Digital Assets

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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.

The DSA has a broad scope and regulates many aspects of digital services, including in the fintech space.

By Gail E. Crawford, Jean-Luc Juhan, Susan Kempe-Mueller, Deborah J. Kirk, Lars Kjølbye, Elisabetta Righini, Sven B. Völcker, Ben Leigh, Victoria Wan, and Amy Smyth

As a key part of the EU’s digital regulation strategy, the Digital Services Act (DSA) seeks to modernise legal frameworks and create a safer and more open digital environment.

It regulates many aspects of digital services, including liability for online content and services, targeted advertising, know-your-business-customer requirements, transparency for users, and managing systemic platform risks.

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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 new regime specifies licensing and reporting requirements for a range of activities related to virtual assets in the Emirate of Dubai.

By Brian A. Meenagh, Matthew Rodwell, and Ksenia Koroleva

On February 7, 2023, the Dubai Virtual Assets Regulation Authority (VARA) adopted the Virtual Assets and Related Activities Regulations 2023 (the Regulations) together with four compulsory and seven activity-specific rulebooks.

VARA adopted these Regulations further to Dubai Law No. 4 of March 11, 2022 on…

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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)…