Global Fintech & Digital Assets Blog

Understanding Decentralization in Web3 Protocols

Posted in Blockchain, Cryptoassets

By Stephen Wink and Adam Zuckerman

Decentralization is the key innovation enabled by blockchain technology, and can have significant technological, economic, and legal implications for web3 companies and protocols. Decentralization remains hard to grasp and define despite its importance. In the web3 spirit of collaboration and open source, Latham has partnered with a16z Crypto to develop two matrices to help enumerate the components of decentralization.

The matrices articulate not only the various categories and factors of decentralization but also suggest indicators of various thresholds of decentralization with respect to each factor.  Additionally, as decentralization must be assessed differently for different types of protocols and projects, we provide two different matrices for the following:

  • tokenized blockchain protocols, such as layer 1 and layer 2 blockchains; and
  • tokenized smart contract protocols deployed to blockchains.

We hope this resource helps innovators, legal practitioners, investors, and policymakers to better understand and define decentralization. And we hope it can serve as a tool for builders to understand how to better pursue decentralization and self-assess their progress. This is intended to serve as a comprehensive starting point for defining decentralization, but we welcome feedback from all industry participants as both technology and standards evolve.

Learn more and access the Decentralization Matrix tools.

New Era Dawns for Hong Kong’s Virtual Assets Sector

Posted in Cryptoassets, Fintech Regulation

The regulatory perimeter continues to expand as the Securities and Futures Commission introduces a comprehensive regime to regulate virtual asset service providers.

By Simon Hawkins and Adrian Fong

In December 2022, Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill), which will establish a new licensing regime and statutory framework for virtual asset service providers from 1 June 2023. Initially, the Amendment Bill will apply to anyone operating a centralised virtual asset trading platform in Hong Kong or actively marketing such services to the Hong Kong public.

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New York Attorney General Proposes Stringent Crypto Bill

Posted in Blockchain, Cryptoassets

The CRPTO Act is intended to increase transparency and consumer protections, and reduce conflicts of interest, through heightened disclosures and penalties.

By Jenny Cieplak, Arthur S. Long, Yvette Valdez, Stephen P. Wink, and Deric Behar

On May 5, 2023, New York Attorney General (NYAG) Letitia James introduced a bill that, if passed, would increase New York’s oversight of digital assets market activity.[1] The Crypto Regulation, Protection, Transparency and Oversight Act (the CRPTO Act, or the Bill) would provide the NYAG’s office with greater enforcement powers to police the digital asset industry. It would also expand the New York Department of Financial Services’ (NYDFS’s) authority to regulate individuals and businesses engaging in digital asset transactions. The CRPTO Act comes on the heels of several high-profile enforcement actions by the NYAG against digital asset businesses.

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CFPB Finalizes Rule on Small Business Lending Data

Posted in Fintech Regulation

The rule requires that lenders collect and report extensive applicant data to the CFPB, intended to deter discrimination and promote economic growth.

By Parag Patel, Victor Razon, and Deric Behar

On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) finalized a regulation implementing Section 1071 of the 2010 Dodd-Frank Act. The regulation requires lenders, including fintech lenders, to collect and report certain demographic and financial data to the CFPB for credit applications received from small businesses. The purpose of the regulation is to promote economic development, increase transparency and accountability, and address unlawful discrimination in small business lending. The CFPB intends to establish a comprehensive and publicly accessible database containing the small business credit application data collected in connection with this regulation.

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Bored Apes Scores Win in Protecting Its Trademarks

Posted in Blockchain, Cryptoassets

In a major Web3 trademark infringement case, NFT creators prevail over those with a bad-faith intent to profit.

By Stephen P. Wink, Tiffany M. Ikeda, Adam Zuckerman, and Deric Behar

On April 21, 2023, Yuga Labs, the original creators of the Bored Ape Yacht Club (BAYC) non-fungible token (NFT) collection, successfully moved for summary judgment on two of its key claims arising under the Lanham Act against Ryder Ripps and Jeremy Cahen (collectively, the Defendants). The US District Court for the Central District of California (the Court) considered Yuga’s motions to determine that NFTs are goods for purposes of the Lanham Act of 1946 and that the Defendants had violated the Lanham Act through false designation of origin and cybersquatting.

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UK Government to Consult AI Firms and Creative Sector in Revising Text and Data Mining Exception Proposal

Posted in Data Privacy, Cybersecurity, and AI

The government has announced it will come up with a new code of practice to replace an earlier approach that faced opposition from the creative sectors.

By Deborah Kirk and Brett Shandler

Latham previously reported on the UK government’s proposal to introduce a new copyright and database exception that allows text and data mining (TDM) for any purpose, provided that the party employing TDM obtains lawful access to the material (June 2022 TDM Proposal). The UK government has now announced that it is abandoning this proposal, and intends to consult with AI firms and rightholders to produce a code of practice to support AI firms to access copyrighted work as an input to their models, whilst ensuring protections on generated output to support rightholders. It has foreshadowed that this code of practice, due by summer 2023, may be followed up with legislation if it is not adopted or agreement is not reached.

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SEC Tackles Digital Assets in Reopened Proposal to Reinterpret Definition of “Exchange”

Posted in Blockchain, Cryptoassets

Whereas the original proposal did not directly discuss digital assets, the reopening release is mainly focused on digital asset platforms.

By Stephen P. Wink, Marlon Q. Paz, Naim Culhaci, and Deric Behar

On April 14, 2023, the Securities and Exchange Commission (SEC) issued a release amending portions of its earlier proposal to reinterpret the definition of an “exchange” and reopening the comment period for the proposed amendments (the Reopening Release.)

The SEC had issued a set of proposed amendments (the Original Proposal) on January 26, 2022, regarding the regulation of alternative trading systems (ATSs). The Original Proposal would amend Rule 3b-16 (Rule 3b-16) under the Securities Exchange Act of 1934 (the Exchange Act) to more expansively interpret certain terms used in the statutory definition of an “exchange” under Section 3(a)(1) of the Exchange Act. This reinterpretation would, among other things, cause the “exchange” definition to capture “Communication Protocol Systems”, which are not captured under the present version of Rule 3b-16. (See this Latham post for more information.)

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US House Financial Services Committee Wrangles Over Stablecoins

Posted in Cryptoassets, Fintech Regulation

Congress will be “starting from scratch” in attempting to establish a regulatory framework for stablecoins — an issue that many believe is the top digital asset legislative priority.

By Arthur S. Long, Parag Patel, Yvette Valdez, Pia Naib, and Deric Behar

On April 15, 2023, the US House Financial Services Committee (Committee) published a draft bill on the regulation of stablecoins in anticipation of a hearing by its Subcommittee on Digital Assets, Financial Technology and Inclusion (Subcommittee) on April 19. Government entities from the Financial Stability Oversight Council to the President’s Working Group on Financial Markets have identified stablecoins as the one type of digital asset that most demands federal regulation. In the prior Congress, leaders of the Committee, Maxine Waters and Patrick McHenry, made material progress on the now published draft bill.

Notably, the April 15 draft bill as published would establish a regulatory framework for stablecoins that would be very similar to the existing framework for banks.

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Hong Kong Court Confirms the Proprietary Nature of Cryptocurrencies but Denies Clients’ Proprietary Claims

Posted in Cryptoassets

This is the first decision by the Hong Kong Court on whether clients of a crypto exchange have proprietary claims to cryptocurrencies held on the platform. It confirms that cryptocurrency constitutes property under Hong Kong law.

By Dominic Geiser, Simon Hawkins, Howard K. H. Lam, Adrian Hei-Yin Fong, Flora F. W. Innes, and Tsun Ming (Truman) Mak

In a recent landmark decision of Re Gatecoin Limited [2023] HKCFI 914 involving a Hong Kong cryptocurrency exchange in liquidation, the Hong Kong Court of First Instance expressly confirmed for the first time that cryptocurrency is “property” under Hong Kong law and can be held on trust. This decision aligns Hong Kong with the position in other major common law jurisdictions.

The court also found, based on the facts and circumstances of this particular case, that the cryptocurrency exchange did not hold assets on trust for its customers under its latest applicable terms and conditions, thereby rendering such customers unsecured creditors, rather than beneficiaries, of the exchange.

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Latham Collaborates on Fintech Mexico 2023 Annual Report

Posted in Fintech Regulation

The report, which includes contributions from Latham, provides an in-depth look at Mexico’s fintech ecosystem.

By Yvette Valdez

On April 18, 2023, the Asociación Fintech México released its Fintech Mexico 2023 Annual Report. Along with a detailed discussion of Mexico’s booming fintech industry, the white paper presents a comparative analysis of the regulatory framework encompassing Mexico’s fintech industry, highlighting restrictions and areas of opportunity vis-à-vis best practices in Latin America and the US.

Latham contributed the US perspective and participated in the regulatory chapter of the white paper, which was prepared in collaboration with NTT Data, Mexico City-based law firm Nader, Hayaux & Goebel, and various other law firms.

Read the white paper.

Continúe leyendo para ver esta publicación en español.

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