What has happened?
Earlier this month the DIFC enacted a Digital Assets Law (Law No.2 of 2024) (the DAL).
Why has the DIFC done this?
The UAE (and the DIFC in particular) has rapidly positioned itself as a global hub for investors in, and users of, digital assets (such as cryptocurrencies, NFTs, tokens and digital bonds).
Regulating digital assets is a complex endeavour, given their sophisticated and dynamic nature. Achieving balance is essential: regulations must neither be excessively strict nor outdated, as they should bolster investor trust, but they must also protect users from market volatility and illegal activity.
The UAE is at the forefront of addressing this challenge, having established wide-ranging regulatory frameworks through the efforts of the Virtual Assets Regulatory Authority, Dubai Financial Services Authority, and ADGM Financial Services Regulatory Authority.
The DAL takes matters a step further. Its purpose is to define digital assets and outline how they can be managed, exchanged, and transacted. Essentially, it brings digital assets into the realm of "property," moving beyond their traditional status as financial products.
So, in plain English, what is a “Digital Asset”?
The DAL defines a digital asset as follows:
a virtual "unit" (e.g., of measurement or value) that comes into existence because a group of people and computers work together on a network, using software that creates and records this unit; and
it does not belong to just one person or follow the rules of any single country; and
it cannot be copied exactly, and if one person or a specific group uses it (like spending a digital coin), it means others cannot use that same asset in the same way.
How is a digital asset characterised as “property”?
The DAL characterises a Digital Asset as something that is capable of ownership, but:
it cannot be physically touched or held (i.e. it is intangible); and
it is not a right to do something or get something (such as a debt or a legal claim).
Who is the owner of a digital asset?
The DAL deals with ownership in a two-step process:
Step 1 – Identify who controls the digital asset?
The DAL deals with “control” of a digital asset. A person controls a digital asset: 1. if the digital asset or its system gives that person, the following powers:
to stop others from getting the main advantages or uses from the digital asset; and
to use the digital asset to get its main benefit themselves; and
to give these powers to someone else; and
2. the digital asset or its system lets the person prove that they the above power.
The above powers do not necessarily need to be exclusive (for example if the digital asset is coded to limit its use or if a person has agreed to share control with others).
Step 2 – Apply the DAL’s basic rules of ownership
In simple terms:
A person (or a group of people working together) becomes the official owner of a digital asset if they gain control over it and plan to keep controlling it. If the digital asset is in a specific digital location (like a digital wallet), intending to control assets in that location also counts.
If someone controls a digital asset, the DAL will assume they are the rightful owner unless there's proof saying otherwise.
If a person (A) controls a digital asset on behalf of someone else (B), and A intends to manage it on B’s behalf, then B is the legal owner.
Keeping Ownership: Once someone becomes the owner, they stay the owner until they transfer the asset to someone else or the asset is destroyed.
How is a digital asset transferred?
To transfer a digital asset to someone else, two things need to happen:
the control of the asset must change hands to the new owner; and
the person giving away the asset must intend for the other to become the new owner.
What if someone messes with my ability to use the digital asset?
The DAL includes a section that deals with “impairment”, i.e. when a person negatively affects a digital asset’s owner’s use of the digital asset.
In short, a person (A) is liable to another person (B) for impairing B’s use of their digital asset if:
B has a legal interest in the digital asset; and
A has damaged B’s ability to use it; and
A’s actions were either on purpose or reckless; and
A’s actions caused B a loss.
How does the DAL impact existing DIFC laws?
The introduction of the DAL means that several other DIFC laws have been updated to ensure that digital assets are properly recognised and covered, including:
Contract Law
Implied Terms in Contracts and Unfair Terms Law
DIFC Law of Damages and Remedies
Insolvency Law
Law of Obligations
Law of Damages and Remedies
Personal Property Law
Trust Law
New DIFC Law of Security
The DIFC has also enacted an entirely new Law of Security, which we will cover in a future update.
Conclusion
This is a landmark piece of law in the DIFC’s relatively short history and showcases the DIFC’s role as a driving force for technological innovation and economic diversification across the MENA region. The move is also aligned with the UAE's vision to diversify its economy beyond oil, fostering innovation, entrepreneurship, and financial inclusivity.
Who can I speak to for more information?
It is important for businesses operating in or doing business in the DIFC to understand the DAL and the impact that it may have.
Support Legal is well placed to help clients understand what the DAL may mean for them. For further information, please contact Nathan Hooper, Principal.
This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.
