Authors
Key Takeaways
- DIFC introduces a consultation for a new Digital Assets Law.
- An official definition for ‘Digital Assets’ has been provided, including a confirmation of its characterisation in the DIFC as intangible property.
- Existing DIFC laws have been amended to accommodate the increasing use of Digital Assets.
- A clear set of rules have been introduced to ascertain ownership of Digital Assets, where title is determined by who has control over the Digital Asset in question.
The Dubai International Financial Centre Authority (DIFCA) has issued a consultation paper on its proposal to enact a new Digital Assets Law (DAL) and to amend several existing DIFC laws to accommodate the legal features and consequences of the recognition of digital assets as a type of property. The consultation paper invites comments from interested stakeholders by 5 November 2023.
Legal nature of digital assets
The DAL aims to provide legal certainty and clarity on the foundational aspects of the legal nature and treatment of digital assets as a matter of property law, such as the definition, characterisation, acquisition, transfer, interference in the use, and recovery of digital assets. The draft DAL defines a digital asset as a thing:
(a) that 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, independent of any particular person or legal system;
(b) that is not capable of duplication; and
(c) whose use or consumption by one or more persons necessarily prejudices its use or consumption by one or more other persons.
A digital asset is characterised as being intangible property, which is neither a thing in possession nor a thing in action. The consultation paper sets out a detailed explanation of the reasons for the position the DIFC has taken as regards the legal status of digital assets, which is in line with the position adopted by the Law Commission of England and Wales on the treatment of digital assets.
Ownership
It is proposed that the DAL will adopt the principle that control is at the root of title to digital assets, and that a transfer of title requires a change of control and an intention to transfer title. The draft DAL further sets out the conditions for a person to have control of a digital asset, which include the exclusive ability to prevent others from obtaining substantially all the benefit from the digital asset, the ability to obtain substantially all the benefit from the digital asset, the exclusive ability to transfer those abilities to another person, and the ability to identify oneself as having those abilities. The draft DAL accommodates exceptions to the change of control requirement in situations involving death, insolvency, or incapacity, where the applicable law may provide for a transfer of title without a change of control.
Once issued, the DAL will establish a regime for the protection of digital asset owners against wrongful interference or impairment of use by third parties, which is based on the notion of an impairment of use that causes loss to the owner. The draft DAL provides for defences to an impairment claim, such as consent or the likelihood of consent by a reasonable person in the owner’s position. The draft DAL also allows an owner to recover control of a digital asset from a person who has no knowledge of the owner’s title.
Amendments to existing laws
The consultation paper outlines the key proposed amendments to the existing DIFC laws that are necessary or desirable to accommodate digital assets, such as the Contract Law, the Implied Terms in Contracts and Unfair Terms Law, the Insolvency Law and Insolvency Regulations, the Law of Damages and Remedies, the Law of Obligations, the Personal Property Law, the Trust Law, and the Foundations Law. These amendments cover various aspects of private law, such as mistake, contractual interpretation, the action for the agreed sum, rectification, rescission, wrongful interference with property, misrepresentation, electronic trade documents, bona fide purchase, agency, foreign currency conversion, priorities, and shortfall.
The draft DAL and the related draft amendments are to be read in conjunction with the proposed new Law of Security, which incorporates an amended version of the current Financial Collateral Regulations and sets out the rules for the creation, perfection, priority, and enforcement of security rights over digital assets.
Conclusion
The consultation paper announces the upcoming arrival of sophisticated digital assets-related legislation. Once issued, such legislation will put in place a comprehensive and coherent legal framework for digital assets in the DIFC, which could enhance the attractiveness and competitiveness of the DIFC as a leading financial centre and a hub for innovation and technology. The consultation paper further raises a number of complex and novel legal issues that require careful consideration and analysis by the DIFCA and stakeholders. Therefore, interested parties are encouraged to provide their comments and feedback to the DIFCA by the deadline of 5 November 2023.
Client Alert 2023-232