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.

A new program addresses innovative banking activities such as bank-fintech partnerships and digital assets while reinforcing guardrails around stablecoin activity.

By Arthur S. Long, Parag Patel, Pia Naib, Ja Hyeon Park, and Deric Behar

On August 8, 2023, the Board of Governors of the Federal Reserve System (FRB) issued guidance to the banking organizations that it oversees regarding its supervision of novel activities. The guidance also provides information on the process that state banks can follow to engage in certain stablecoin activities.

A bifurcated decision in a highly anticipated digital assets enforcement action may not provide the clarity that market participants want or need.

By Jack Barber, Jenny Cieplak, Benjamin Naftalis, John Sikora, Stephen P. Wink, Douglas K. Yatter, Luca Marquard, Adam Zuckerman, and Deric Behar

On July 13, 2023, Judge Analisa Torres of the US District Court for the Southern District of New York issued an order on motions for summary judgment in the civil enforcement action brought by the Securities and Exchange Commission (SEC) on December 22, 2020, against Ripple Labs Inc. (Ripple), its former CEO (Christian Larsen), and its former COO and current CEO (Brad Garlinghouse). The SEC’s claims include the unlawful offer and sale of securities in violation of Section 5 of the Securities Act of 1933 (the Securities Act), as well as aiding and abetting the allegedly unlawful offer and sale of securities by the individual defendants (see this Latham blog post for more information).

The issue before the Court was whether, at the time of the various offerings, the defendants sold XRP as an investment contract. The Court determined at the outset that “XRP, as a digital token, is not in and of itself a ‘contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract. Rather, the Court examines the totality of the circumstances surrounding the defendants’ different transactions and schemes involving the sale and distribution of XRP.”

MAS has published new requirements for DPT service providers and a consultation paper on additional regulations and prohibitions against unfair trading practices.

By Simon Hawkins, Farhana Sharmeen, Adrian Fong, and Tan Gen Huong

On 3 July 2023, the Monetary Authority of Singapore (MAS), Singapore’s primary regulator for banks and payment services, announced new custody and segregation requirements for digital payment token (DPT) service providers, including new obligations to safekeep customer assets under a statutory trust.

Additionally, the MAS published a consultation paper (the Consultation Paper) seeking the public’s views on its proposed regulatory measures for DPT service providers and prohibitions against unfair trading practices. The Consultation Paper follows the MAS’ previous consultation paper on proposed regulatory measures for DPT services in December 2022.

The MAS’ proposals largely align with the Hong Kong Securities and Futures Commission’s (SFC) new framework for regulating virtual asset trading platforms (VATP) (see Latham’s blog post), and indicate that virtual asset service providers must comply with regulatory rules similar to the securities regime. This aligned concept aims to ensure investor protection in line with regulators’ “same risk, same regulation” approach.

The regulatory perimeter continues to expand as the Securities and Futures Commission introduces a comprehensive regime to regulate virtual asset service providers.

By Simon Hawkins and Adrian Fong

In December 2022, Hong Kong passed the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill), which will establish a new licensing regime and statutory framework for virtual asset service providers from 1 June 2023. Initially, the Amendment Bill will apply to anyone operating a centralised virtual asset trading platform in Hong Kong or actively marketing such services to the Hong Kong public.

The CRPTO Act is intended to increase transparency and consumer protections, and reduce conflicts of interest, through heightened disclosures and penalties.

By Jenny Cieplak, Arthur S. Long, Yvette Valdez, Stephen P. Wink, and Deric Behar

On May 5, 2023, New York Attorney General (NYAG) Letitia James introduced a bill that, if passed, would increase New York’s oversight of digital assets market activity.[1] The Crypto Regulation, Protection, Transparency and Oversight Act (the CRPTO Act, or the Bill) would provide the NYAG’s office with greater enforcement powers to police the digital asset industry. It would also expand the New York Department of Financial Services’ (NYDFS’s) authority to regulate individuals and businesses engaging in digital asset transactions. The CRPTO Act comes on the heels of several high-profile enforcement actions by the NYAG against digital asset businesses.

In a major Web3 trademark infringement case, NFT creators prevail over those with a bad-faith intent to profit.

By Stephen P. Wink, Tiffany M. Ikeda, Adam Zuckerman, and Deric Behar

On April 21, 2023, Yuga Labs, the original creators of the Bored Ape Yacht Club (BAYC) non-fungible token (NFT) collection, successfully moved for summary judgment on two of its key claims arising under the Lanham Act against Ryder Ripps and Jeremy Cahen (collectively, the Defendants). The US District Court for the Central District of California (the Court) considered Yuga’s motions to determine that NFTs are goods for purposes of the Lanham Act of 1946 and that the Defendants had violated the Lanham Act through false designation of origin and cybersquatting.

Whereas the original proposal did not directly discuss digital assets, the reopening release is mainly focused on digital asset platforms.

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

On April 14, 2023, the Securities and Exchange Commission (SEC) issued a release amending portions of its earlier proposal to reinterpret the definition of an “exchange” and reopening the comment period for the proposed amendments (the Reopening Release.)

The SEC had issued a set of proposed amendments (the Original Proposal) on January 26, 2022, regarding the regulation of alternative trading systems (ATSs). The Original Proposal would amend Rule 3b-16 (Rule 3b-16) under the Securities Exchange Act of 1934 (the Exchange Act) to more expansively interpret certain terms used in the statutory definition of an “exchange” under Section 3(a)(1) of the Exchange Act. This reinterpretation would, among other things, cause the “exchange” definition to capture “Communication Protocol Systems”, which are not captured under the present version of Rule 3b-16. (See this Latham post for more information.)

Congress will be “starting from scratch” in attempting to establish a regulatory framework for stablecoins — an issue that many believe is the top digital asset legislative priority.

By Arthur S. Long, Parag Patel, Yvette Valdez, Pia Naib, and Deric Behar

On April 15, 2023, the US House Financial Services Committee (Committee) published a draft bill on the regulation of stablecoins in anticipation of a hearing by its Subcommittee on Digital Assets, Financial Technology and Inclusion (Subcommittee) on April 19. Government entities from the Financial Stability Oversight Council to the President’s Working Group on Financial Markets have identified stablecoins as the one type of digital asset that most demands federal regulation. In the prior Congress, leaders of the Committee, Maxine Waters and Patrick McHenry, made material progress on the now published draft bill.

Notably, the April 15 draft bill as published would establish a regulatory framework for stablecoins that would be very similar to the existing framework for banks.

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.