Professional investors will benefit from increased exposure to cryptoassets via traditional financial instruments, though retail investors’ exposure remains limited.

By Stuart Davis, Gabriel Lakeman, and Ivan Pizeta*

In the fast-paced world of cryptocurrency, regulatory clarity is essential for both investors and market participants. In March this year, the Financial Conduct Authority (FCA) made a significant announcement regarding listing cryptoasset-backed Exchange Traded Notes (cETNs) in the UK. This decision marks an important step towards greater regulatory clarity in the crypto industry and presents new opportunities for professional investors.

What Is the FCA’s Updated Position?

Traditionally, cryptoassets have posed challenges for regulators due to their decentralised and often volatile nature. However, now that cryptoassets have a more established trading history, the FCA determined that exchanges and professional investors should be able to understand whether cETNs meet their specific risk appetite. Consequently, the FCA updated its position and allowed the Recognised Investment Exchanges (RIEs) to create a UK listed market segment for cETNs. Notably, these products will be available exclusively to professional investors such as authorised investment firms and regulated credit institutions — the ban on the sale of cETNs to retail consumers remains in place.

Despite this approval, the FCA requires that stringent controls remain a prerequisite for exchanges seeking to list cETNs. These controls ensure cryptoasset trading remains orderly, that professional investors are adequately protected, and that the market segment is accessible to professional investors only. Additionally, cETNs must meet all requirements of the UK Listing Regime to maintain transparency and accountability, including provisions on prospectuses and ongoing disclosure.

What Does This Mean for Cryptoasset Regulation in the UK?

The FCA’s decision opens the door to further exploration of cryptoasset regulation. As RIEs consider creating new UK listed market segments, the FCA will assess applications on a case-by-case basis, ensuring adequate protection for professional investors. Moreover, RIEs must ensure that they fully understand the risks of admitting crypto-linked instruments to trading, and that their admission to trading criteria and trading controls will adequately mitigate those risks.

While the FCA is allowing exposure to cryptoassets through cETNs only to professional investors with certain protections in place, the regulator maintains that cETNs and cryptocurrency derivatives are unsuitable for retail consumers because of the potential harm they present. This stance introduces tension between limiting retail investors’ exposure to cETNs and crypto derivatives in order to protect those retail investors, and allowing those same retail investors exposure to cryptoassets via spot trades through cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.

With the FCA catching up on global regulatory developments and introducing further regulatory clarity, it will be interesting to observe future progress on retail investors’ exposure to cryptoassets and the complete ban on sale of cETNs and crypto derivatives to retail investors.

Latham & Watkins will continue to monitor regulatory developments in the cryptoassets industry.

* Admitted to practice in New York only.

The proposed regulatory framework would create substantive obligations on issuers of fiat-referencing stablecoins to safeguard the public.

By Simon Hawkins and Adrian Fong

On 27 December 2023, the Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) released a consultation paper on their legislative proposal for a regulatory regime governing stablecoin issuers in Hong Kong (Consultation Paper). The HKMA followed with its own press release announcing a future sandbox arrangement for stablecoin issuers.

This blog post summarises the proposed Hong Kong regulatory framework set out in the Consultation Paper, and next steps for stablecoin issuers who may fall within scope of the proposed regime.

New laws implement regulatory standards and licensing requirements for fintechs seeking to improve employee access to wages.

By Parag Patel, Mik Bushinski, and Deric Behar

On June 13, 2023, Nevada enacted a law that regulates earned wage access (EWA) services provided to state residents. Missouri followed by enacting an EWA law on July 7, 2023 that shares many similarities with Nevada’s. The new EWA laws make Nevada and Missouri the first two states in the US to establish statutory frameworks designed to regulate EWA services.

EWA services enable a consumer to receive earned employment income prior to a scheduled payday. They ideally provide an alternative to high-cost forms of credit, such as payday loans, although some consumer advocacy groups have warned of fees and other problematic aspects with certain EWA services.

To date, the principal providers of EWA services are fintechs, some of which are new entrants and some of which have been in the EWA business for several years.

Importantly, the EWA laws in both states exempt EWA services from their respective state laws that regulate loans and money transmission. EWA service providers in Nevada or Missouri would therefore not be regulated as a lender or money transmitter in connection with the EWA services they provide to residents of those states.

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.

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)

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

Consumers and service providers should take note of some of the enhanced risks upon an e-money institution’s insolvency.

By Hongbei Li

Technology is rapidly changing the way customers and businesses interact with financial systems. Fintech companies are a driving force behind the disruption of traditional banking and payment services, with regulatory innovation close behind.

In the 12 months to June 2021, electronic money institutions (EMIs) in the UK processed more than £500 billion of transactions, according to Financial Conduct Authority

Hong Kong’s Core Climate aims to facilitate trading of carbon credits, while the Hub plans to expedite Singapore’s ESG ecosystem growth.

By Farhana Sharmeen, Paul A. Davies, and James Bee

On 28 October 2022, the Hong Kong Exchange and Clearing Limited (HKEX) launched Core Climate, Hong Kong’s International Carbon Marketplace. The birth of Core Climate is a further step toward the growth of ESG initiatives in Asia, which are gaining particular traction among the continent’s stock exchanges.

HKEX

The latest statements from the government and regulators indicate that Hong Kong is moving forward with enhancing its virtual asset regulatory and legal regime.

By Simon Hawkins and Adrian Fong

The Hong Kong government and the Securities and Futures Commission (SFC) announced their policy stances and further measures to support the development of virtual assets (VA) in Hong Kong at the Hong Kong Fintech Week 2022. Senior government officials and regulators expressed support for Hong Kong to continue to establish