UX Failures in Cross-Chain Bridges: When Users Become the Weakest Link

Introduction

In the global cryptocurrency industry, a fundamental reality creates both opportunity and complexity: digital tokens have no universal legal classification. The same token can be deemed a security in one jurisdiction, a virtual asset in another, and a payment instrument in a third. For blockchain projects navigating international markets, understanding these jurisdictional differences is not merely helpful — it is essential to legal compliance and business viability.

This article examines how three major jurisdictions — the United States, the United Arab Emirates, and Singapore — classify and regulate the same crypto tokens. By comparing their approaches, crypto projects can better understand the multi-jurisdictional compliance landscape and make informed decisions about where to establish operations.

The United States: The Howey Test and Securities Law Approach

The U.S. Securities and Exchange Commission (SEC) determines whether a crypto token constitutes a security by applying a legal framework established in SEC v. W.J. Howey Co. (1946). Under this precedent, a security exists when there is an investment contract, which the Supreme Court defined as an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others.

The Four-Prong Howey Test

The Howey Test consists of four elements:

1. An investment of money (or something of value)
2. In a common enterprise (pooling of funds or collective effort)
3. With a reasonable expectation of profits
4. Derived from the efforts of others (reliance on a promoter, developer, or third party)

If all four elements are present, the token is classified as a security and must comply with federal securities laws, including registration with the SEC or qualification for an exemption.

Enforcement-Driven Regulation

The SEC does not have specific statutory provisions addressing cryptocurrencies. Instead, it applies existing securities laws to digital assets through an enforcement-driven approach. This regulatory-by-litigation strategy has created significant uncertainty for crypto projects operating in the United States.

A landmark case illustrating this approach is SEC v. Ripple Labs. The SEC alleged that Ripple Labs conducted an unregistered securities offering by selling XRP tokens. Rather than declaring XRP categorically a security or non-security, the court adopted a transaction-specific analysis. The court held that institutional sales of XRP — made directly to sophisticated investors under written agreements — constituted investment contracts because purchasers had a reasonable expectation of profit based on Ripple’s ongoing development efforts.

In contrast, the court found that programmatic sales of XRP on secondary markets did not satisfy the Howey Test. Purchasers in these transactions often did not know whether XRP was being sold by Ripple or another market participant and therefore could not reasonably rely on Ripple’s managerial efforts.

Key takeaway: The U.S. focuses on the economic reality of each transaction and the investment intent of purchasers. The same token can be a security in one context and not a security in another, depending on how it is sold and marketed.

The United Arab Emirates: VARA’s Virtual Asset Framework

The United Arab Emirates has adopted a different regulatory approach, shaped by its unique economic structure. The UAE operates multiple special economic zones, each with its own regulatory authority. For Dubai mainland, the Virtual Assets Regulatory Authority (VARA) governs crypto and digital asset activities.

VARA’s Broad Definition of Virtual Assets

According to Article 2 of the VARA Law, a Virtual Asset is defined as:

“A digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes, but does NOT include Fiat Currency or a digital representation of Fiat Currency.”

This definition has extremely broad coverage and captures nearly all crypto tokens, including Bitcoin, Ethereum, utility tokens, governance tokens, and even many NFTs. Unlike the SEC’s approach, VARA does not require proof of investment intent or reliance on the efforts of others. If a token is a digital representation of value that can be traded or transferred, it falls under VARA’s jurisdiction.

Virtual Assets vs. Fiat-Referenced Tokens

VARA further classifies tokens into two main categories:

1. Virtual Assets (VAs): Digital tokens that can be traded or transferred, including Bitcoin, Ethereum, Solana, and most altcoins.

2. Fiat-Referenced Tokens (FRTs): Stablecoins pegged 1:1 to fiat currencies such as USD or AED. Examples include USDT and USDC. FRTs face additional regulatory requirements beyond standard Virtual Assets, including:

• Reserve backing (100% collateralization)
• Regular attestations proving reserves
• Redemption rights for users
• Enhanced consumer protection disclosures

High Capital Requirements

VARA requires minimum paid-up capital of AED 50 million (approximately $13.6 million USD) for companies operating crypto exchanges and custody services, among the highest capital requirements globally. This substantial barrier to entry reflects VARA’s emphasis on financial stability and consumer protection, but it also limits access to well-capitalized firms.

VARA uses an activity-based licensing system. Licenses are issued based on the specific services a company provides, such as exchange services, custody services, transfer services, advisory services, or token issuance.

Key takeaway: UAE regulation is broad, clear, and activity-based. Nearly all crypto tokens are regulated as Virtual Assets, with additional requirements for stablecoins. The high capital threshold makes UAE licensing accessible primarily to established firms.

Singapore: MAS’s Digital Payment Token Framework

Singapore has emerged as the most crypto-friendly major financial center globally, largely due to its clear and proportionate regulatory framework. The Monetary Authority of Singapore (MAS) regulates digital assets under the Payment Services Act (PSA), which came into force in January 2020.

MAS’s Token Classification System

MAS divides digital tokens into three categories:

1. Digital Payment Tokens (DPTs): Tokens that function as a medium of exchange or store of value, but are not securities or e-money. This includes Bitcoin, Ethereum, and most utility tokens.

2. Securities Tokens: Tokens that constitute securities under the Securities and Futures Act, such as tokenized equity, debt instruments, or units in a collective investment scheme.

3. Excluded Items: Non-regulated tokens, including in-game currencies (non-withdrawable), traditional loyalty points, and certain NFTs used purely for collectibles.

The DPT Framework

A Digital Payment Token is defined as any digital representation of value (other than excluded items) that is expressed as a unit, is not denominated in any currency, and is intended to be a medium of exchange accepted by the public for payment of goods or services or the discharge of a debt.

Most cryptocurrencies fall into the DPT category unless they are clearly structured as securities. MAS takes a functional approach: if a token primarily serves as a means of payment or transfer, it is a DPT. If it represents ownership, debt, or investment rights, it may be a securities token.

Lower Barriers to Entry

Singapore has significantly lower capital requirements than the UAE. MAS requires minimum capital of SGD 1 million (approximately $740,000 USD) for DPT service providers operating exchanges and custody services. This is 18 times less than VARA’s requirement, making Singapore more accessible for startups and mid-sized crypto firms.

Principles-Based Regulation

Singapore’s regulatory approach is principles-based rather than rules-based. MAS establishes regulatory objectives (such as AML compliance, consumer protection, and market integrity) and allows firms flexibility in how they achieve those objectives. This contrasts with the UAE’s prescriptive requirements and the U.S.’s enforcement-driven model.

Key takeaway: Singapore offers the clearest, most predictable, and most innovation-friendly regulatory framework. Most crypto tokens are classified as DPTs unless they function as securities. Lower capital requirements and principles-based regulation make Singapore the preferred jurisdiction for many crypto firms.

Comparative Case Study: How XRP Is Classified Across Jurisdictions

XRP, issued by Ripple Labs, provides a clear example of how jurisdictional differences create regulatory complexity. The same token receives entirely different classifications depending on where it is analyzed:

United States (SEC): Partially a Security

In SEC v. Ripple Labs, the court held that institutional sales of XRP to sophisticated investors constituted securities transactions under the Howey Test. These purchasers invested capital with the expectation that Ripple’s ongoing development efforts would increase XRP’s value.

However, programmatic sales on secondary markets were not deemed securities because purchasers often did not know whether they were buying from Ripple or another seller. They could not reasonably rely on Ripple’s efforts in the same way.

Classification: Security (for institutional sales); Not a security (for secondary market sales)

United Arab Emirates (VARA): Virtual Asset

Under VARA’s Article 2 definition, XRP is a digital representation of value that can be traded and transferred. It meets the definition of a Virtual Asset regardless of how it was marketed, sold, or the intent of purchasers. VARA’s broad definition captures XRP automatically.

Classification: Virtual Asset (regulated under VARA)

Singapore (MAS): Digital Payment Token

XRP is used for cross-border payments and remittances, functioning primarily as a medium of exchange. Under the Payment Services Act, this qualifies XRP as a Digital Payment Token (DPT). Singapore does not apply the Howey Test or similar investment-intent analysis. XRP is not treated as a security in Singapore.

Classification: Digital Payment Token (regulated under PSA)

Business Implications

These conflicting classifications create significant operational consequences for Ripple Labs:

• United States: Faces ongoing enforcement action and regulatory uncertainty; limited ability to operate exchange services
• United Arab Emirates: Can operate legally with a VARA license, provided it meets capital and compliance requirements
• Singapore: Can operate as a licensed DPT service provider with clear regulatory expectations

This is why Ripple Labs, like many crypto projects, has established operations in jurisdictions outside the United States. The fragmented regulatory landscape rewards jurisdictional arbitrage.

Implications for Crypto Projects

The absence of a universal classification system for crypto tokens has profound implications for how projects structure their operations:

Jurisdictional Arbitrage

Many crypto projects choose to establish their headquarters, legal entities, and primary operations in jurisdictions with favorable regulatory frameworks. Singapore is currently the preferred destination due to:

• Clear DPT framework
• Lower capital requirements (SGD 1M vs. AED 50M in UAE)
• Principles-based regulation allowing operational flexibility
• Established rule of law and predictable enforcement

Projects often limit their exposure to hostile jurisdictions like the United States by:

• Geo-blocking U.S. users
• Avoiding marketing to U.S. residents
• Not seeking U.S. regulatory approval

Multi-Jurisdictional Compliance Challenges

For projects that do operate internationally, compliance becomes exponentially more complex. The same token may require:

• Securities registration in the U.S. (if it meets Howey Test)
• VASP licensing in UAE (for Virtual Asset activities)
• DPT service licensing in Singapore (for payment token services)
• Compliance with different AML/KYC standards in each jurisdiction
• Legal opinions analyzing classification in each target market

This complexity creates demand for compliance professionals who understand comparative regulatory frameworks — precisely the expertise this article demonstrates.

Strategic Considerations

Crypto projects must make strategic decisions about:

1. Where to incorporate: Choosing a jurisdiction that aligns with the token’s primary use case and business model
2. Which markets to enter: Balancing market size against regulatory risk and cost
3. How to structure token offerings: Designing token economics and distribution to minimize securities law risk
4. When to seek licenses: Deciding whether to obtain licenses proactively or wait for regulatory clarity

Conclusion

No universal classification system exists for crypto tokens. The same digital asset can be a security in one jurisdiction, a virtual asset in another, and a payment token in a third. This fragmentation creates both challenges and opportunities for crypto projects.

For companies operating internationally, multi-jurisdictional compliance is essential but complex. Many projects engage in jurisdictional arbitrage, establishing operations in favorable regulatory environments like Singapore while limiting exposure to hostile jurisdictions like the United States.

While international harmonization of digital asset regulation may eventually emerge through organizations like the Financial Action Task Force (FATF), near-term convergence appears unlikely. Different jurisdictions have different policy priorities: the U.S. emphasizes investor protection, the UAE seeks to attract crypto capital, and Singapore balances innovation with consumer protection.

Until regulatory convergence occurs — if it ever does — token issuers must analyze each jurisdiction independently, seek qualified legal counsel, and structure their operations to comply with the specific requirements of each market they enter.

The regulatory landscape for crypto tokens remains fragmented, evolving, and jurisdiction-specific. For legal and compliance professionals, this complexity creates opportunity. For crypto projects, it requires careful strategic planning and ongoing regulatory monitoring.

This article is for informational and educational purposes only and does not constitute legal or financial advice. Readers should consult qualified legal counsel before making decisions about token issuance or crypto business operations.

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How the U.S., UAE, and Singapore Classify the Same Crypto Token: A Comparative Analysis was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.