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Why has the DIFC done this?

The DIFC has rapidly positioned itself as a regional and global hub for investors in, and users of, digital assets and tokenised securities (such as cryptocurrencies, NFTs, tokens and digital bonds).

Regulating digital assets is highly complex, given their sophisticated and dynamic nature. Achieving balance is essential: Too much regulation risks stifling investment – too little regulation risks opening users to 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 Securities and Commodities Authority, the Virtual Assets Regulatory Authority, the Dubai Financial Services Authority, and the ADGM Financial Services Regulatory Authority.

The new law takes matters a step further. Its purpose is to define digital assets and outline how they can be managed, exchanged, and transacted as "property," rather than simply 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:

·       if the digital asset or its system gives that person, the following powers:

o   to stop others from getting the main advantages or uses from the digital asset; and

o   to use the digital asset to get its main benefit themselves; and

o   to give these powers to someone else; and

·       the digital asset or its system lets the person prove that they the above powers.

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.

·       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

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 more information

This material is provided for general information only. It does not constitute legal or other professional advice. For more information contact Nathan Hooper, Principal: [email protected]