The Dubai International Financial Centre (DIFC) recently enacted its Digital Assets Law, DIFC Law No. 2 of 2024 (the “DAL”), effective as of March 8, 2024. Through the DAL, the DIFC established a framework to support digital assets innovation while promoting responsible practices and ensuring a secure and transparent market. Investors seeking growth opportunities will now find incentives and safeguards within the DAL.

Rationale and Objectives

Within its broader mandate, the DIFC aims to acknowledge the growing significance of digital assets, enhance market confidence and consumer protection, and foster innovation across the financial services sector and beyond.

Specifically, the DAL serves to establish and clarify legal principles applicable to Digital Assets, as defined in Part 2 thereof.

This legislation offers a clear definition of a Digital Asset, consisting of three key elements:

(i) a notional quantity unit: Digital Assets serve as a unit of account and may function similarly to traditional currencies or commodities.

(ii) independence from any particular person and legal system: In principle, Digital Assets operate on distributed ledger technologies such as blockchain and are independent from any central intermediary, ensuring they are not completely controlled by any single entity.

(iii) incapability of duplication and use: Digital Assets are endowed with cryptographic properties that serve as safeguards against unauthorized replication or counterfeit. These cryptographic features ensure that each Digital Asset unit is unique and cannot be duplicated.

Furthermore, the DAL characterizes a Digital Asset as an intangible property existing solely in digital form, that is neither a thing in possession nor a thing in action. By recognizing Digital Assets as property, similar to money or goods, the DIFC has resolved a fundamental issue and provided legal guidelines on the nature of Digital Assets.

Key Provisions

The DAL further establishes provisions regarding the control of Digital Assets. It stipulates that control is vested in an individual if they possess the exclusive ability to:

1. prevent others from obtaining substantially all the benefit from the Digital Asset;
2. obtain substantially all the benefit from the Digital Asset; and
3. transfer these aforementioned abilities to another person (referred to as a “change of control”).

Additionally, the Digital Asset must allow that person to identify themselves as possessing these abilities.

In this regard, the DAL also establishes that this same control confers original legal title to a person, contingent upon the intention to exercise control over the Digital Asset or the general intention to exercise control over Digital Assets in the Address in which the Digital Asset is located. Such title shall not cease to exist until it is either transferred or the Digital Asset is destroyed.

Moreover, the person who has control of a Digital Asset is presumed to have the superior legal title to it.

In particular, a transfer occurs when control of the Digital Asset shifts to the transferee, with the transferor intending to transfer title. In cases of gifting, title transfer is presumed unless proven otherwise.

Upon the death, incapacity, or insolvency of a person holding legal title to a Digital Asset, another person may assume control as per applicable law. This new holder can exercise rights over the Digital Asset and transfer title to a third party if the conditions of transfer of title are met.

The DAL also differentiates between reckless and intentional impairment, establishing liabilities for both categories. Defenses include consent or implied consent by a reasonable person in the affected party’s position.

Co-owners may seek proportionate recovery. Moreover, liability extends to co-owners, and if a superior legal title emerges, the initial liable party must account to the new claimant.

A legal title holder may reclaim control from another who lacks legal title or possesses an inferior one.

Furthermore, the DAL elaborated on the intentional and unintentional impairment of the use of a Digital Asset, and recovery of their control. We anticipate that this could potentially create opportunities for litigation based on new legal grounds.

Modifications of DIFC Laws

The DAL introduces significant amendments to existing laws within the DIFC, such as the Contract Law, Insolvency Law, Law of Damage and Remedies, Personal Property Law, Trust Law, Foundations Law and Law of Obligations, and several Regulations.

Notably, these amendments accommodate emerging concepts such as “Coded Contracts” and “Electronic Trade Documents”, reflecting the evolving landscape of digital transactions.

The DIFC also repealed the Law of Security (Law No. 8 of 2005) and replaced it by Law of Security, DIFC Law No. 4 of 2024.

Future Outlook

The enactment of the DAL establishes industry-defining benchmarks for regulating digital assets, and provides a key indication of the overall recognition within the UAE market of the important role that Digital Assets play within the broader financial market. These standards provide a starting point for the development of comprehensive legislation around Digital Assets, providing a foundation upon which further legislative efforts can build.

Furthermore, amid varying global regulatory stances towards digital assets – ranging from cautious skepticism to outright prescription – the DIFC remains steadfast in its commitment to protecting market integrity, enhancing governance and fostering an environment conducive to innovation and fintech within its jurisdiction.