On 28 September 2023, the Dubai International Financial Centre (DIFC) announced a proposal to enact a first-of-its-kind Digital Assets Law, a new Law of Security regime, and related amendments to existing DIFC legislation.
Jacques Visser, Chief Legal Officer at DIFC said:
“DIFC has been working closely with experts in the field of digital assets and banking and finance to create a global, groundbreaking Digital Assets Law, and in doing so proposes a significantly enhanced and updated Law of Security regime. The proposed Digital Assets Law sets out the legal characteristics of a digital asset, its proprietary nature, how it may be controlled, transferred, and dealt with by interested parties. The proposed new Law of Security is modelled on the UNCITRAL Model on Secured Transactions and has been adapted to take account of specific factors relating to DIFC. We believe these proposals will put DIFC’s legal and regulatory framework at the forefront of international best practice.”
Whilst we are seeing an increase in the number of cases relating to digital assets appearing before common law courts globally, so far, those cases have tended to focus on relatively narrow issues, which leaves other important issues undetermined and therefore uncertain.
Rather than waiting for case law to guide the future (which is not ideal in a sector which is evolving as rapidly as this one), consulting on, enacting (and amending) legislation to address key issues such as the legal features and consequences of digital assets will provide the market with more legal certainty, increase consumer protection, and in turn increase market confidence and inward investment, whilst taking into account the unique complexities that arise in this sector.
As such, the DIFC’s proposal to regulate the digital assets sector shows its commitment to keeping up with the constantly developing technology, market opportunities and scope for future innovation in what is now believed to be a trillion-dollar asset class.
Similarly, the significant innovation taking place in secured transactions regimes internationally has motivated the DIFC to revise the current Law of Security (which was enacted in 2005) and provide the necessary clarity in relation to taking security over digital assets.
The DIFC’s proposal to enact the new Digital Assets Law and Law of Security has been published for public consultation, with comments requested by 5 November 2023. The Consultation Papers No. 4 and No. 5 (to be read in conjunction with each other) and associated documents can be found on the DIFC’s website here.
Who should consider the proposals?
The proposals will be of interest to a wide range of stakeholders, including (but by no means limited to):
- entities operating in the DIFC;
- family offices;
- banks and financial institutions;
- investment companies and fund managers;
- digital asset intermediaries including investment companies, custodians, broker-dealers, asset managers and advisors;
- those involved in secured transactions relating to digital assets; and
- legal advisors.
Key features of the proposed Digital Assets Law
Amongst other things, the proposed Digital Asset Law covers:
- What is a digital asset?
- Is a digital asset property, and what type of property is it?
- How does one acquire and transfer title to a digital asset?
- When can one sue a defendant for interfering with the use of a digital asset?
Key features of the proposed Law of Security
- To promote credit at reasonable cost by enhancing the availability of secured credit;
- To allow debtors to use the full value inherent in their assets to support credit;
- To enable parties to obtain security rights in a simple and efficient manner;
- To provide for equal treatment of diverse sources of credit and forms of secured
- To validate non-possessory security rights in all types of assets;
- To enhance certainty and transparency by providing for registration of a notice in a
- general security rights registry, while recognising that, in relation to specific types
- of assets, other rules (not involving registration) are also appropriate;
- To establish clear and predicable priority rules;
- To facilitate efficient enforcement of a secured creditors’ rights;
- To allow parties maximum flexibility to negotiate the terms of their security agreement;
- To balance the interests of persons affected by a secured transaction; and
- To promote the harmonisation of secured transactions laws, including conflict of laws rules
As a result of enacting the Digital Asset Law, consequential amendments will be required to other foundational DIFC laws such as the Contract Law, Implied Terms in Contracts and Unfair Terms Law, Insolvency Law, Law of Damages and Remedies, Law of Obligations and others, to cater to the requirements of digital assets in the larger legal framework of the DIFC. In conjunction with the proposed new Digital Assets Law, the DIFC proposes to repeal the current Law of Security and to significantly amend and enhance the DIFC’s securities regime to align with international best practice, particularly UNCITRAL’s Model Law on Secured Transaction.
Note the proposals are in draft form only and will not come in to force until formally enacted.