Fortifying Investor Confidence: DIFC launches Digital Assets Law

Coming into effect on March 8, 2024, the Digital Assets Law marks a significant milestone in the regulation of Digital Assets.
Water and Shark Legal UAE - Nikita Mulay, Water and Shark Legal India - Vikshita Poojary
Water and Shark Legal UAE - Nikita Mulay, Water and Shark Legal India - Vikshita Poojary

Change is the only constant. In the ever-evolving digital revolution, technology is reshaping every facet of our lives. The digital revolution in the past few years has played a crucial role in driving progress and enhancing global opportunities. ‘Digital Assets’ are a part of this digital revolution; they include cryptocurrencies and blockchain based tokens. Digital Assets have significantly redefined what we value and how we exchange it.

While the world is grappling with the digital revolution, recognizing its transformative potential while also acknowledging the need for a regulatory framework is imperative. Having said that, very few jurisdictions have been able to keep up with the pace and the Dubai International Financial Centre (“DIFC”) stands prominently among them.

On March 8, 2024, the Digital Assets Law DIFC Law No. 2 of 2024 (“Digital Assets Law” or “DAL”) came into effect, thereby solidifying its commitment to keep up with the rapid developments in fintech while bolstering investor confidence and the users of Digital Assets. The Digital Assets Law marks a significant milestone in the regulation of Digital Assets.

Legal Landscape and Advancements

DIFC a leading financial hub in the Middle East, Africa, and South Asia (MEASA) region, was established in 2004. It operates within a unique regulatory framework, offering companies global financial exchange, a legal system, and infrastructure to promote economic growth and development.

Modelled on the English Common Law, DIFC boasts of having an independent financial regulator, the Dubai Financial Services Authority (DFSA), along with autonomous DIFC courts and a robust regulatory framework known as "DIFC Law."

It is interesting to note that the journey of legislating Digital Assets by DIFC could be traced back to 2021, when DFSA updated its Rulebook to deal with investment tokens, which are defined as —

The Security or Derivative in the form of a cryptographically secured digital representation of rights and obligations that is issued transferred and stored using DLT or other similar technology; or a cryptographically secured digital representation of rights and obligations that is issued, transferred and stored using DLT or other similar technology”.

In December 2021, DIFC Courts launched the Digital Economy Court (DEC), specifically for dealing with the disputes arising out of the digital economy. Further, in 2022, DIFC took steps to regulate virtual currency, and on March 8, 2022, DFSA issued Consultation Paper No. 143, proposing a regulatory framework for cryptocurrencies.

Subsequently, on March 8, 2024, DIFC enacted the Digital Assets Law which encompasses a wide range of provisions to regulate various aspects of Digital Assets activities. DIFC is also set to introduce a new law of security, to replace the 2005 law. The revised regime is modelled on the UNCITRAL model of Secured Transactions, with a view to enhance the legislative framework and keeping pace with the international advancements in the field of digital assets.

Important provisions of the Digital Assets Law

As an overview the Digital Assets Law contains about 16 Sections and 5 Parts, and include definitions, characterizations, control and title, obligations.

Section 8 of the DAL defines a Digital Asset as a thing if –

“(a) it exists as a notional quantity unit manifested by the combination of the active operation of software by a network of participants and network-instantiated data;

(b) it exists independently of any particular person and legal system; and

(c) the thing is not capable of duplication and the use or consumption of the thing by one person or specific group of persons necessarily prejudices the use or consumption of that thing by one or more other persons.”

Section 9 characterizes Digital Asset as an intangible property which is neither a thing in possession nor a thing in action.

Section 14 pertains to a few obligations of users. It states that a person has an interest in the Digital Asset if the person has a legal title to it. It further provides that if someone interferes with another's use of a digital asset, they legally own, and does so either carelessly or on purpose, they can be held responsible for any loss caused. However, if the interference was agreed upon or would likely be agreed to by a reasonable person, it's not considered wrongful.

Concluding Remarks

It is pertinent to consider that the presence of blockchain pioneer entities like Ripple, Binance, and Bifinity in the DIFC (before the legislations were introduced) may have contributed to the jurisdiction's thriving ecosystem for Digital Assets.

DIFC’s holistic approach for amending the provisions of the other laws having significance to this specific asset class, inter-alia including Contracts Law, Law of Obligations, Trust law and the Foundation Law, further shows DIFC’s commitment to stay abreast with the rapid advancements in international trade and financial markets arising from technological developments while building investor trust.

The enforcement of the Digital Assets Law may definitely be seen as a move to bolster a more conducive environment for the rapidly growing businesses engaged in blockchain technology.

About the authors: Nikita Mulay is a Senior Legal Associate at Water and Shark UAE. Vikshita Poojary is a Legal Intern at Water and Shark India.

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