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 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).

The decision, which addresses a broad range of market activity by Coinbase relating to 13 third-party tokens, could have significant implications for market participants.

By Latham & Watkins’ Litigation & Trial Practice

On March 27, 2024, Judge Katherine Failla of the US District Court for the Southern District of New York (SDNY) ruled[i] (the Ruling) in favor of the Securities and Exchange Commission (SEC) on all but one argument raised in Coinbase’s motion for judgment on the pleadings, finding that the Commission adequately alleged the tokens at issue and Coinbase’s staking services are securities and that Coinbase has been operating as an unregistered broker, exchange, and clearing agency.  

The Ruling followed significant recent decisions in two other high-profile SEC enforcement actions regarding cryptocurrencies: SEC v. Ripple Labs, Inc., No. 1:20-Civ-10832 (SDNY), and SEC v. Terraform Labs Pte. Ltd., No. 1:23-cv-01346 (SDNY). The Coinbase decision, however, may be the most significant among the three decisions because (1) it addresses a broader range of market activity by a token exchange (as opposed to an issuer) and 13 third-party tokens (as opposed to fewer tokens from a single issuer), and (2) Judge Failla’s Ruling addresses the prior decisions in Ripple and Terraform and thus serves as the latest, most comprehensive opinion to date in the canon of case law on the issues.

The rule targets a statutory loophole that the CFPB asserts large credit card issuers exploited to exact excessive late fees from consumers.

By Barrie VanBrackle and Deric Behar

On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule (the Rule) to amend Regulation Z, which implements the Truth in Lending Act (TILA) to limit credit card late fees. The Rule was initially proposed in February 2023 and was intended to go into effect in October 2023 (for

Regulator sets out its expectations for banks looking to provide digital asset custody services, and sell and distribute tokenised products.

By Simon Hawkins and Adrian Fong

On 20 February 2024, the Hong Kong Monetary Authority (HKMA) published two circulars prescribing additional guidance to banks interested in carrying on certain digital asset services:

  • Sale and Distribution of Tokenised Products
  • 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).

    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

    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 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.