DIFC DIGITAL ASSETS LAW NO. 2 OF 2024
With the new legislation coming into effect on March 8, 2024, the Dubai International Financial Centre (DIFC) has achieved a significant milestone by enacting its inaugural digital assets law. This innovative legislation aims to provide a solid framework and legal clarity for digital asset investors and consumers within the financial centre. The Digital Assets Law No. 2 of 2024 recognises and defines a digital asset not just as a financial product but also as an asset that can be used in a non-financial services context.
It is important to note that the Digital Assets Law No. 2 of 2024 is not applicable to the entire Emirate but only to the DIFC.
Digital assets, a trillion-dollar asset class, hold immense potential for market growth and future innovation. From a regulated financial services perspective, many jurisdictions have primarily focused on regulating and enforcing penalties on certain practical implementations of this asset class.
Conversely, the fundamental benefits of blockchain, the digital assets it can generate, and its various applications are set to broaden and become more significant. In this context, there has been extensive ongoing debate on several crucial legal issues, such as the exact legal characteristics and implications of digital assets. While common law decisions and international legal developments have provided some insight into this issue, a comprehensive legal framework that fully outlines the legal characteristics of digital assets and the potential interactions between users and investors within this asset class is yet to be established.
I. General Provisions:
Transferable Records in Electronic Form Updates to the Law of Obligations allow for the use of transferable records in electronic form. Examples of paper trade documents or instruments that have an electronic equivalent include promissory notes, bills of lading, bills of exchange, and warehouse receipts. The recognition of such documents in electronic form promotes increased efficiency in cross-border digital trade by accelerating and securing the transfer of documentation and enabling the automation of some transactions using smart contracts.
Law of Security: DIFC Law No. 4 of 2024 Secured transaction regimes globally have witnessed significant innovation, particularly following the enactment of the DIFC Law of Security in 2005. This includes the emergence of companies and platforms that facilitate the extension of credit through secured or collateralized digital asset arrangements and the increasing drive to digitise global trade.
The 2005 Law of Security is being repealed and replaced with a new Law of Security to significantly enhance and amend the securities regime in the DIFC. This is being done after considering the policies of other jurisdictions, particularly UNCITRAL’s Model Law on Secured Transactions, in conjunction with the recently passed Digital Assets Law. This will align the regime with global best practices and clarify the process of prioritising security over digital assets.
II. Key Features of the Digital Assets Law (DIFC Law No. 2 of 2024):
Definition of Digital Assets: A key feature of this new law is that it clearly defines “digital assets” within the jurisdiction of the DIFC. Specifically, a “thing is a digital asset” if it meets the following criteria: (a) it exists as a notional quantity unit that is manifested by the combination of network-instantiated data and active software operation by a network of participants; (b) it exists independently of any specific person or legal system; and ? it is not duplicable and its use or consumption by one person or particular group of people does not necessarily prejudice its use or consumption by one or more other people. The primary characteristic of the digital asset in the law is that it is an “intangible property and is neither a thing in possession nor a thing in action.”
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Ownership of a Digital Asset: The terms “control” and “title” over digital assets are precisely defined and governed by the DIFC Digital Assets Law. A person is considered to be in control of a digital asset if they are the only ones with the ability to prevent others from deriving significant benefits from it, if they can derive a substantial amount of benefit from it themselves, and if they are the only ones with the ability to transfer these abilities to another person—a process known as a “change of control.” In addition, control involves the person’s capacity to acknowledge that they possess such abilities. The law recognises circumstances in which control may not be exclusive due to the inherent limitations of the digital asset or mutual agreements with other parties. In acquiring title, a person (or a group of people collaborating) obtains original legal title to a digital asset when they gain control with the intention of using that control; ownership is presumed to belong to the controller unless there is evidence to the contrary. This presumption also applies to agency arrangements, in which the principal obtains a legal title from an agent managing a digital asset on their behalf. A digital asset’s title endures until it is either transferred or destroyed; transfers require a change in control and the intention to transfer the title. Until proven otherwise, the presumption supports title transfer in the context of gifts.
Additionally, legal title or control of digital asset transfers follows applicable laws in cases of death, incapacity, or insolvency, enabling the new titleholder to exercise all related rights and carry out transfers subject to certain restrictions. Resolving conflicts between this law and the Trust Law or Foundations Law provisions favours the latter, highlighting the DIFC’s complex approach to regulating digital asset ownership and governance.
Obligations for Digital Assets Ownership: Part 4 of the DIFC Digital Assets Law outlines the duties for the impairment and recovery of control over digital assets. Article 14 describes the conditions under which a person is deemed to have an interest in a digital asset, with a primary emphasis on legal title possession. It emphasises risk awareness and supremacy of interest, outlining the conditions under which impeding another’s use of a digital asset is deemed careless or deliberate. If someone (A) willfully or carelessly interferes with another person’s (B) ability to use a digital asset, resulting in B’s loss, then A is responsible. The consent of B, or the consent that a reasonable person in B’s circumstances would likely give, is one defence against impairment. In the event of impairments, co-owners may sue one another and seek compensation based on their respective interests. If someone is found to be responsible for a digital asset’s impairment and another claimant with a stronger legal title arises, the first claimant has to give the new claimant a justification.
If someone else (A) controls a digital asset without a valid title or with a title less valuable than (B)'s, Article 15 permits the individual (B) with legal ownership to regain control. This framework safeguards legitimate owners and co-owners and provides a means of redress when the usage of digital assets is impaired. It also establishes accountability for such impairments.
Updates to established laws: The Digital Assets Law No. 2 of 2024 has harmonised existing regulations with its definition of “digital assets.” This substantial legislation has amended several provisions across various laws to explicitly encompass digital assets. These amendments include:
While digital assets have long had the reputation of being risky and unregulated, the law provides the ability to enter into digital asset transactions using the legislative framework of the DIFC, underpinned by a recognised and reputable common law court in the DIFC Courts , and we expect more parties to elect the DIFC as a forum for contracts involving digital assets.
As the digital asset market continues to evolve, the DIFC’s proactive approach to establishing a comprehensive legal framework could position the financial centre as a hub for innovation and attract further investment in the burgeoning sector.
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