DIFC’s law tipped to help digital assets go mainstream

Dubai Tourism

• Classifies assets as property
• Existing laws updated too
• Trade ‘likely to be transformed’

The Dubai International Financial Centre has introduced a law to define and regulate digital assets – a move that should herald their integration into more parts of the economy, lawyers have told AGBI.  

The DIFC legislation came into effect on March 8 and classifies the assets as property.

Digitally tracked items such as cryptocurrencies, non-fungible tokens (better known as NFTs) and electronic documents offer big potential as an asset class, but have long been dogged by concerns over their volatility, regulatory ambiguity and the risk of fraud.

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Authorities in the UAE hope the legislation will provide a clear framework for the ownership, control and transfer of digital assets, broadening their use beyond financial services.

The DIFC, which is home to more than 5,000 companies and has its own legal system based on English common law, has also updated its legislation on contracts, personal property, insolvency and security to cover these assets. 

Adela Mues, a partner in the Dubai office of law firm Reed Smith, says this regulatory clarity is likely to drive transformation in sectors including trade and real estate. 

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Mues says the use of digital assets as collateral could become commonplace as traditional assets such as real estate begin to be “tokenised” – or converted into digital tokens on a blockchain, making them easier to buy and sell.

The market for tokenised real-world assets could reach $10 trillion by 2030, according to a report published last year by digital asset manager 21.co.

The DIFC law also makes electronic transferable records functionally equivalent to paper ones, which Mues says should allow important trade documents that track shipment or guarantee payment to go digital.

Although cash and paper are still common in the region, there is a shift toward digital trade, she says. 

This would make international trade quicker and more efficient, with the use of electronic documents and “smart contracts” – computer programs that automatically carry out the terms of an agreement when certain conditions are met.

Mues also points to the UAE Central Bank’s development of a central bank digital currency – a concept inspired by crypto – saying it could drive change in the financial services sector. 

“This is a form of digital money that would be issued and guaranteed by the Central Bank, initially being tested for cross-border payment between international governments, with the aim of eventually being used for retail transactions and recognised as legal tender,” she said.

Mazen Boustany, a partner and head of the financial regulation practice at law firm Baker McKenzie UAE, says digital assets may also be included in credit balances or insolvencies, or transferred to beneficiaries.

According to Nadim Bardawil, a partner at law firm BSA, the DIFC has positioned itself as a leading jurisdiction for digital asset transactions and “one of the go-to jurisdictions” for disputes.

The DIFC’s courts have already ruled on disputes involving digital transactions, he points out. The first judgment in this area – in a case about the misappropriation of 300 bitcoins – was handed down in October 2022.

Jacques Visser, chief legal officer at the DIFC Authority, describes its law as “the first legislative enactment to comprehensively set out the legal characteristics of digital assets as a matter of property law”. 

However, other jurisdictions have also classified digital assets as property. Similar rulings on cryptocurrencies have been made in China, Hong Kong and Singapore.    

Although there may be “teething pains” and the new rules have yet to be tested, Mues believes the DIFC has made it clear that digital assets are “here to stay and will be part of the legal and economic reality of the future”.