Global Fintech & Digital Assets Blog

FRB Again Highlights Risks in the Stablecoin Sector

Posted in Cryptoassets

Treasury officials believe congressional action is “highly appropriate” this year to address the risks that the latest financial stability report underscores.

By Alan W. Avery, Pia Naib, and Deric Behar

On May 9, 2022, the Board of Governors of the Federal Reserve System (FRB) published its semi-annual Financial Stability Report (Report). The Report, which covers a variety of topics, briefly repeated some familiar warnings regarding digital assets and potential risks to the wider financial system. In particular, the FRB expressed concern about funding risks posed by stablecoins. Continue Reading

California Executive Order Foreshadows Stronger Regulation of Digital Assets

Posted in Blockchain, Cryptoassets

The Executive Order aims to strengthen consumer protection and cultivate innovation in digital assets and related financial products and services.

By Christopher D. Frey, Scott D. Joiner, Barrie VanBrackle, Katherine A. Sawyer, and Scott Kanchuger*

On May 4, 2022, California Governor Gavin Newsom issued an Executive Order (California Order) calling upon California state agencies to develop stronger regulatory and enforcement mechanisms for blockchain technology, cryptoassets, and related financial products and services. Recognizing the historical costs of reactive government regulation for new technologies, the California Order seeks to draw upon the benefits of early engagement by public institutions to “manage emerging risks and opportunities, with the twin goals of strengthening consumer financial protection and cultivating responsible innovation.”

The California Order is the first of its kind in any state and follows President Biden’s March 2022 Executive Order on Digital Assets, which calls for greater federal regulation and enforcement activity over digital assets and related technologies. The California Order aims to create a “transparent and consistent business environment for companies operating in blockchain … that harmonizes federal and California laws” and “balances the benefits and risks to consumers.” Governor Newsom ordered California state agencies to “work with, and concurrently to, the federal government” to “establish a comprehensive, thoughtful, and harmonized regulatory and business environment for crypto assets.” Continue Reading

Decentralized Autonomous Organizations: Piercing the Digital Veil

Posted in Cryptoassets

A complaint filed in federal court will test the boundaries of protection from liability for individuals behind decentralized autonomous organizations.

By Stephen P. WinkNima H. Mohebbi, Adam Zuckerman, and Deric Behar

On May 2, 2022, a putative class action was filed in the US District Court for the Southern District of California against the bZx protocol decentralized autonomous organization (DAO), the DAO’s two individual co-founders, two limited liability corporations (LLCs) that invested in the DAO and participated in its governance, and several other associated entities. DAOs are (in theory) organizations without a centralized leadership structure like traditional corporations or other limited liability entities. Their governance is generally driven by the coded terms of smart contracts maintained on a blockchain ledger, rather than top-down by a management team. And rather than having a hierarchy of control, DAO stakeholders with tokenized voting rights are typically considered “equals” in which one token equals one vote. Continue Reading

Rising Regulation of Fintech Innovation — Implications for PE Investments

Posted in Cryptoassets, Fintech Regulation

Assertive regulators are bringing greater clarity and new challenges as they step up oversight of fintech innovation.

By Stuart DavisTom D. EvansNicola HiggsChristian F. McDermottDavid J. WalkerBrett CarrCatherine Campbell, and Charlotte Collins

As the fast-growing fintech industry thrives, the sector has begun to attract greater regulatory scrutiny. We expect new legal and regulatory focus and oversight of those players operating on the unregulated perimeter of financial services.

While the level of supervision is set to increase and pose challenges for industry participants, a more robust regulatory environment could play into the hands of PE buyers and create opportunities for portfolio companies best able to navigate this rising regulation. In our view, PE firms must pay heed to the tone of more assertive regulators, but that approach coupled with new regulation will create a space in which firms in nascent fintech verticals can legitimately pursue their aims with greater certainty, no longer looking over their shoulders.

While the UK government is keen to stress that the new regulation will be applied proportionately, proposals are likely to result in the redirection of resources and attention of firms, and buyout firms should remain alert to changes that may impact a range of fintech investments. Continue Reading

CFPB Puts Fintechs in the Crosshairs

Posted in Fintech Regulation

The agency just revived its dormant authority to supervise nonbank financial entities that it determines pose risk to consumers. 

By Matt Hays, Benjamin Naftalis, Parag Patel, Barrie VanBrackle, and Deric Behar

On April 25, 2022, the Consumer Financial Protection Bureau (CFPB) — the US government agency established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) and responsible for consumer protection in the financial sector — announced that it is invoking a largely unused legal provision to examine nonbank financial companies that pose risks to consumers. Continue Reading

Digital Assets Could Revolutionize Global Remittances

Posted in Cryptoassets

The promise of faster and cheaper remittances may accelerate crypto adoption in many emerging markets, including those that have not historically utilized credit and debit payments, notably Latin America.

 By Gianluca Bacchiocchi, Barrie VanBrackle, Nima H. Mohebbi, and Deric Behar

One of the most promising benefits of digital assets is the ability to move value over the global internet nearly instantaneously, in immutably recorded transactions. For many people in warzones or geographies with limited access to banking or payment card infrastructure, this capability is critical and can often be life-saving. Continue Reading

Dubai Issues Landmark Law to Promote Development of Virtual Assets Market

Posted in Cryptoassets

The new law establishes the Dubai Virtual Assets Regulatory Authority and identifies activities to be regulated, such as operating virtual asset platforms.

By Andrew Moyle, Ksenia Koroleva, and Matthew Rodwell

On March 11, 2022, Dubai Law No. 4 of 2022 on the Regulation of Virtual Assets in the Emirate of Dubai (Virtual Assets Law) was published in the Official Gazette of the Government of Dubai. The new law is a landmark piece of legislation for Dubai, which aims to become one of the leading jurisdictions for virtual assets. Continue Reading

New Report Reviews Impact of UK Payments Regulation

Posted in Payments

The report, from UK Finance, The Payments Association, and Latham & Watkins, urges fresh thinking about regulating payments in the growing digital economy.

By Stuart Davis and Brett Carr

UK Finance, The Payments Association, and Latham & Watkins have published UK Payments Regulation Review: Making sense of where to go now, a new report examining regulation of the UK’s payments industry and its impact on the financial sector, consumers, and businesses.

Amidst the rapid digitalisation of the UK economy, the report explores how existing payments regulation has shaped the ability of sector participants to invest, grow, and deliver good outcomes for UK consumers and businesses, and how it may need to adapt to changing structures and demands of the market. In light of ongoing work reviewing how the UK’s financial services regulatory framework should adapt, the publication also examines the need for a coherent and consistent regulatory framework across banking and finance, to provide clarity where regulation overlaps; to ensure that proportionality, appropriate cost-benefit analysis, and responsiveness are embedded at the heart of regulation; and to empower regulators to adapt to the fast-moving payments sector whilst enabling and supporting innovation and investment.

President Biden Issues Executive Order on Digital Assets

Posted in Cryptoassets

The order directs federal agencies to focus on six priority areas within the digital asset sector and potential development of a US CBDC.

By Alan W. Avery, Yvette D. Valdez, Stephen P. Wink, Pia Naib, Adam Bruce Fovent, and Deric Behar

On March 9, 2022, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets (Order). In the face of rapid advancement in blockchain technology and its applications, the Order asserts that “an evolution and alignment” in the approach of the various federal agencies (Agencies) to digital assets is necessary. It directs the Agencies to study the risks of digital assets to the US economy, investors, and consumers, and to explore the development of a US central bank digital currency (CBDC). The Order also directs the Agencies to monitor and assess the impact of digital assets on financial stability and financial system integrity, the prevention of crime and illicit finance, national security, financial inclusion and equity, energy policy, and climate change. Continue Reading

Expanded Definition of “Exchange” and SEC Regulation of Crypto Platforms

Posted in Cryptoassets

The amended definition could provide a new means for the SEC to regulate crypto platforms.

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

We previously published a blog post on the set of proposed amendments (Proposal) issued on January 26, 2022, by the Securities and Exchange Commission (SEC) regarding the regulation of alternative trading systems (ATSs) that would, among other things, substantially expand the activities covered by the definition of an “exchange” as interpreted by Rule 3b-16 under the Exchange Act to capture “Communication Protocol Systems”. Whereas we previously offered our general views on the proposed expansion of definitions and resulting potential impact on the securities industry, now we turn specifically to the potential impact of the Proposal on platforms trading digital assets. Continue Reading