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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. Valdez, Stephen 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.”

An appeals court panel rules that the SEC rejection of a proposed spot bitcoin ETP was arbitrary and capricious, opening the door for the potential launch of numerous ETPs in the near future.

By Jack Barber, Aaron Gilbride, Marlon Paz, Stephen P. Wink, and Deric Behar

On August 29, 2023, a three-judge panel on the District of Columbia Circuit Court of Appeals ruled in favor of Grayscale Investments, LLC On Petition for Review of an Order of the Securities and Exchange Commission (SEC).

Grayscale proposed to the SEC in October 2021 that Grayscale would convert its Bitcoin Trust into an exchange traded product (ETP) based on the spot bitcoin market (rather than bitcoin futures). As ETPs are traded on stock exchanges, and investors in the ETP would not need to buy the digital asset directly, an ETP could potentially accelerate retail and institutional adoption.

The SEC rejected Grayscale’s proposal in June 2022 because it asserted that the ETP failed to meet consumer protection requirements, including measures “designed to prevent fraudulent and manipulative acts and practices.” Grayscale subsequently sued the SEC under the Securities and Exchange Act of 1934, petitioning the Court of Appeals to review the SEC’s denial. In its decision, the Court of Appeals panel vacated the SEC’s denial.

Bitcoin Association for BSV will release software to facilitate court orders to freeze stolen or lost coins, while some courts recently authorised service proceedings by tokenised airdrop.

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

Earlier this year, in Tulip Trading Ltd (TTL) v. Bitcoin Association for BSV (Bitcoin Association) and others, the UK High Court held that bitcoin software developers do not owe a duty of care to bitcoin owners who have lost their…

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.

The promise of faster and cheaper remittances may accelerate crypto adoption in many emerging markets, including those that have not historically utilized credit and debit payments, notably Latin America.

 By Gianluca Bacchiocchi, Barrie VanBrackle, Nima H. Mohebbi, and Deric Behar

One of the most promising benefits of digital assets is the ability to move value over the global internet nearly instantaneously, in immutably recorded transactions. For many people in warzones or geographies with limited access to banking or payment card infrastructure, this capability is critical and can often be life-saving.

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.

For market participants pivoting toward ESG and digital assets, weighing the issues at the crossroads of these two megatrends is critical.

By Paul A. Davies, Stuart Davis, Simon Hawkins, Nicola Higgs, Yvette D. Valdez, Thomas Vogel, Stephen P. Wink, and Deric Behar

The huge rise in popularity of Bitcoin — and the growing interest by mainstream financial institutions in virtual assets as an investable and tradable asset class — has shone a light on the cryptocurrency industry’s environmental, social, and governance (ESG) performance.

The vast majority of the world’s financial institutions manage climate risk and other ESG risks in their own portfolios. As a result, many financial institutions perform related diligence on corporates they look to service, whether by traditional lending, capital markets underwriting, or direct investment. While the focus has primarily been on the ESG performance of cryptocurrency miners (given their role in the creation of cryptocurrencies and the energy requirements associated with that process), the ESG performance of the broader cryptocurrency industry will increasingly need to be considered, particularly as institutional investment in this space is accelerating. Accordingly, investors in cryptocurrency miners, in cryptoasset service providers, and even in companies that put cryptoassets on their balance sheets must now weigh the potential for increased returns against the possible negative impact on their ESG credentials.

While much has been written about the sustainability challenges related to cryptocurrency mining, ESG represents a broad range of considerations. This post explores the ESG-related challenges that cryptocurrency market participants are facing and practical steps to meet them.

An NFT is a special, one-of-a-kind digital asset that raises a number of novel legal questions.

By Christian F. McDermott and Calum Docherty

Earlier this month, a blockchain firm bought a US$95,000 print by the British street artist Banksy, only to burn it in a livestreamed video and re-sell it for US$380,000 as a virtual asset called a non-fungible token (NFT) — sparking a flurry of news around what may prove to be this year’s hottest crypto craze.

How did the Banksy sale work? The group explained that by removing the physical piece from existence and releasing the NFT as digital art, the value of the physical piece will be moved onto the NFT. This trend isn’t just setting the art world ablaze; in fact, musicians and even footwear companies are finding ways to break into the space.

As the market for NFTs heats up, market participants should remain mindful of the regulatory implications of complex schemes.

By Stephen P. Wink, Miles P. Jennings, Shaun Musuka, and Deric Behar

As the current crypto boom has progressed, it seemed Decentralized Finance (DeFi) had cemented its position as the dominant new narrative of this cycle. This view is supported by the tens of billions of dollars that have flowed into DeFi protocols over the past 12 months. Yet amid renewed public interest, non-fungible tokens (NFTs) show signs that they should not be overlooked in discussions regarding the hottest new developments in the crypto space. As with any fast-moving market driven by explosive consumer interest and waves of money, regulators will likely take an interest and scrutinize market practices against existing regulations.

Regulators once again offered piecemeal guidance, while focusing on risks and enforcement. Meanwhile, innovation and institutional adoption took off.

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

Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that remains without a comprehensive regulatory framework in the US.