Dubai’s DIFC launches ‘groundbreaking’ Digital Assets Law to enhance legal certainty, boost investor confidence

The new DIFC law, which went into effect on March 8, defines the legal characteristics of digital assets as a form of property, outlining how they can be controlled, transferred, and dealt with by interested parties

The Dubai International Financial Centre (DIFC) has enacted the world’s first comprehensive Digital Assets Law, a groundbreaking move that aims to provide legal certainty and foster innovation in the rapidly evolving sector.

The new law, which went into effect on March 8, defines the legal characteristics of digital assets as a form of property, outlining how they can be controlled, transferred, and dealt with by interested parties. Alongside the Digital Assets Law, DIFC has also introduced a new Law of Security, modeled after the UNCITRAL Model of Secured Transactions, and made related amendments to existing legislation.

“We consider this legislation to be groundbreaking as the first legislative enactment to comprehensively set out the legal characteristics of digital assets as a matter of property law, and to provide for how digital assets may be controlled, transferred, and dealt with by interested parties,” said Jacques Visser, Chief Legal Officer at DIFC Authority.

The move comes as digital assets, representing a trillion-dollar asset class, continue to gain traction globally, presenting significant opportunities for innovation and market growth. However, the legal landscape surrounding digital assets has remained uncertain, with jurisdictions grappling with how to regulate and enforce rules in this nascent sector.

What does this mean for Islamic Finance?

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“Typically, clear and comprehensive regulations are viewed as positive if they reduce legal and operational uncertainties involved with digital assets, which could foster innovation while balancing risks associated with digital assets, including market volatility, cybersecurity risks, and the potential for financial crime,” said Bashar Al Natoor, Fitch Rating’s Global Head of Islamic Finance.

However, the intersection of digital assets and Islamic finance could present a “unique blend of opportunities and challenges,” he added. DIFC, which houses Nasdaq Dubai – one of the top Sukuk listing venues with over $85 billion in listed Sukuk – could potentially see the development of Sharia-compliant digital assets, although ensuring compliance with Islamic principles could introduce additional challenges.

“Sharia-compliant digital assets development is nascent in the UAE, GCC, and even globally.”

According to Nadim Bardawil, Partner at law firm BSA, the Digital Assets Law is only applicable to the DIFC area, not the entire emirate of Dubai. He told Arabian Business that the law was “another feather in the cap of the UAE which is positioning itself at the forefront of providing a legislative model to integrate digital assets in the day-to-day economy.”

“While digital assets have long had the reputation of being risky and unregulated, the DLA provides the ability to enter into digital asset transactions using the legislative framework of the DIFC underpinned by a recognised and reputable common law court in the DIFC Court,” he added.

“This is particularly interesting given that disputes involving digital transactions have already been adjudicated by the DIFC Court and we expect more parties to elect into the DIFC has a forum for contracts involving digital assets.”

The DIFC has integrated digital assets into many of its foundational laws, establishing itself as a jurisdiction welcoming digital asset transactions and aiming to be a go-to destination for resolving related disputes, he explained.

Currently, the majority of global legislations to do with digital assets have been more focused on the financial services aspect of the industry. “Dubai and the UAE have already made their mark in this type of regulation through the FSRA, VARA and DFSA’s regulations on the usage of cryptocurrencies/virtual assets,” he said.

“The difference with the DLA is that it is recognising and defining a digital asset not just as a financial product, but also as an asset which can be used in a non-financial services context.”

DIFC updates other laws

The new Digital Assets Law follows an extensive review of legal approaches to digital assets in multiple jurisdictions and a public consultation period in 2023. Existing DIFC laws, such as the Contracts Law, Law of Obligations, Law of Damages and Remedies, Trust Law, and Foundations Law, have also been updated to cater to specific issues arising in relation to this asset class.

Additionally, updates to the Law of Obligations provide for the use of electronic transferable records, which are functionally equivalent to paper trade documents or instruments like bills of lading, bills of exchange, promissory notes, and warehouse receipts. This recognition of electronic documents facilitates greater efficiencies in cross-border digital trade by increasing the speed and security of transmission and enabling the automation of certain transactions through smart contracts.

“The DIFC’s move to modernize its property and securities laws for blockchain capabilities could support growth in digital asset and tokenization initiatives by attracting market participants to the free zone,” Moody’s Ratings said in an email statement on Friday.

“This could pave the way for new digital finance products and services. Equating electronic transferable records, under the updated Law of Obligations, to be functionally equivalent to paper trade documents, or instruments such as bills of lading, bills of exchange, promissory notes and warehouse receipts, is similar to existing national frameworks,” the statement added.

The new Law of Security, replacing the 2005 law, significantly enhances DIFC’s securities regime to keep pace with international developments and ensure alignment with best practices. It provides clarity on taking security over digital assets and amalgamates financial collateral provisions into a new chapter.

“The new legislation reflects the Centre’s commitment to maintaining a transparent and robust legal and regulatory framework aligned with global best practice,” the DIFC Authority said in a statement.

As the digital asset market continues to evolve, the DIFC’s proactive approach in establishing a comprehensive legal framework could position the financial center as a hub for innovation and attract further investment in the burgeoning sector.

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