The requirements in the proposed framework are more extensive in scope and reach than what many virtual asset industry stakeholders anticipated.

By Simon Hawkins and Adrian Fong


On 8 February 2024, the Financial Services and the Treasury Bureau (FSTB) released a consultation paper on its legislative proposal to introduce a regulatory regime governing over-the-counter (OTC) trading of virtual assets (VA) in Hong Kong (Consultation Paper).

This blog post summarises the proposed regulatory framework set out in the Consultation Paper.


Background

Understanding NFTs as commodities calls for a more nuanced analysis than what their “non-fungible” label might suggest at first glance.

By Yvette D. Valdez

The appropriate regulatory characterization of cryptocurrencies and digital assets for US legal purposes has spawned many pages of analysis and occupied many hours of industry, law firm, and regulatory consideration. Significant amounts of commentary, and later government and judicial attention, have been devoted to determining whether fungible cryptocurrencies and digital assets constitute securities for purposes of

The SEC’s long-awaited green light for spot bitcoin ETPs is welcomed by the market, but the ambivalent decision raises more questions than it answers.

By Jenny Cieplak, Aaron Gilbride, Yvette D. ValdezStephen P. Wink, and Deric Behar

On January 10, 2024, the Securities and Exchange Commission (SEC) issued, on an accelerated basis, an Omnibus Approval Order (the Order) for proposed NYSE Arca, Nasdaq, and Cboe BZX rule changes seeking to list and trade shares of 11 spot bitcoin trusts. Spot bitcoin trusts hold actual bitcoin, as opposed to bitcoin futures trusts, which hold derivatives tied to the price of bitcoin.

The approval of these rule change requests represents a green light for spot bitcoin-based exchange traded products (ETPs) to trade on national securities exchanges for the first time in bitcoin’s 15-year history, after a decade of attempts by market participants to obtain such approval.

In the Order, the SEC found the proposals to be “consistent with the Securities Exchange Act of 1934 (the Exchange Act) and rules and regulations thereunder applicable to a national securities exchange,” including the requirement that the exchanges’ rules be designed to “prevent fraudulent and manipulative acts and practices.”

A recent bipartisan bill, if enacted, would particularly benefit small lenders and bank-fintech partnerships by promoting transparency, appellate rights, and examiner accountability.

By Arthur S. Long, Parag Patel, Barrie VanBrackle, Pia Naib, and Deric Behar

On December 14, 2023, a bipartisan group of senators introduced the Fair Audits and Inspections for Regulators’ Exams Act (FAIR Exams Act), which seeks to increase transparency in the bank examination process. The proposed legislation would require examining agencies to act quickly and transparently, while creating an independent review and appeals process under the Federal Financial Institutions Examination Council (FFIEC),[1] which would allow banks to seek independent review of material examiner findings.

The proposed regulatory framework would create substantive obligations on issuers of fiat-referencing stablecoins to safeguard the public.

By Simon Hawkins and Adrian Fong

On 27 December 2023, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) released a consultation paper on their legislative proposal for a regulatory regime governing stablecoin issuers in Hong Kong (Consultation Paper). The HKMA followed with its own press release announcing a future sandbox arrangement for stablecoin issuers.

This blog post summarises the proposed Hong Kong regulatory framework set out in the Consultation Paper, and next steps for stablecoin issuers who may fall within scope of the proposed regime.

The OCC outlines safety and soundness principles and appropriate risk management processes for its regulated institutions that engage in BNPL lending.

By Arthur S. Long, Parag Patel, Barrie VanBrackle, Becky Critchley, Deric Behar, and Charlotte Collins

On December 6, 2023, the Office of the Comptroller of the Currency (OCC) issued Bulletin 2023-37 (Guidance), which clarifies the OCC’s policy positions on the risk management of “Buy Now, Pay Later” (BNPL) lending. These consumer lending arrangements (also known as “point-of-sale installment loans” or “pay-in-4”) involve short-term installment loans repayable in four or fewer payments and carry no finance or interest charges. The OCC expects that banks engaged in BNPL lending “do so within a risk management system that is commensurate with associated risks.”

The Guidance applies to all OCC-regulated institutions, including national banks, federal savings associations, covered savings associations, and federal branches and agencies of foreign banking organizations. The OCC also highlighted that the Guidance applies to community banks engaging in (or considering engaging in) BNPL lending.

The proposal would subject certain large non-bank companies offering wallet and payment services to federal regulatory oversight on par with banks and credit unions.

By Jenny Cieplak, Parag Patel, Barrie VanBrackle, and Deric Behar

On November 7, 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule, Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications (the Proposal), to supervise large providers of digital wallets and payment apps. The Proposal aims to ensure that US-based non-bank financial service companies providing digital wallets and payment apps will be subject to the same federal supervisory rules as banks, credit unions, and other financial institutions that the CFPB already supervises.

According to the CFPB, fintech companies and other firms offering novel products and services in the consumer finance space have “blur[ed] the traditional lines of banking and commerce.” The Proposal therefore aims to “enable the CFPB to monitor for new risks to both consumers and the market,” and to “promote fair competition” through consistent enforcement between depository and non-depository institutions.

Covered financial institutions now face heightened expectations in relation to cybersecurity governance, risk assessment, and incident reporting.

By Jenny Cieplak, Tony Kim, Arthur Long, Clayton Northouse, Serrin Turner, Yvette D. Valdez, Deric Behar, and Molly Whitman

The New York State Department of Financial Services’ (DFS) amendments (the Amendments) to its cybersecurity regulations, which were adopted last month with the first implementation deadline of December 1, 2023, impose new and enhanced requirements on covered entities.

On November 1, 2023, the DFS announced the Amendments to its regulations that were initially published in 2017 (23 NYCRR part 500). The changes impose more demanding requirements for larger entities, new obligations to report ransomware incidents and payments, and expanded oversight responsibilities for board and senior management. Requirements related to business continuity and disaster recovery have also been included for the first time.

The initiative covers a wide array of insights and guidance for the blockchain ecosystem, while a Latham-led working group explores the convergence of blockchain and AI.

By Latham & Watkins’ Fintech Team

Latham & Watkins collaborated with Global Blockchain Business Council (GBBC) and industry leaders to release the Global Standards Mapping Initiative (GSMI) 4.0. GSMI 4.0 is the most comprehensive effort to map and analyze the blockchain and digital assets landscape across key areas. It builds on previous releases since 2020 by mapping, cataloging, and analyzing data to provide a holistic view of the blockchain and digital assets industry’s global activity.

Recognizing new realities in decentralization, the regulations aim to provide market players with governance flexibility within distributed ledger technology foundations.

By Stuart Davis, Brian Meenagh, Andrew Moyle, and Ksenia Koroleva

On October 2, 2023, the Board of Directors of Abu Dhabi Global Market (ADGM), a financial free zone in the United Arab Emirates (UAE), enacted the Distributed Ledger Technology Foundations Regulations 2023 (Regulations). The Regulations were published on November 1, 2023.

Latham & Watkins has advised ADGM in drafting the Regulations. The Regulations were developed following extensive benchmarking across a number of peer jurisdictions and incorporate stakeholder feedback from ADGM’s April 2023 consultation paper. The adoption of the Regulations is part of the strategy to promote ADGM as a global center for digital assets.

The Regulations recognize the suitability of common law foundation structures for projects related to digital assets, and aim to allow maximum flexibility for the sector with respect to governance.