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

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.

The new standard aims to improve accounting treatment of certain digital assets under GAAP and may pave the way for increased institutional adoption.

By Jack Barber, Robert J. Malionek, Marlon Q. Paz, Heather Waller, and Deric Behar

On September 6, 2023, the Financial Accounting Standards Board (FASB)[1] voted to approve Accounting for and Disclosure of Crypto Assets, an Accounting Standards Update (ASU) to FASB Accounting Standards Codification (ASC) Topic 350 (Intangibles—Goodwill and Other), originally proposed in March 2023. The ASU will standardize the treatment of certain digital assets under US generally accepted accounting principles (GAAP) (the Update).

According to FASB, market feedback indicated concern with the current accounting methodology for crypto assets under ASC 350 as indefinite-lived intangible assets (whereby assets must be calculated at a historical cost less impairment, such as for trademarks). The methodology reflects “only the decreases, but not the increases, in the value of crypto assets in the financial statements until they are sold,” and therefore “does not provide investors . . . with decision-useful information . . . that reflects (1) the underlying economics of those assets and (2) an entity’s financial position.”

To address FASB’s concern, the Update now requires an entity to measure crypto assets at fair value[2] each reporting period with changes in fair value recognized in net income.

The Update also mandates enhanced disclosure requirements concerning an entity’s crypto asset holdings, intended to improve information available to investors.

This is the first decision by the Hong Kong Court on whether clients of a crypto exchange have proprietary claims to cryptocurrencies held on the platform. It confirms that cryptocurrency constitutes property under Hong Kong law.

By Dominic Geiser, Simon Hawkins, Howard K. H. Lam, Adrian Hei-Yin Fong, Flora F. W. Innes, and Tsun Ming (Truman) Mak

In a recent landmark decision of Re Gatecoin Limited [2023] HKCFI 914 involving a Hong Kong cryptocurrency exchange in liquidation, the Hong Kong Court of First Instance expressly confirmed for the first time that cryptocurrency is “property” under Hong Kong law and can be held on trust. This decision aligns Hong Kong with the position in other major common law jurisdictions.

The court also found, based on the facts and circumstances of this particular case, that the cryptocurrency exchange did not hold assets on trust for its customers under its latest applicable terms and conditions, thereby rendering such customers unsecured creditors, rather than beneficiaries, of the exchange.

A legislative initiative in Illinois would establish licensing and consumer protection requirements for digital asset businesses serving consumers in the state.

By Jack Barber, Parag Patel, Arthur S. Long, John J. Sikora, Stephen P. Wink, Pia Naib, and Deric Behar

On February 21, 2023, the Illinois Department of Financial and Professional Regulation (IDFPR) announced the Consumer Financial Protection and Innovation Package, which was introduced in both chambers of the Illinois General Assembly, consisting of

The Guidance clarifies the regulator’s expectations on safekeeping customer digital assets, and the disclosures that must accompany such arrangements.

By Arthur S. Long, Parag Patel, Marlon Q. Paz, Yvette D. Valdez, Barrie VanBrackle, Pia Naib, Donald Thompson, and Deric Behar

On January 23, 2023, the New York Department of Financial Services (NYDFS) published Guidance on Custodial Structures for Customer Protection in the Event of Insolvency (the Guidance). It guides virtual currency entities (VCEs)

Banking organizations should ensure appropriate risk management, but regulators are skeptical of certain crypto activities as principal.

By Arthur S. Long, Pia Naib, and Deric Behar

On January 3, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued a concise joint statement on crypto-asset risks to banking organizations.

Relatedly, on January 7, 2023, Mark Van

Digital asset activities of licensed institutions must be approved and will be assessed for potential safety and soundness risks.

By Arthur S. Long, Pia Naib, and Deric Behar

On December 15, 2022, the New York State Department of Financial Services (NYDFS) issued final guidance to covered institutions engaging in (or seeking to engage in) virtual currency-related activity (the Guidance). Such covered institutions are New York “banking organizations” — New York-chartered banks, trust companies, private bankers, savings banks, safe

Unpacking three key competition issues for digital asset innovators and investors: M&A, interlocking directorates, and interoperability.

By Kelly Fayne, Anna Rathbun, and Evan Omi

In a sea of regulatory hurdles and issues, antitrust and competition laws may be low on the list of concerns of digital asset innovators and investors. But competition in the digital asset space is front of mind for key industry regulators. On October 24, 2022, SEC Chair Gary Gensler noted in a speech at