Global Fintech & Digital Assets Blog

SEC Proposes to Expand the Definition of an “Exchange”

Posted in Cryptoassets

The proposal would require certain systems and platforms currently not subject to any registration requirements to register as broker-dealers and ATSs.

By Stephen P. Wink, Marlon Q. Paz, Naim Culhaci, and Deric Behar

On January 26, 2022, the Securities and Exchange Commission (SEC) issued a set of proposed amendments (Proposal) regarding the regulation of alternative trading systems (ATSs) that would, among other things, substantially expand the definition of an “exchange” as interpreted by Rule 3b-16 under the Securities Exchange Act of 1934 (the Exchange Act) to capture “Communication Protocol Systems.” Specifically, Rule 3b-16’s interpretation of the “exchange” definition would be broadened in several meaningful aspects, including by removing the current requirement that a platform needs to bring together “firm orders” to be deemed an “exchange.” Continue Reading

Hong Kong’s New Crypto Regulatory Framework to Facilitate Greater Institutional Participation

Posted in Cryptoassets

Regulators released comprehensive guidance to banks, intermediaries, and insurers on virtual asset-related activities.

By Simon Hawkins and Adrian Fong

On 28 January 2022, Hong Kong’s principal financial services regulators issued much-anticipated guidance to banks, securities firms, and insurers looking to undertake activities related to virtual assets (VAs). In particular:

  • The Hong Kong Monetary Authority (HKMA) issued a circular to banks on “Regulatory approaches to Authorized Institutions’ interface with Virtual Assets and Virtual Asset Service Providers” (HKMA Circular).
  • The HKMA and the Securities and Futures Commission (SFC) issued a joint circular to banks and SFC-licensed intermediaries on “Intermediaries’ Virtual Asset-Related Activities” (Joint Circular).
  • The Insurance Authority (IA) issued a circular to insurers on “Regulatory Approaches of the Insurance Authority in Relation to Virtual Assets and Virtual Asset Service Providers” (IA Circular).

This Client Alert analyses how, with the guidance, financial services industry participants can move towards engaging in VA proprietary investments and client services. The guidance will also impact existing crypto firms, as the regulators stressed that financial services intermediaries are required to use SFC-licensed VA trading platforms. For those not already licensed or seeking to be licensed, this stipulation may serve as the impetus to obtain a license in order to serve Hong Kong customers.

Federal Reserve Takes Measured Approach to Central Bank Digital Currency

Posted in Cryptoassets, Payments

In a long-awaited paper, the FRB continues its exploratory approach and emphasizes the need for congressional support.

By Alan W. Avery, Pia Naib, and Deric Behar

On January 20, 2022, the Board of Governors of the Federal Reserve System (FRB) published its long-awaited discussion paper (the Paper) on the potential benefits and risks of issuing a US central bank digital currency (CBDC). The Paper, titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” is intended to initiate a discussion around the various factors the FRB is considering with respect to a potential US CBDC rather than “advance a specific policy outcome.” Continue Reading

The Limits of Applying Reves v. Ernst & Young to DeFi and the Perils of Regulating Web3 by Enforcement

Posted in Cryptoassets

The SEC’s reliance on a nebulous US Supreme Court decision raises important questions for the future of decentralized finance.

By Benjamin Naftalis, Douglas K. Yatter, and Peter E. Davis

Reves v. Ernst & Young,[1] a 30-year-old US Supreme Court decision on farmers’ co-ops, is garnering attention in the Web3[2] world, specifically in the context of protocol-driven decentralized finance (DeFi).[3] The case popped up in recent speeches by senior Securities and Exchange Commission (SEC) officials, including congressional testimony of SEC Chair Gary Gensler,[4] and featured in one of the SEC’s latest moves in crypto enforcement — an August 2021 action against a company called DeFi Money Market (DMM).[5] These developments raise several important questions. What is the relevance and application of the Reves four-factor test? How does it apply (or not apply) to Web3 generally and DeFi specifically? Most importantly, does it give the SEC broad authority to regulate DeFi? Continue Reading

2021 Digital Asset Regulatory Lookback (US Edition)

Posted in Cryptoassets

Popular and institutional interest in digital assets, decentralized applications, NFTs, and blockchain technology skyrocketed, and regulators sprinted to catch up.

By Todd Beauchamp, Yvette D. Valdez, Stephen P. Wink , Adam Bruce Fovent, Adam Zuckerman, and Deric Behar

For the digital asset markets, 2021 was a banner year. Among the milestones:

•  Bitcoin prices hit an all-time high, exceeding $65,000, up from about $30,000 at the end of 2020.

•  Total value locked in decentralized finance (DeFi) surged from under $20 billion to over $250 billion in 12 months.

•  Market capitalization for all digital assets reached $3 trillion.

•  Non-fungible tokens (NFTs) went from crypto curiosity to mainstream phenomenon, with a single NFT selling for $69 million at a traditional auction house and notable NFT collections reaching trading volumes in the billions.

•  Valuations for crypto companies and cryptoassets soared, with at least 40 unicorns (valuation of $1 billion or more) minted.

•  Venture capital (VC) firms invested an estimated $32.8 billion into crypto and blockchain-related startups, including $10.5 billion in Q4 2021 (up from an estimated $8 billion for all of 2020). Furthermore, 49 new crypto-focused VC funds were raised, with three of those funds raising over $1 billion and two topping $2 billion.

Continue Reading

Hong Kong Monetary Authority Consults on Stablecoin Regulation

Posted in Blockchain, Cryptoassets

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. Continue Reading

UK to Regulate Cryptoasset Promotions

Posted in Cryptoassets

HM Treasury has confirmed that it will bring certain unregulated cryptoassets within scope of the financial promotions regime.

By Stuart Davis, Rob Moulton, and Charlotte Collins

On 18 January 2022, the UK government confirmed its intention to bring the promotion of certain cryptoassets into scope of regulation. HM Treasury has been considering for some time whether, and if so how, to bring unregulated cryptoassets within the regulatory perimeter, having originally consulted on these proposals in 2020. Continue Reading

Singapore: MAS Issues Guidelines on Promoting Digital Payment Token Services

Posted in Cryptoassets, Digital, Payments

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). Continue Reading

US Infrastructure Law: Top Impacts on the Digital Asset Industry

Posted in Cryptoassets

The industry will have two years to learn the new requirements and develop systems to ensure compliance.

By Elena Romanova, Stephen P. Wink, Adam Zuckerman, and Deric Behar

On November 15, 2021, President Biden signed the US$1.2 trillion Infrastructure Investment and Jobs Act into law (the Law). Two provisions of the Law could have a wide-ranging impact on the digital asset industry: (i) the Law includes a broad definition of “digital asset,” and (ii) the Law redefines “broker” to include certain persons providing services to transfer digital assets. Continue Reading

PWG Issues Clarion Call for US Legislation on Stablecoins

Posted in Cryptoassets

The report addresses the market risks and regulatory challenges presented by stablecoins and urges Congress to act quickly.

By Alan W. Avery, Yvette D. Valdez, Stephen P. Wink, Pia Naib, and Deric Behar

On November 1, 2021, the President’s Working Group on Financial Markets (PWG) in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) published its long-anticipated Report on Stablecoins (the Report). Regulators worldwide have become acutely aware of how stablecoins function as a bridge between traditional financial markets and digital asset markets. As a result, regulators are seeking to address the risks, opportunities, and regulatory gaps presented by this burgeoning asset class.

The Report first describes how payment stablecoins function, before identifying key gaps in prudential authority over stablecoins in the US financial system. It then presents recommendations for addressing those gaps. Continue Reading