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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.”

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.

A sovereign nation’s decision to adopt Bitcoin as legal tender raises interesting questions — and legal ramifications.

By Elena Romanova, Larry Safran, Yvette D. Valdez, Eric S. Volkman, Stephen P. Wink, Adam Bruce Fovent, and Deric Behar

On June 8, 2021, El Salvador’s Legislative Assembly voted to establish Bitcoin as unrestricted legal tender, making El Salvador the first sovereign nation to formally adopt the cryptocurrency. Bitcoin will assume the status as legal tender alongside the US dollar, not as a replacement for it. The US dollar has been the sole legal tender of El Salvador since December 2000, and will remain the country’s reference currency for accounting purposes.

The Bitcoin law, which will come into effect 90 days from its publication in the Official Gazette, holds that the state is obligated to promote financial inclusion and well-being for its citizenry. To that end, the state will promote the necessary training and infrastructure to its citizens to be able to transact in the new legal tender.

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.