In brief:
- Following public consultations that commenced in September 2023, the DIFC has issued a significant new law on digital assets, the Digital Assets Law No. 2 of 2024 (the DAL).
- The Digital Assets Law will, in addition to defining the scope of digital assets, regulate, among other things, establishment and passage/transmission of title and control thereof.
In September 2023, the Dubai International Financial Centre (DIFC) commenced public consultations on a new Digital Assets Law (DAL). Following public consultations, the DIFC announced the enactment of the DAL on March 13, 2024.
Digital Assets Law
The DAL addresses, among other concepts: (a) the definition and characterisation of digital assets; (b) the concepts of control and title and the general rules applicable in connection therewith as applied to digital assets and rules governing the transfer of title to digital assets; and (c) an “impairment regime” which will describe circumstances where liability arises in connection with parties dealing in digital assets.
The definition of a digital asset includes the satisfaction of the following conditions: (i) existence as a manifestation of a combination of software operation and network-instantiated data; (ii) existence independent of particular persons or legal systems; and (iii) exhibiting characteristics of rivalrousness and non-duplication (i.e., the use or consumption by one person of such asset precluding the use and consumption by another). Given this, cryptocurrencies, stablecoins and non-fungible tokens (NFTs) are expected to qualify as digital assets, in line with market expectations.
The concept of control is a key factor with respect to determining title to a digital asset, along with the intention to exercise control. Control over a digital asset is deemed to exist if the person asserting control can show the following: (i) the ability to obtain substantially all the benefit from the digital asset; (ii) the exclusive ability to prevent others from obtaining substantially all the benefit from the digital asset; (iii) the exclusive ability to transfer the above-mentioned abilities to another person; and (iv) the ability to identify oneself as having the above-mentioned abilities. Control of a digital asset by itself—absent of anything else—confers superior legal title over other aspects or elements. A transfer of title of a digital asset is achieved if the transferor has control over, and an intention to transfer, the digital asset.
The DAL also includes rules of liability that would apply in instances where one person impairs the ability of another (who is legally entitled) to use such digital asset as well as differentiating between the types of impairment (reckless v. intentional) and highlighting the defenses that may be asserted against a charge of impairment.
Other consequential amendments
The issuance of the DAL has necessitated further amendments to other existing DIFC laws so as to enable the smooth functioning of market practices relevant to digital assets in the context of the potential application of such DIFC laws to the same. Among the key laws to be subject to such amendments are the Personal Property Law (DIFC Law No. 9 of 2005), the Law of Obligations (DIFC Law No. 5 of 2005), the Contract Law (DIFC Law No. 6 of 2004), the Implied Terms in Contracts and Unfair Terms Law (DIFC Law No. 6 of 2005), the Law of Damages and Remedies (DIFC Law No. 7 of 2005), the DIFC Trusts Law (DIFC Law No. 4 of 2018), the DIFC Insolvency Regulations (currently the consolidated version 2 in force on March 7, 2022) and the Law of Security (DIFC Law No. 8 of 2005).
Although it is not feasible to go into the detail of each proposed amendment for the purposes of this article, a few examples of such amendments are as follows: (a) to expand the scope of avoidance of a contract for mistake under the Contract Law to include instances of automated acceptances by computer programs without any human interference where it is contrary to commercial standards of fairness; (b) to include the concept of digital assets (by cross referencing it to the DAL) in, among others, the Personal Property Law, the Trusts Law, the Law of Obligations and the Law of Damages and Remedies; and (c) changes to the bona fide purchaser rules set out in the Personal Property Law.
Conclusion
The new laws signify the continuing intent and objective of the DIFC to cement its reputation as a leading jurisdiction for, and as the pre-eminent hub of, financial activity. The DAL in particular will establish and settle the legal framework for digital assets such as cryptocurrencies and NFTs and is expected to substantially enhance opportunities for commercial activity in relation to such assets.
By Ajai Ramakrishnan, senior associate in the banking and finance team at Hadef & Partners.
