Proposed rule would be implemented by statute and would give primacy to parties’ choice of governing law and jurisdiction.

By Stuart Davis, Nell Perks, and Matthew Unsworth

There is at least a tentative consensus in English law that cryptocurrencies and other digital assets are capable of giving rise to property rights.[1] However, there remains considerable uncertainty around which laws should govern proprietary disputes about digital assets and which courts should have jurisdiction over those disputes.

The Financial Markets Law Committee (FMLC) explained the crux of this problem in their initial report on digital assets in 2018.[2] Traditionally, a question as to rights or entitlement to personal property is governed by the law of the place where the property is situated (lex situs).  But this rule is ill-suited to digital assets which, by their nature, are intangible, digitised, and constituted on a decentralised ledger shared across a network of participants in potentially any number of jurisdictions.

Professional investors will benefit from increased exposure to cryptoassets via traditional financial instruments, though retail investors’ exposure remains limited.

By Stuart Davis, Gabriel Lakeman, and Ivan Pizeta*

In the fast-paced world of cryptocurrency, regulatory clarity is essential for both investors and market participants. In March this year, the Financial Conduct Authority (FCA) made a significant announcement regarding listing cryptoasset-backed Exchange Traded Notes (cETNs) in the UK. This decision marks an important step towards greater regulatory clarity in the crypto industry and presents new opportunities for professional investors.

What Is the FCA’s Updated Position?

Traditionally, cryptoassets have posed challenges for regulators due to their decentralised and often volatile nature. However, now that cryptoassets have a more established trading history, the FCA determined that exchanges and professional investors should be able to understand whether cETNs meet their specific risk appetite. Consequently, the FCA updated its position and allowed the Recognised Investment Exchanges (RIEs) to create a UK listed market segment for cETNs. Notably, these products will be available exclusively to professional investors such as authorised investment firms and regulated credit institutions — the ban on the sale of cETNs to retail consumers remains in place.

Despite this approval, the FCA requires that stringent controls remain a prerequisite for exchanges seeking to list cETNs. These controls ensure cryptoasset trading remains orderly, that professional investors are adequately protected, and that the market segment is accessible to professional investors only. Additionally, cETNs must meet all requirements of the UK Listing Regime to maintain transparency and accountability, including provisions on prospectuses and ongoing disclosure.

What Does This Mean for Cryptoasset Regulation in the UK?

The FCA’s decision opens the door to further exploration of cryptoasset regulation. As RIEs consider creating new UK listed market segments, the FCA will assess applications on a case-by-case basis, ensuring adequate protection for professional investors. Moreover, RIEs must ensure that they fully understand the risks of admitting crypto-linked instruments to trading, and that their admission to trading criteria and trading controls will adequately mitigate those risks.

While the FCA is allowing exposure to cryptoassets through cETNs only to professional investors with certain protections in place, the regulator maintains that cETNs and cryptocurrency derivatives are unsuitable for retail consumers because of the potential harm they present. This stance introduces tension between limiting retail investors’ exposure to cETNs and crypto derivatives in order to protect those retail investors, and allowing those same retail investors exposure to cryptoassets via spot trades through cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.

With the FCA catching up on global regulatory developments and introducing further regulatory clarity, it will be interesting to observe future progress on retail investors’ exposure to cryptoassets and the complete ban on sale of cETNs and crypto derivatives to retail investors.

Latham & Watkins will continue to monitor regulatory developments in the cryptoassets industry.

* Admitted to practice in New York only.

The bipartisan bill seeks to foster innovation and promote US dollar dominance while protecting consumers and mitigating illicit finance risks.

By Jenny Cieplak, Arthur LongYvette D. ValdezStephen P. WinkAdam Fovent, and Deric Behar

On April 17, 2024, US Senators Cynthia Lummis from the Senate Banking Committee and Kirsten Gillibrand from the Senate Agriculture Committee introduced proposed legislation to create a US regulatory framework for stablecoins. The bipartisan Lummis-Gillibrand Payment Stablecoin Act (the Bill) seeks to promote responsible innovation and preserve US dollar dominance, while protecting consumers and digital asset market participants.

The preliminary injunction was granted pursuant to Fifth Circuit precedent that the CFPB’s independent funding structure is unconstitutional.

By Barrie VanBrackle and Deric Behar

On May 10, 2024, the US District Court for the Northern District of Texas blocked the Consumer Financial Protection Bureau’s (CFPB) final rule (the Rule) amending Regulation Z to limit credit card late fees. The Rule was initially proposed in February 2023, finalized on March 5, 2024, and was set to go into effect on May 14, 2024.

The Rule aims to ensure that credit card late fees are “reasonable and proportional” to the costs that issuers incur in collecting late payments, as required by TILA. The Rule, however, faced immediate and intense criticism from market participants and trade groups representing banks and credit unions (for more information, see this Latham blog post).

Implementation of Basel Committee cryptoassets standard to provide additional clarity for banks looking to engage in cryptoassets business.

By Simon Hawkins and Adrian Fong

On 7 February 2024, the Hong Kong Monetary Authority (HKMA) released a consultation paper on its proposal for implementing new regulations on the prudential treatment of cryptoasset exposures (Consultation Paper).

The Consultation Paper comes shortly after the Financial Services and the Treasury Bureau and the HKMA issued a consultation paper in December 2023 outlining their legislative proposal for a regulatory regime governing stablecoin issuers in Hong Kong (see this Latham blog post). On 20 February 2024, the HKMA also published guidance on digital asset custody services and sale and distribution of tokenised products conducted by banks. Together, these papers offer guidance and greater certainty to banks interested in providing digital asset services (including digital asset issuance, custody, and dealing services).

This blog post summarises the proposed regulations set out in the Consultation Paper as well as next steps for banks, known in Hong Kong as authorised institutions (AI).

As regulatory thinking evolves, firms must ensure that any current or planned use of AI complies with regulatory expectations.

By Fiona M. Maclean, Becky Critchley, Gabriel Lakeman, Gary Whitehead, and Charlotte Collins

As financial services firms digest FS2/23, the joint Feedback Statement on Artificial Intelligence and Machine Learning issued by the FCA, Bank of England, and PRA (the regulators), and the UK government hosts the AI Safety Summit, we take stock of the government and the regulators’ thinking on AI to date, discuss what compliance considerations firms should be taking into account now, and look at what is coming next.

The FCA recently highlighted that we are reaching a tipping point whereby the UK government and sectoral regulators need to decide how to regulate and oversee the use of AI. Financial services firms will need to track developments closely to understand the impact they may have. However, the regulators have already set out how numerous areas of existing regulation are relevant to firms’ use of AI, so firms also need to ensure that any current use of AI is compliant with the existing regulatory framework.

Revamped SFC and HKMA guidance applies to intermediaries that distribute products or provide dealing, advisory, and asset management services related to virtual assets.

By Simon Hawkins and Adrian Fong

On 20 October 2023, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) issued a joint circular (Joint Circular) to provide updated guidance to intermediaries conducting virtual asset (VA) activities. The Joint Circular revises a previous joint circular issued on 28 January 2022 (see Latham’s Client Alert).

The need to update the 2022 joint circular emerged after a new regulatory regime for virtual asset trading platforms (VATP) was launched in June 2023, which allowed such platforms to onboard retail investors (see Latham’s Client Alert) for the first time.

The latest statements from the government and regulators indicate that Hong Kong is moving forward with enhancing its virtual asset regulatory and legal regime.

By Simon Hawkins and Adrian Fong

The Hong Kong government and the Securities and Futures Commission (SFC) announced their policy stances and further measures to support the development of virtual assets (VA) in Hong Kong at the Hong Kong Fintech Week 2022. Senior government officials and regulators expressed support for Hong Kong to continue to establish

Hong Kong’s licensing regime for virtual asset service providers to take effect in March 2023.

By Simon Hawkins, Adrian Fong, and Shirley Wong

On 24 June 2022, the Hong Kong government gazetted the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill). The Amendment Bill proposes changes to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615) (AMLO) in order to introduce a licensing regime for virtual asset service providers (VASP) and impose statutory anti-money laundering and counter-terrorist financing (AML/CTF) obligations on the VASP sector.

The SFC issued a statement to clarify its regulatory approach in relation to non-fungible tokens and remind investors of related risks.

By Simon Hawkins, Farhana Sharmeen, Adrian Fong, Gen Huong Tan and Shirley Wong

On 6 June 2022, the Hong Kong Securities and Futures Commission (SFC) issued a statement drawing attention to the risks associated with investing in non-fungible tokens (NFTs) and summarising the legal and regulatory requirements applicable to NFTs.

This follows recent guidance from Hong Kong’s banking, securities, and insurance regulators to financial institutions looking to undertake virtual asset activities (see Latham’s Client Alert Hong Kong’s New Crypto Regulatory Framework to Facilitate Greater Institutional Participation). Together, the statement and guidance demonstrate that the regulators are continuing to look closely at the digital asset space.