governing the use of technology in financial services. Reem Mohammed / The NationalShow less

The Dubai Financial Services Regulatory Authority’s managing director urged investors to be wary of cryptocurrency fraud as the UAE’s main regulatory authorities teamed up to unveil a joint consultation exercise on the use of technology in financial services.

"Obviously, there are lots of things out there at the moment that are new and possibly not trustworthy," Peter Smith, the DFSA's head of strategy, policy and risk, told The National.

“There have been some examples in recent weeks around some scams and so on in the innovative area of the financial sector but what we are trying to do here is to say use these technologies, use them wisely and it is for the benefit of everybody if you do that.

"I think the message for consumers at the moment is ‘be careful’, because there is an awful lot of stuff out there that is not regulated at all, including nearly every cryptocurrency,” he said.

On Friday, the Dubai government issued a warning about cryptocurrency fraud after false statements linking it to involvement with the Dubai Coin were circulated.

On Friday, the Dubai government issued a warning about cryptocurrency fraud after false statements linking it to the Dubai Coin were circulated.

Regulation of security tokens and cryptocurrencies is at different stages among the UAE’s authorities, with the Abu Dhabi Global Markets licensing a couple of cryptocurrency exchanges.

However, the Central Bank of the UAE reaffirmed in December that it does not accept or acknowledge any cryptocurrency in the country, where the only legal tender remains the UAE dirham.

In March, the Securities and Commodities Authority issued regulations on security tokens that tokenise existing assets such as stocks and bonds.

The DFSA recently concluded its own dialogue on security tokens and will begin consultation on cryptocurrencies during the third quarter, said Mr Smith.

“We all see in the marketplace at the moment this tension between people often being aware that things are not regulated, but there is this fear of missing out – certainly among some age groups – that drives people to invest [or] speculate on things that they probably should not," he said.

"We have put out messages about the dangers of these scams. We will continue to put out these messages, as do some of the other regulators.”

The consultation document issued jointly by the four regulators yesterday covers everything from APIs – interfaces that allow FinTechs to work with banks’ software – to artificial intelligence, big data, biometrics, cloud computing and distributed ledger or blockchain technology.

Proposed guidelines – which are expected to be issued in the second half of this year – will cover everything from evaluating whether data centres are located in countries that are deemed suitable to store customer data to transparency around AI and big data use, as well as ensuring that participants in permissionless blockchain networks can be identified to prevent criminal activity such as money laundering or terrorism financing.

“It is – I think – the first time that all of the regulators in the UAE have come together to produce something like this. And it is because we all recognise the fundamental importance of technology in the businesses that we are dealing with,” said Mr Smith.

“We have all said slightly different things publicly on technologies and how they should or should not be used. I think there is just a recognition that we have got to set a baseline of what we regard as best practice. It is in nobody’s interests for firms dealing with more than one of that group of regulators to have different stories or different requirements to meet.”

Although most of the technology platforms the group intends to regulate are already in use, there is a danger in trying to govern them too soon, he said.

“It is always a challenge. You want to regulate things but if you do not know how to regulate them, you are giving people false comfort.”

For instance, there have been some major steps forward in AI use over the past two years but this has also been accompanied by a growing debate around potential biases of algorithms.

“We know a lot more now about the things that firms need to think about,” said Mr Smith.

Similarly, if regulators had attempted to tackle initial coin offerings a few years ago, these would now be outdated given the changes that have taken place in the market, he said.

“We only want to license people to do things that we think we understand ... and we think we can supervise properly.”