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Posted In: Alert

Posted By: Singularity Legal

Tags: DIFC, Digital assets

 159

DIFC announces the enactment of new digital assets law

INTRODUCTION

1. On 8 March 2024, the Dubai International Financial Centre (“DIFC”) announced the enactment of new digital assets law, the DIFC Law No. 2 of 2024, Digital Assets Law (“DAL”). The DAL follows the public consultation conducted through Consultation Paper No. 4 in September 2023 (“Consultation Paper”)1, which includes explanations of the provisions of DAL.

2. The enactment of DAL provides legal certainty to a trillion-dollar industry2. It keeps abreast with the rapid developments in international trades and financial markets arising from technological developments. This will reinforce the confidence in investors and users of digital assets in the region.

KEY PROVISIONS OF THE DIGITAL ASSETS LAWS

3. Although, courts of several common law countries have already held digital assets to be “property”3, the DAL lays down the foundational legal characteristics of a digital asset as a matter of property law. The DAL provides for how digital assets may be controlled, transferred, and dealt with by parties.

4. This section addresses the key provisions of the DAL, including its definition and characterization; control, title and transferability; and rights relating to impairment of digital assets

A. Definition and Characterization of Digital Asset

5. Per Article 8 of the DAL, a digital asset consists of three elements, (i) it exists as a “notional quantity” created and maintained by a combination of, the active operation of software by a network of participants and network-instantiated data4; (ii) it exists separately from any particular person and legal system; (iii) it is incapable of duplication and its use or consumption by one person necessarily prejudices its use or consumption by others.

6. The first element clarifies that a digital asset is not merely composed of data represented in an electronic medium but rather data as it exists in the context of the underlying network and system rules, which produces an (abstract) asset with a particular quantity unit. The ‘notional quantity unit’ like 1 bitcoin or 1 Bored Ape5 functions as part of a network ecosystem that contains rules governing the storage, transmission and deletion of that data6. The second element is intended to distinguish digital assets from property rights that are ‘mere claims’ such as debt claims which exists because the legal system confers a contractual right on the creditor. Thus, a digital asset would exist even if the legal system is abolished7. It also exists independently of any particular person as it is a distinct object as opposed to a claim against particular person. The third element is intended to distinguish digital assets from other things which are capable of duplication. The fact that a digital asset exists in one address necessarily means that it does not exists anywhere else8. Notably, a combination of the first and third elements help to ensure that a digital asset cannot be duplicated and thus cannot be double spent.

7. Further, Article 9 characterizes a digital asset as an intangible property which is neither a thing in possession nor in action. Colloquially, as noted by the Singapore High Court in Bybit Fintech Ltd v Ho Kai Xin9 (“Bybit”) personal property consists of things in action or things in possession. As digital assets are not choses in possession, the court in Bybit concluded it to be chose in action. The DAL therefore provides that digital asset is in the third category i.e., it is neither a thing in possession nor in action. It seeks to draw a clear distinction between rights enforceable by action (i.e., things in action) and rights that are independent of the legal system and other persons (see second element above).

B. Control and Title of Digital Asset

8. Given the different systems, networks, and manner in which different digital assets are stored, managed or operated, it may become difficult to determine who is in actual control of the digital asset. Article 10(1) of DAL provides that a person has control of a digital asset if, they (a) can exclusively prevent others from gaining its full benefits, (b) fully benefit from it themselves, and (c) can transfer these abilities to someone else. Moreover, it requires that the digital asset should allow the person to identify themselves as having these powers. 

9. This control can change through actions like replacement, modification, destruction, cancellation, or elimination of the digital asset, which may create a new digital asset controlled by another person10. In some cases, control might be shared if the digital asset’s system allows it or if the person has agreed to share control with others11. This definition of control is in line with Principle 6 of UNIDROIT’s Principles on Digital Assets and Private Law12.

10. Control of digital asset directly assists in determining who has the legal title to the digital asset. Per Article 11 of DAL, in the absence of a contrary evidence, control of a digital asset implies superior legal title. It further provides that a person or group of persons acquires legal ownership of a digital asset when they gain ‘control’ over it with the intention to exercise that control, or generally intend to control assets in the corresponding address13

11. Article 11 also clarifies that when an agent controls a digital asset on behalf of their principal, this control and intention are attributed to the principal. Without this attribution, absurd outcomes could arise, particularly in corporate settings. For instance, if an employee (agent) controls a digital asset like Bitcoin for their company, the employee would hold the title while the company would not. This scenario would necessitate a separate transfer of title for the company to obtain ownership. By affirming that standard agency attribution rules apply, this provision removes such uncertainties.

C. Exercise of right upon death, incapacity, and insolvency

12. In the realm of digital assets, a persistent query revolves around the fate of these assets in the event of the owner's demise or insolvency. What becomes of the digital assets in these circumstances? Do they remain dormant, inaccessible to others indefinitely? The DAL has provided some certainty to this in Article 13.

13. Article 13 provides exceptions to the rule that a change of control (with the associated intention) is required for a transfer of legal title to a digital asset. This exception applies in the case of death, incapacity, or insolvency of a person. In such circumstances, another individual or group may acquire legal title or control of that digital asset as per applicable law or decision of court or legal authority. Article 13(2) clarifies that the operation of this exception does not prejudice the operation of heirship rights under the Trust Law/Foundations Law.

D. Impairment of use of Digital Asset

14. Article 14 provides for a cause of action in the case of interference with the use of digital asset. It directly gives effect to the title holder’s right to exclude others from gaining its full benefits (see [8(a)] above). It entails having a right to sue third parties for interfering with the digital asset.

15. This interference element is organized around the notion of impairment of use to the legal title holder and such impairment should cause loss. It gives way to make claims, including to satisfy the conduct element for a claim of tort of interference. The liability for this impairment requires a higher mental element of intention or recklessness14.  Article 14 of the DAL provides for elements of when a person’s impairment of use is reckless and intentional15. The Consultation Paper explains the legislative’s intention that the mental requirement should not include negligence16.

16. The DAL provides for defences to the defendant. The first defence is if the legal title holder (person interested) has consented to it. The second defence to an impairment is where a reasonable person in the claimant’s position is likely to have consented to the impairment. The Consultation Paper provides examples for when the second defence may likely apply – if in the event of a hack, the defendant blockchain administrator exercises a kill-switch to freeze the claimant’s Digital Assets, such that the claimant’s use of their assets is (temporarily) totally impaired.

E. Recovery of control of Digital Asset

17. Article 15 of the DAL provides a statutory right to someone who has a legal title (superior title or relatively inferior title) to a digital asset to recover control of it. The Consultation Paper explains that Article 15 addresses situations where a party seeks to recover an asset under their legal ownership, yet it is controlled by another party who may be unaware of its ownership status. An example of the same is if a digital asset owned by ABC ends up in XYZ’s blockchain address because of a bug. In such an event, Article 15 would be necessary because there is no remedy under the interference regime for this situation (as it does not have either intention or recklessness to impair the use of ABC) to recover the digital asset.

18. It would be useful to see the how the courts interpret this Article, including if they limit the circumstances (as explained by the Consultation Paper) to invoke the remedy under Article 15.

F. Disapplication and modifications to existing DIFC Laws

19. On account of enactment of DAL, certain DIFC laws were disapplied and modified. Schedule 2 of the DAL lays down a list of the same. Amendments have been made to DIFC’s Contract Law17, Implied Terms in Contracts and Unfair Terms Law18, Insolvency Law19 and Regulations, Laws of Damages and Remedies20, Law of Obligations21, Law of Security22, Financial Collateral Regulations, Personal Property Law23, Securities Regulations, Ultimate Beneficial Owners Regulations, Trust Law24, and Foundations Law25.

20. For example, amendments have been made to:

(a) Contract law to add new definitions including for coded contract and computer programme, in relation to mistake, contractual interpretation, and definitions related to money;

(b) Insolvency Law and Insolvency Regulations in relation to shortfall, the ‘conversion’ provision in respect of foreign currency, and priorities in insolvency;

(c) Law of Damages and Remedies in relation to rectification, rescission, and the action for the agreed sum;

(d) Law of Obligations in relation to the wrongful interference with property regime, electronic trade documents, and misrepresentation;

(e) Personal Property Law in relation to bona fide purchase rules; and

(f) Trust Law in relation to the certainty of objects requirement and to clarify that ‘property’ includes Digital Assets.

CONCLUSION

21. The enactment of the DAL strengthens the conducive environment for blockchain technology businesses. The Chief Legal Officer at DIFC Authority, Jacques Visser, noted that they “consider this legislation to be ground breaking”.26

22. These laws reflect the DIFC's dedication to maintaining a transparent and robust legal framework aligned with global best practices, offering legal certainty for investors and users in the digital asset space. It also underscores the DIFC's aspiration to solidify its position as a leading financial jurisdiction and hub for digital asset activity. The DAL enables digital asset transactions under the legislative framework of the DIFC Court, enhancing trust and providing a reputable forum for resolving disputes. The DAL is expected to substantially enhance opportunities for commercial activity in digital assets in the region.

23. The application and scope of DAL’s provisions can be extensive and impactful. It remains to be seen how the court's legal interpretations will develop in addressing the diverse questions that arise in the realm of digital assets.

Authors: Jimisha Dalal and Lakshay Arora

About our Digital Assets & Fintech Practice

Our team of lawyers for digital assets and fintech practice is a dedicated group with a substantial background in blockchain and digital asset and fintech dispute resolution. Our focus is to provide strategic and effective legal representation to clients facing complex disputes in this innovative industry.

Our clients are individual and institutional investors, blockchain platform companies, digital asset exchanges, custodians, collectors of NFTs, traditional tech companies, cryptocurrency miners, digital banks, peer-to-peer platforms, token issuers, payment and financial service providers

At Singularity, we specialize in resolving disputes across various digital asset categories, including cryptocurrencies, NFTs, DeFi, DAOs, and stablecoins; and AI and fintech products & services. Navigating disputes and compliances in the realm of digital assets demands a multifaceted approach and specialized expertise. Singularity possesses a comprehensive set of capabilities tailored to address the unique challenges of digital asset and fintech and disputes, including in-depth knowledge of the industry, technological proficiency, financial acumen and global reach.

Our extensive experience in international arbitration, litigation, fraud & investigation, and global recovery and enforcement gives us deep and diverse perspectives on the dynamic regulatory and technological environment. Whether you're facing a complex dispute or seeking proactive legal guidance, our team can help you achieve your goals and protect your interests in the fast-paced world of digital assets.

  1. The Consultation Paper is accessible here
  2. As on 2 June 2024, the global crypto market capitalization stands at US$ 2.53 trillion (see https://coinmarketcap.com/)
  3. England & Wales - AA v Persons Unknown [2019] EWHC 3556 (Comm); Singapore - Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02; New Zealand - Ruscoe v Cryptopia Ltd [2020] NZHC 728; Hong Kong - Re Gatecoin Ltd [2023] HKCFI 91
  4. The term ‘network instantiated data’ has been defined as “data that is part of a system consisting of two or more interconnected computing devices that store and communicate information” (see Article 3, Schedule 1, DAL)
  5. Bored Ape is part of the non-fungible token collection.
  6. Consultation Paper at [27] to [30].
  7. [32], Consultation Paper
  8. [34] – [37], Consultation Paper
  9. [2023] SGHC 199
  10. Article 10(2), DAL
  11. Article 10(3), DAL
  12. UNIDROIT’s Principles on Digital Assets and Private Law can be accessed here
  13. The term ‘Address’ has been defined as “a string of data that is unique to a participant on a Distributed Ledger and is shared with other participants. A participant’s Address can be used by the recipient of a transaction to confirm the authenticity of the transaction” (see Article 3, Schedule 1, DAL)
  14. [88] and [93], Consultation Paper
  15. Article 14(1)(b) and (c) of the DAL.
  16. [98], Consultation Paper
  17. DIFC Law No. 6 of 2004
  18. DIFC Law No. 6 of 2005
  19. DIFC Law No. 1 of 2019
  20. DIFC Law No. 7 of 2005
  21. DIFC Law No. 5 of 2005
  22. DIFC Law No. 8 of 2005
  23. DIFC Law No. 9 of 2005
  24. DIFC Law No. 4 of 2018
  25. DIFC Law No. 3 of 2018
  26. The statement can be accessed here