Recognising Digital Assets as Property: A Landmark DIFC Court Decision

Introduction

Data is not recognised as tangible or intangible property, at least in the absence of legislation specifying (sometimes to varying levels of effectiveness) that certain types of data are, in law, property and thus can be owned.  Digital assets are a certain type of data set.  DIFC Law No. 2 of 2024 (“Digital Assets Law”) recognises that digital assets are a form of property.  The recent DIFC Court of Appeal case Gate Mena DMCC v. Tabarak Investment Capital Limited [2023] DIFC CA 002 is notable because it predates the enactment of the Digital Assets Law but nonetheless it recognized a property right in digital assets under UK common law, marking a significant development.

Background

The case involved a dispute over a cryptocurrency transaction that resulted in the loss of 300 Bitcoin (“BTC”) due to alleged fraud.  The appellants, Gate Mena DMCC and Huobi Mena FZE, claimed that the respondents, Tabarak Investment Capital Limited and Christian Thurner, were liable for the loss.  The primary legal issue was whether BTC could be considered property under common law, and if so, what legal duties were owed by the parties involved.

Recognition at Common Law

The DIFC Court of Appeal, in its judgment, affirmed that BTC and other digital assets are considered property under UK common law.  This recognition aligns with the reasoning in the English case of AA v Unknown Persons ([2019] EWHC 3556 (Comm)), where Bryan J held that cryptocurrencies meet the criteria for property as defined by Lord Wilberforce in the seminal case National Provincial Bank v Ainsworth ([1965] AC 1175).  The criteria include being definable, identifiable by third parties, capable of assumption by third parties, and having some degree of permanence.

The Court of Appeal stated that digital assets constitute a third category of property, distinct from ‘choses in possession’ and ‘choses in action’.  This categorization is supported by the Law Commission of England and Wales' report, "Digital Assets: Final Report," which proposed that digital assets should be treated as a distinct category of property.  The Court of Appeal emphasized that digital assets exist independently of any legal system's recognition and can be controlled through private keys, making them rivalrous and capable of being owned and transferred.

Custodial and Escrow Services

The Court of Appeal examined the role of Tabarak as a custodian and intermediary in the transaction.  It was found that Tabarak had agreed to hold the BTC in a wallet and transfer it to the buyer only upon receipt of payment.  This arrangement implied a duty to take reasonable care of the BTC, similar to the duties of a bailee under common law.  However, the Court noted that the concept of bailment traditionally applies to tangible property, and its application to digital assets requires a nuanced understanding of control and possession.

Duty of Care

The Court of Appeal held that Tabarak owed a duty of care to the appellant Huobi under Article 18 of the DIFC Law of Obligations, which requires a relationship of sufficient proximity and that it be fair, just, and reasonable to impose such a duty.  The Court of Appeal found that Tabarak had acted in the honest but mistaken belief that the security measures in place were sufficient to protect the BTC.  Consequently, Tabarak was found not to be in breach of its duty of care.

The Digital Assets Law

The Digital Assets Law provides a statutory framework for the recognition and regulation of digital assets.  By classifying digital assets as intangible property (Article 9), it resolves uncertainties around ownership, control, and title, which were previously debated.  The law’s provisions on control (Articles 10 to 13) offer clarity on how digital assets are managed, ensuring that businesses and investors have clearly defined rights and obligations.

Importantly, the Digital Assets Law simplifies enforcement by outlining specific regulations for custodianship and transfer of title, ensuring that digital assets are treated like more traditional forms of property.  This not only enhances investor confidence but also facilitates broader adoption of digital assets within the DIFC.

The Digital Assets Law integrates security measures to mitigate risks, addressing challenges like the infinite reproducibility and usability of digital assets.  By explicitly stating that digital assets are not things in possession or things in action, the law provides legal certainty in how these assets should be governed, traded, and protected, reducing potential disputes.

Evidently, the Digital Assets Law bridges the gap between traditional property laws and the modern complexities of digital assets, offering clarity in ownership, control, and legal enforcement, which were previously uncertain.