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.

The Court held that software developers do not owe a duty of care to bitcoin owners who lost their private keys.

By Christian F. McDermott, Andrew C. Moyle, and Nara Yoo

In Tulip Trading Ltd (TTL) v. Bitcoin Association for BSV and others, TTL claimed that personal computers of its CEO, Dr. Craig Wright, were hacked and the encrypted private keys to two addresses holding around 111,000 bitcoin (currently worth over £3.6 billion) belonging to TTL were stolen. TTL also claimed that the hackers deleted copies of the keys, preventing Dr. Wright and TTL from accessing the digital assets at those addresses.

TTL brought action against 16 core developers (Developers) that allegedly control the software in respect of the four relevant digital asset networks (Networks), consisting of one “original” network and three subsequent blockchain copies. In this case, the Court looked at the extent of the Developer’s liability to TTL for the stolen/lost keys.

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.

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 HKMA’s discussion paper seeks feedback on its proposed regulatory approach to stablecoins, with responses due by 31 March 2022.

By Simon Hawkins and Adrian Fong

On 12 January 2022, the Hong Kong Monetary Authority (HKMA), Hong Kong’s principal regulator for banks and payment systems, published a discussion paper seeking the public’s views on its proposed approach to the regulation of stablecoins (Discussion Paper). The HKMA outlines its views on the development of stablecoins and proposes questions and its initial outlook for establishing an effective regulatory framework for stablecoin activities in Hong Kong.

The Discussion Paper comes three months after the HKMA issued its technical whitepaper on retail central bank digital currency in October 2021, which considers a proposed architecture for issuing e-HKD. These publications, together with recent consultation conclusions from the Financial Services and the Treasury Bureau on implementing a regulatory regime for virtual asset service providers, (see Latham’s blog post), indicate that Hong Kong regulators are moving quickly to create guardrails as financial innovation accelerates.

The guidelines set out the MAS’ expectation that digital payment token service providers should not promote their services to the general public in Singapore.

By Simon Hawkins, Farhana Sharmeen, and Tan Gen Huong

On 17 January 2022, the Monetary Authority of Singapore (the MAS) issued new guidelines (the Guidelines) setting out restrictions on the promotion of services related to digital payment tokens (DPTs) in Singapore. The Guidelines apply to banks and financial institutions providing DPT services in Singapore, and entities providing DPT services in Singapore that have either been granted a licence under the Payment Services Act (PSA) or that are currently operating under transitional exemptions under the PSA (collectively, DPT service providers).