Other BriefingsDubai International Financial Center Announces Digital Assets Law
The Dubai International Financial Center introduced the world’s first Digital Assets Law on March 8, 2024, which sets out to bring clarity and structure to the previously fragmented digital asset sector in the UAE. By establishing rules governing various aspects of emerging technologies, such as the exchange and management of cryptocurrencies and NFTs, the law aims to provide legitimacy, protect consumers from fraud, and combat financial crimes.
By Giulia Interesse
In the realm of digital assets, traditional regulatory efforts have primarily concentrated on enforcing sanctions and supervising their application within regulated financial services. However, with the emergence of blockchain technology, broader legal inquiries have arisen concerning the precise nature and legal ramifications of digital assets. While international legal developments have provided some clarity, a comprehensive legal framework mapping out the full extent of the legal characteristics of digital assets and interactions within this asset class has been lacking.
Important legal updates
Following extensive review and a period of public consultation in 2023, the Dubai International Financial Centre (DIFC) has introduced its own Digital Assets Law No. 2 of 2024 (hereinafter, “Digital Assets Law”), the world’s first, effective from March 8, 2024.
This landmark legislation is complemented by substantial amendments to existing laws. Specifically, the Law of Security DIFC Law No. 4 of 2024, has replaced outdated regulations with a modernized framework aligned with international standards, specifically tailored to accommodate the expanding digital asset landscape. Additionally, the DIFC Amendment Law, No. 3 of 2024, has introduced adjustments to existing regulations to ensure coherence with the newly established digital assets and updated security regimes.
As the leading global financial center in the Middle East, Africa, and South Asia (MEASA) region, the DIFC’s proactive approach indicates its commitment to fostering innovation and ensuring the integrity of its financial services sector.
In this article, we look at the implications of the Digital Assets Law and examine its impact on the financial ecosystem within the DIFC and beyond.
Dubai’s Digital Assets Law: Overview
Scope and definition
The Digital Assets Law defines a digital asset as intangible property characterized by specific criteria. According to the law, a digital asset meets three main criteria:
- It exists as a notional quantity unit resulting from the active operation of software by a network of participants and network-instantiated data;
- It exists independently of any particular person and legal system; and
- It cannot be duplicated, and the use or consumption of the asset by one person or group necessarily affects the use or consumption by others.
Additionally, the law clarifies that a digital asset is neither a thing in possession nor a thing in action, further delineating its unique nature within the legal framework.
Control, title acquisition, and transfer of digital assets
The Digital Assets Law defines control over digital assets based on the transferor’s intention to convey title to the transferee. When a digital asset is gifted from one individual or group to another, the default presumption is that the transfer intends to transfer title, unless evidence suggests otherwise.
Moreover, the legislation addresses the exercise of rights in situations involving death, incapacity, or insolvency. If a natural person (A) passes away, becomes incapacitated, or faces insolvency, and another person (B) gains entitlement to legal title or control of a digital asset previously owned by person (A), person (B) is empowered to exercise all associated rights over the digital asset as per applicable laws.
Additionally, person (B) is authorized to transfer title to the digital asset to a third party (C) under specified conditions outlined in the law.
Article 13 of the Digital Assets Law also emphasizes the precedence of the Trust Law or Foundations Law in cases of conflict, ensuring adherence to established legal frameworks and consistency in the application of laws governing digital assets.
Obligations regarding digital assets: Impairment of use and recovery of control
According to the Digital Assets Law, an individual’s impairment of a digital asset in which another party holds an interest is considered reckless if the individual is aware of the risk of impairment and unreasonably proceeds despite this knowledge. Additionally, intentional impairment occurs when an individual knows of another party’s interest in the digital asset and proceeds with impairment despite this knowledge.
An individual is liable to another if they impair the use of a digital asset in which the other party holds an interest, and this impairment is intentional or reckless, causing loss to the other party. However, it can be a defense if the other party consents to the impairment or if a reasonable person in their position would likely have consented.
In cases of co-ownership, recovery under these obligations is proportionate to each co-owner’s interest in the digital asset. A co-owner can bring an action against another co-owner regarding impairment of the same digital asset.
Moreover, if an individual (B) holds legal ownership of a digital asset, they have the right to regain control of it under the following conditions:
- The digital asset is currently under the control of another individual or group (A); and
- Person A either lacks legal ownership of the digital asset entirely or holds a legal title that is considered inferior to that of person B.
Key advantages of Dubai’s Digital Assets Law
The enactment of the Digital Assets Law is a significant milestone in the UAE’s regulatory landscape. Before its introduction, the digital asset sector in the UAE lacked clarity and structure. However, this law sets up rules governing various aspects of emerging technologies, like the exchange and management of cryptocurrencies and NFTs.
This not only makes the UAE more appealing for digital asset businesses but also helps in reducing financial crimes.
The key benefits of Dubai’s Digital Assets Law can be summarized as it follows:
- Legitimacy: The law gives digital asset businesses legitimacy, making investors more confident.
- Consumer protection: It protects consumers from fraud, making digital asset transactions safer.
- Fighting financial crime: The law emphasizes following rules to prevent money laundering and identify fraud, making it harder for criminals to operate in the digital asset world.
Takeaways for businesses
The Digital Assets Law brings forth significant opportunities for businesses operating within this sector. Firstly, businesses engaged in providing digital assets services, including trading, custody, or management, will likely be required to obtain licenses from the Dubai Virtual Assets Regulatory Authority (VARA). This regulatory measure ensures that businesses operate within the legal framework established by the law and adhere to industry best practices.
Moreover, companies will need to ensure compliance with various regulations governing Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, consumer protection standards, and reporting requirements. While this may initially appear burdensome, it serves to foster a more responsible and sustainable virtual asset industry. Moreover, it lays the groundwork for attracting a broader range of startups and institutional investors to the UAE’s digital assets landscape.
Lastly, with the implementation of the Digital Assets Law, the UAE’s digital assets sector is poised to witness an influx of new market participants. This is expected to stimulate competition and innovation, ultimately leading to a more dynamic market environment.
As a direct consequence, consumers too can anticipate benefiting from a wider array of services and products within the virtual asset space.
