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What are the legal risks investors need to watch out for when investing in virtual assets? Image Credit: Shutterstock

Dubai: With the rise in popularity of digital investment assets like cryptocurrencies and the UAE approving a law to regulate virtual assets, there is a rising demand for clarification on the legal ramifications when investing in this new investment class.

What are classified as virtual investment assets?
A virtual asset is a representation of currency in some environment or situation. In this context, currency can be defined as either a medium of exchange or a property that has value in a specific environment, such as a video game or a financial trading simulation exercise.

Blockchain, Bitcoin, crypto assets, virtual currencies are words that form a whole new vocabulary describing innovative technology to swiftly transfer value around the world. The fast-evolving blockchain and distributed ledger technologies have the potential to radically change the financial landscape.

New laws on virtual assets are being made worldwide

Regulators, tax officials, and central banks all around the globe are trying to promulgate appropriate laws on virtual assets to regulate and tax activities in this space.

Kokila Alagh

While institutional and retail investors can earn a lot of money by investing in virtual assets, they can also risk breaking the law when purchasing and liquidating virtual assets.

People who invest in cryptocurrencies have to think carefully about how the government taxes them and whether the virtual assets they hold are likely to have any regulatory concerns.

Regulators, tax officials, and central banks all around the globe are trying to promulgate appropriate laws on virtual assets to regulate and tax activities in this space.

Are UAE investors’ money protected when buying digital assets?

The UAE on Wednesday approved a law to regulate virtual assets, and set an independent regulatory body to oversee the implementation of the law. The Dubai Virtual Assets Regulatory Authority, an affiliate of the Dubai World Trade Centre, will oversee and monitor regulations and disclosures.


In the UAE, operating a virtual asset exchange that provides custody to investors’ virtual assets, manage them and arranges deals in virtual assets, legally fall under the ‘regulated activity’ in the country.

They require approval from a regulator in the mainland or free zones such as the Abu Dhabi Global Market (ADGM), Dubai International Financial Centre (DIFC) and the Dubai Multi-Commodities Centre (DMCC).

The regulations and rules that are in place in the UAE require authorised entities to disclose various details and fulfil certain applicable requirements in order to engage in activities relating to virtual assets.

Under law, any person or legal entity cannot be a virtual asset service provider without a license or being registered in the UAE. The law calls for imprisonment for no less than six months or a penalty of Dh200,000 to Dh5 million, or both combined, of anyone who is not registered or licensed in the UAE.

The laws in the UAE protect investments that apply to tokens that are offered in or from the UAE. The investors can seek legal and judicial recourse under existing and specific regulations regarding virtual assets to exercise their rights as provided by the tokens or against a company.

Can investing or trading in virtual assets land you in trouble?

Trading virtual assets often means holding virtual assets in an exchange’s account or digital wallet hosted by various service providers.

What is a digital wallet?
A digital wallet, also known as e-wallet, is an electronic device, online service, or software program that allows one party to make electronic transactions with another party bartering digital currency units for goods and services.

According to the applicable local laws, all investors may be required to report the foreign account to the government as per the filing requirements regarding foreign bank accounts, including virtual asset holdings if captured by the regulation.

Ishan Pandey

Therefore, investors should perform due diligence on digital wallets that store their virtual assets. Due to the lack of regulations, these wallets may be operated by unlicensed private companies.

As a result, the virtual assets may not be insured and the company shall not be liable for any financial losses incurred by the customers, including the use of the wallet for illegal activities.

Due to this, the regulators may not be able to provide a safety net to the customers in case of a hack or if the company goes into liquidation or defrauds its customers.

Can investing or trading in virtual assets land you in trouble?
How can criminals misuse virtual assets?
Despite the potential of the fast-evolving blockchain and distributed ledger technologies, their speed, global reach and above all - anonymity - also attract those who want to escape authorities’ scrutiny.

Since the tech’s inception just over 10 years ago, virtual assets have become widely available and have started to be used as payment products. However, without established regulation and oversight, the sector is often still referred to as the ‘wild west’ of the finance industry.

In 2017, the ‘Wannacry’ ransomware attack held thousands of computer systems hostage until the victims paid hackers a ransom in Bitcoin.

The cost of the attack went far beyond the ransom payments, it resulted in an estimated $8 billion (Dh30 billion) in damages to hospitals, banks and businesses across the world. Other ransomware attacks have happened since and appear to be on the rise.

Criminals use tactics to mask payments unlawful origin

Criminals utilise several tactics to mask payments’ unlawful origin, utilising virtual assets for laundering. The most basic kind of virtual asset-related money laundering relies heavily on the fact that virtual assets transactions may be anonymous. This is where illegal cryptocurrency tumblers come to play.

What is a cryptocurrency tumbler?
A cryptocurrency tumbler or cryptocurrency mixing service is a service offered to mix potentially identifiable or ‘tainted’ cryptocurrency funds with others, so as to obscure the trail back to the fund's original source.

So tumblers or crypto mixing services break up the laundered virtual assets obtained from hacks or other criminal activities.

Tumblers transmit it to several different addresses before recombining it. In most incidents of virtual assets laundering, the virtual asset begins in a legal crypto wallet on the publicly accessible Internet or non-dark web, commonly known as ‘Clearnet’.

After numerous trips, it gets transmitted to a dark web wallet and then to a secondary dark web wallet. After these processes, the virtual assets are now clean enough to be brought back up to the Clearnet, where they may be exchanged on a genuine virtual asset exchange or sold for cash.

How can crypto investors combat such criminal risks to their investments?

Therefore, investors must perform due diligence when purchasing virtual assets either in cash or through an over-the-counter (OTC) desk to ensure that the virtual assets do not pose any money laundering risks.

This can be done by using various virtual assets based anti-money laundering tools such as AMLBot, Elliptic and ChainAnalysis.

Purchasing or selling tainted or laundered virtual assets may land investors in a legal problem with anti-money laundering authorities as the act may fall under aiding and abetting money laundering, which is a severe offence globally.

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How can crypto investors combat such criminal risks to their investments?

Beware: With an unregulated virtual assets exchange, your funds are never safe

Unregulated and unlicensed virtual asset exchanges are risky and may cause billions in investor losses. For instance, Thodex, a Turkish virtual asset exchange, in April 2021, had defrauded investors where the CEO of the exchange allegedly took $2 billion (Dh7.35 billion) of customer’s funds with him.

Stories like these are not rare but common occurrences in the industry, mainly because such virtual assets exchanges are not licensed and regulated. Regulated virtual assets exchanges that control or hold client assets have higher capital requirements and are monitored by the regulators closely.

Further, the identities of the key senior management are in the public domain. This is not the case with unregulated virtual asset exchanges, which are neither monitored nor have an insurance fund that may pay investors in the case of a hack.

Further, unregulated virtual asset exchanges are an excellent avenue for criminals to launder virtual assets mixing tainted or dirty virtual assets with a common hot wallet, mixing the trial of virtual assets.

Due to this, users who withdraw virtual assets from these unregulated exchanges may receive laundered virtual assets without their knowledge as they have been mixed with the digital wallet maintained by the unregulated exchange.

Bottom line?

Virtual assets have emerged as a new asset class. However, due to the technology underpinning virtual assets, they are different from shares, bonds, commodities or other forms of traditional assets.

Therefore, when investing in virtual assets, investors must perform due diligence on the exchanges, take advice on their respective government treats virtual assets and determine whether the virtual assets they are purchasing is not tainted or dirty in any shape or form.

Performing these controls shall allow an investor to securely navigate the virtual assets space.