As the market heats up for art-related NFTs, buyers should be aware of limitations on their rights to use those works.

By Ghaith Mahmood, Jordan Naftalis, and Veronica Ye

The convergence of blockchain technology and creative intellectual property (IP) through a non-fungible token (NFT) is having a mainstream moment. Media stories abound with reports of artwork, tweets, and other digital media selling for millions of dollars on blockchain marketplaces when they are represented by an NFT.

This post explains how NFTs are linked to sales of digital media, and the practical IP considerations that can arise when buying or selling the creative works that the NFTs are attached to.

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.

A new proposal would subject financial institutions and exchanges to onerous recordkeeping and reporting requirements for certain digital currency transactions.

By Miles P. Jennings, Benjamin A. Naftalis, Eric S. Volkman, Margaret Allison Upshaw, and Deric Behar

In a surprise release in the waning days of the Trump administration, the Financial Crimes Enforcement Network (FinCEN) division of the Department of the Treasury issued a proposed rule (the Proposal) that would impose significant new obligations on market participants in the cryptocurrency and digital asset market (Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets). The Proposal “would require banks and money service businesses (MSBs) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA) held in unhosted wallets, or held in wallets hosted in a jurisdiction identified by FinCEN.”

Under the Proposal, CVC and LTDA, such as Bitcoin and Ether, would be deemed ‘‘monetary instruments’’ under the Bank Secrecy Act (BSA). This classification would bring them under the BSA’s existing anti-money laundering and countering the financing of terrorism recordkeeping and reporting requirements for currency transactions. The Proposal would also establish a new recordkeeping requirement for certain CVC and LTDA transactions, similar to the recordkeeping and travel rule regulations applicable to funds transfers.

Hong Kong’s Securities and Futures Commission introduces new licensing regime to regulate previously unregulated markets and restates expectations regarding security token offerings.

By Simon Hawkins, Kieran Donovan, and Kenneth Y.F. Hui

The second day of Hong Kong Fintech Week again brought together regulators and market participants from across the fintech industry for a range of insightful discussions.

Ashley Alder, Chief Executive Officer of the Securities and Futures Commission (SFC), delivered the day’s biggest headline in his keynote speech, announcing that the Financial Services and Treasury Bureau (FSTB) would be issuing a consultation paper proposing a new licensing regime for virtual asset service providers (VASPs), effectively creating a legal framework that brings previously unregulated activities within the SFC’s regulatory perimeter. (Further analysis is available in Latham’s Client Alert on the proposed framework.)

US Department of Justice’s sprawling report reveals regulatory enforcement priorities for cryptocurrencies and highlights multi-agency cooperation.

By Susan Engel, Miles Jennings, Benjamin Naftalis, Yvette Valdez, Eric Volkman, Stephen Wink, Douglas K. Yatter, and Deric Behar

On October 8, 2020, the US Attorney General’s Cyber-Digital Task Force of the Department of Justice (DOJ) published an extensive white paper, titled Cryptocurrency: An Enforcement Framework (the Report). The Report gives a detailed overview of legitimate uses of cryptocurrencies, the risks of illicit cryptocurrency activity, and related federal enforcement challenges and response strategies.

The proposed regulation will provide greater consumer and investor protection and lessen the risks of participating in digital finance.

By Stuart Davis

The EU Commission has published a proposal for a wide-ranging EU regulation covering cryptoassets and e-money tokens, both of which are currently largely unaddressed in EU financial services legislation.

The draft Markets in Cryptoassets Regulation (MiCA) has been designed to:

  • Increase legal certainty in the area of cryptoassets
  • Support innovation and promote the development of cryptoassets and the wider use of distributed ledger technology (DLT)
  • Instil appropriate levels of consumer and investor protection and market integrity in an area that presents many of the same risks as traditional financial instruments
  • Ensure financial stability

Andrew Bailey outlined what payments market participants can expect from regulators seeking to address financial stability risk in the world of payments, including as part of the rise and adoption of global stablecoins.

By Brett Carr and Stuart Davis

On 3 September 2020, the Governor of the Bank of England (BoE) Andrew Bailey delivered a speech “Reinventing the Wheel (with more automation)”, in which he outlined regulatory changes that payments market participants can expect, including as part of the global regulatory response to stablecoins.

The long-awaited guidance clarifies the application of the “actual delivery” exception to leveraged virtual currency transactions with retail purchasers.

By Yvette D. Valdez, J. Ashley Weeks, and Deric Behar

Earlier this year, the US Commodity Futures Trading Commission (CFTC) approved final interpretive guidance (Guidance) concerning retail commodity transactions involving certain digital assets. The Guidance clarifies the CFTC’s views regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in the context of virtual currencies, and is intended for exchanges, trading platforms, custodians, and other market participants transacting in virtual currencies that are considered commodities (such as Bitcoin and Ether) and traded via leverage, margin, or other financing provided by the seller, trading platform, or other third party.

SEC’s motion for a preliminary injunction is granted, prohibiting delivery of Telegram tokens to purchasers.

By Stephen P. Wink, Shaun MusukaCarolina Bernal and Deric Behar

On March 24, the Court in the Southern District of New York sided with the SEC and granted an injunction prohibiting Telegram Group Inc. and TON Issuer Inc. (together, Telegram) from delivering Telegram’s digital token, “Grams,” to 175 entities and high-net-worth individuals (Initial Purchasers).

As we previously discussed after the SEC filed its complaint, Telegram entered into agreements with the Initial Purchasers (Gram Interest Agreements), where, in exchange for US$1.7 billion from the Initial Purchasers, Telegram provided a promise to deliver Grams to the Initial Purchasers upon the launch of its blockchain (TON Blockchain).

Global monetary authorities and financial regulators have responded forcefully to the advent of privately developed global stablecoins.

By Todd Beauchamp, David L. Concannon, Stephen P. Wink, Simon Hawkins, Stuart Davis, and Deric Behar

A new report highlights the risks of global stablecoins and enumerates the legal, regulatory, and oversight hurdles a global stablecoin must clear before launching. The Group of Seven Working Group on Stablecoins released the report, titled Investigating the Impact of Global Stablecoins (G7 Report), at the October 2019 International Monetary Fund annual meeting. The G7 Report was published in tandem with a report by the Financial Stability Board (FSB) on the Regulatory Issues of Stablecoins (FSB Report). Taken together, the two reports provide insight into how some of the world’s most advanced economies (the US, the UK, Canada, France, Germany, Italy, and Japan) view digital assets and stablecoins, particularly those with the potential to launch and quickly scale on an established private-sector global network.