Global Fintech & Digital Assets Blog

Federal Reserve Narrows the Crypto Activities of Member Banks

Posted in Blockchain, Cryptoassets

Custodia Bank was denied Federal Reserve membership, while certain crypto principal activities are deemed presumptively not appropriate for member banks.

By Arthur S. Long, Pia Naib, and Deric Behar

On January 27, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve) took two actions, clarifying that it considers many cryptocurrency activities to be inconsistent with the business of banking. First, the Federal Reserve announced that it had denied the application of Custodia Bank, Inc. (Custodia) to become a member of the Federal Reserve System. Second, using its authority under Section 9(13) of the Federal Reserve Act, it issued a policy statement (Policy Statement) whose purpose was to “level the playing field” for state and national banks with respect to “novel activities.”

With these actions, and the current cautious attitude toward cryptocurrency at the Office of the Comptroller of the Currency (OCC), state banking supervisors will likely be the ones advancing new developments in crypto activities.

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New York Department of Financial Services Issues Crypto Custody Guidance

Posted in Blockchain, Cryptoassets

The Guidance clarifies the regulator’s expectations on safekeeping customer digital assets, and the disclosures that must accompany such arrangements.

By Arthur S. Long, Parag Patel, Marlon Q. Paz, Yvette D. Valdez, Barrie VanBrackle, Pia Naib, Donald Thompson, and Deric Behar

On January 23, 2023, the New York Department of Financial Services (NYDFS) published Guidance on Custodial Structures for Customer Protection in the Event of Insolvency (the Guidance). It guides virtual currency entities (VCEs) acting as custodians (VCE Custodians) on how to appropriately custody customer assets and properly disclose such holdings and arrangements. Issued in the wake of numerous connected crypto industry insolvencies that imperiled customer assets and funds due to commingling and rehypothecation, the Guidance instructs VCEs to put customer protection first. The NYDFS emphasized “the paramount importance of equitable and beneficial interest always remaining with the customer.”

The Guidance is addressed to VCE Custodians that are either licensed under New York’s BitLicense regulation (23 NYCRR Part 200) or New York state-chartered limited purpose trust companies (Regulated VCE Custodians), but reads as a broad statement of policy.

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New House Subcommittee to Prioritize Crypto Oversight

Posted in Blockchain, Cryptoassets

The Financial Services Committee seeks to bring order to an industry many say has suffered from lack of proper rulemaking.

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

On January 12, 2023, incoming House Financial Services Committee Chair Patrick McHenry established a new subcommittee on digital assets, financial technology, and inclusion. Rep. French Hill will chair the subcommittee, while Rep. Warren Davidson will serve as its vice-chair.

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SEC v. Ripple: Approaching Judgment Day

Posted in Blockchain, Cryptoassets

While a conclusion to the much-hyped case may be approaching, market participants should be wary of doomsday prognostications.

By Stephen P. Wink, Douglas K. Yatter, John Sikora, Benjamin Naftalis, William Baker, Jack Barber, Natalie DeLave, and Deric Behar

As a new year begins, the digital assets industry is still enduring a deep and widespread crypto winter. When the story of this crypto winter is written, a chapter will likely be devoted to the impending resolution of a civil enforcement action brought by the Securities and Exchange Commission (SEC) on December 22, 2020, against Ripple Labs Inc. (Ripple), its former CEO, and its former COO and current CEO. The parties have been litigating this case since then in the US District Court for the Southern District of New York.

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Banking Regulators Issue Joint Statement on Crypto Risks

Posted in Blockchain, Cryptoassets

Banking organizations should ensure appropriate risk management, but regulators are skeptical of certain crypto activities as principal.

By Arthur S. Long, Pia Naib, and Deric Behar

On January 3, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued a concise joint statement on crypto-asset risks to banking organizations.

Relatedly, on January 7, 2023, Mark Van Der Weide, the Federal Reserve general counsel, and Benjamin McDonough, the OCC general counsel, delivered remarks to the Banking Law Committee of the American Bar Association’s Business Law Section, reiterating that their agencies were staying the course on their “careful and cautious” approach to crypto.

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New York Department of Financial Services Issues Crypto Guidance for Banks

Posted in Blockchain, Cryptoassets

Digital asset activities of licensed institutions must be approved and will be assessed for potential safety and soundness risks.

By Arthur S. Long, Pia Naib, and Deric Behar

On December 15, 2022, the New York State Department of Financial Services (NYDFS) issued final guidance to covered institutions engaging in (or seeking to engage in) virtual currency-related activity (the Guidance). Such covered institutions are New York “banking organizations” — New York-chartered banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions, and Article XII investment companies — and NYDFS-licensed branches and agencies of non-US banks.

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E-Money, Payment Services, and Insolvency

Posted in Payments

Consumers and service providers should take note of some of the enhanced risks upon an e-money institution’s insolvency.

By Hongbei Li

Technology is rapidly changing the way customers and businesses interact with financial systems. Fintech companies are a driving force behind the disruption of traditional banking and payment services, with regulatory innovation close behind.

In the 12 months to June 2021, electronic money institutions (EMIs) in the UK processed more than £500 billion of transactions, according to Financial Conduct Authority (FCA) data. In 2019, UK EMIs held £10 billion in customer funds, the UK government estimates. By 2025, more than seven in 10 smartphone owners will be mobile P2P payment users. As a major remittance source country, the UK has seen a 30% growth in its digital remittance market in 2021. According to Statista, this market is predicted to grow to more than $4.6 billion by 2025. These trends are fuelling the UK’s ambition to become a world leader in payments innovation.

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LBRY Ruling: A Nice Read for the SEC

Posted in Blockchain, Cryptoassets

In granting the SEC’s motion for summary judgment, a federal court ruled that sales of LBC tokens were securities transactions.

By Stephen P. WinkDouglas K. Yatter, Jack McNeily, Benjamin Naftalis, Adam Zuckerman, and Deric Behar

On November 7, 2022, the Securities and Exchange Commission (SEC) prevailed in a motion for summary judgment against blockchain-based streaming and publishing firm LBRY, Inc. The US District Court for the District of New Hampshire (the Court) considered the motion papers and oral argument, determining that with no triable defense, “LBRY offered LBC [LBRY Credits, the protocol’s native token] as a security.” LBRY therefore violated Sections 5(a) and (c) of the Securities Act of 1933 by offering LBC to investors without proper registration.

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Dubai Financial Services Authority Issues New Regime to Regulate Crypto Tokens

Posted in Cryptoassets

The regime introduces rules on various crypto tokens, including cryptocurrencies and stablecoins, in the Dubai International Financial Centre.

By Brian A. Meenagh, Matthew Rodwell, and Ksenia Koroleva

On November 1, 2022, the Dubai Financial Services Authority (DFSA) crypto token regulatory regime came into effect.

The rules expand upon the DFSA framework for regulating investment tokens established in 2021 (the 2021 Rules). The Dubai International Financial Centre (DIFC) regime defines a token as a cryptographically secured digital representation of value, rights, or obligations which may be issued, transferred, and stored electronically, using distributed ledger technology (DLT) or other similar technology. The 2021 Rules only regulated investment tokens, which comprised security tokens and derivative tokens (in essence, tokenized equivalents of conventional securities and derivatives, respectively) (the Investment Tokens). Pursuant to the 2021 Rules, persons carrying out certain activities with Investment Tokens (e.g., issuing, offering, holding, promoting, dealing, advising, brokering) need to obtain approval from the DFSA and comply with certain obligations.

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The Law Commission of England and Wales Proposes to Classify NFTs as Data Objects

Posted in Blockchain, Cryptoassets, Non-Fungible Tokens

NFT creators and consumers should evaluate the legal and commercial considerations of NFTs that are linked to copyright work.

By Andrew Moyle, Christian McDermott, and Avinash Balendran

The Law Commission of England and Wales (the Commission) is a statutory independent body that keeps the law of England and Wales under review and recommends reform where it determines that it is needed. The Commission recently published a public consultation paper on digital assets which closed on 4 November 2022. One of the key proposals in the paper is the recognition of a third category of personal property, labelled “data objects”.

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