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By Brian Meenagh, and Khaled Alhuneidi.

In June 2018, the Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA) unveiled a dedicated cryptoasset regulatory framework by way of various amendments to the FSRA’s core regulations – the Financial Services and Markets Regulation (FSMR) as well as supplementary guidance thereto.

In May 2019, the FSRA issued updated and greatly expanded guidance (FSRA Guidance) that includes a more granular level of detail and addresses a range of topics not covered in the initial guidance. We consider some of these topics below.

The regulators attempt to clarify their position on the possible custody of digital assets by broker-dealers, but questions remain.

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

The SEC and FINRA recently released a joint staff statement (Joint Statement) addressing the custody of digital asset securities by broker-dealers. For some time, registered broker-dealers and applicants have sought to facilitate digital asset transactions and the accompanying custody of such assets. However, their efforts have been stymied, in part due to a lack of interpretive guidance from the SEC and FINRA regarding how to custody digital assets in compliance with the relevant regulations. The Joint Statement is an initial step by the SEC and FINRA toward clarifying their positions on these issues. It makes clear that broker-dealers that do not seek to custody such assets but seek to otherwise engage in brokerage activities with digital assets (e.g., private placements or if the broker-dealer matches buyers and sellers who conduct settlement between themselves) should be permitted to do so. The bottom line, however, is that the regulators “are just not ready”[i] to approve broker-dealers to custody digital assets.

The paper discusses supervision and regulatory issues of cryptocurrencies, and finds that a central bank digital currency in the EU is not (yet) warranted.

By Max von Cube

In May, the European Central Bank’s Crypto-Assets Task Force published a paper on cryptocurrencies such as Bitcoin, Ether, and Ripple (referred to as narrowly defined “crypto-assets”). The paper, titled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” follows similar recent publications by the European Banking Authority (EBA)[i] and the European Securities and Markets Authority (ESMA).[ii]

After examining cryptocurrency markets and tracing their linkage to the financial system and the real economy, the authors of the paper found that cryptocurrencies currently do not pose a material risk to financial stability. Further, the authors currently see no direct implications of cryptocurrencies for monetary policy.

Federal legislators introduce two bills in an attempt to provide the blockchain economy with regulatory certainty.

By Stephen P. Wink, Morgan E. Brubaker, Cameron R. Kates, and Shaun Musuka

US regulators and federal legislators may be heeding the calls of crypto-enthusiasts for legal clarity regarding the status of digital assets and cryptocurrencies (collectively, Tokens). Two weeks ago, the Securities and Exchange Commission (SEC) released an analytical framework for determining when a Token constitutes a security. Last week, US federal legislators followed up by introducing two bills that are designed to “provide regulatory certainty for businesses, entrepreneurs, and regulators in the US’ blockchain economy,” the Token Taxonomy Act of 2019 (H.R. 2144) (TTA) and the Digital Taxonomy Act of 2019 (H.R. 2154) (DTA, and together with the TTA, the Bills).

The new legislation may act as a catalyst for a crypto-evolution within Russian law.

By Andrew C. Moyle and Elizaveta Bacheyeva

On 18 March 2019, the Russian legislator took the first step in introducing the Russian civil law system to the new universe of digital assets. The Russian Civil Code was amended to include concepts of digital right and smart contracts, and the legislator also recognized digital rights as an independent object of civil law regulation.

By way of background, the Russian civil law system is based on laws rather than precedents, and — unless a particular concept is explicitly mentioned in the legislation — then the concept is non-existent for civil law regulation and falls outside any legal protection. Prior to these amendments to the Civil Code, digital assets or cryptocurrencies did not fall within any category of assets recognized by the Civil Code, and there was much uncertainty on how these digital asserts were regulated and how transactions with such assets should be structured. In one instance, a Russian court failed to recognize Bitcoin as an asset and, on those grounds, refused to include the Bitcoin in a debtor’s insolvency estate.

These amendments to the Civil Code will come into force on 1 October 2019 and will apply to all transactions made after that date. The new legislation is only the starting point for a crypto-evolution within Russian law, as the Russian legislator is currently considering two draft laws “On digital finance assets” and “On crowdfunding.” These laws would provide more in-depth regulation of cryptocurrencies, tokens, and investments through digital platforms.

The SEC provides additional guidance for analyzing whether a digital asset is a security.

By Stephen P. Wink, Cameron R. Kates, and Shaun Musuka

On April 3, 2019, the U.S. Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (the SEC) released a framework (the Framework) for assessing whether a blockchain-issued token or digital asset (each, a Token) constitutes an investment contract. An investment contract is an enumerated type of security subject to US federal securities laws. The Framework does not have the force of law, but rather, provides additional guidance on the factors to consider when applying the Howey test to Tokens. For background regarding the Howey test, please see Latham’s Client Alert. Latham’s read of the Framework suggests two key takeaways. First, it provides added insight into how existing Tokens may be reevaluated over time and may cease to be subject to federal securities laws. Second, it offers the clearest guidance to date that Tokens that are designed and marketed as purely “virtual currency” should not be considered securities.

UK regulators are addressing regulatory uncertainty through a number of regulatory initiatives due for implementation in 2019.

By Stuart Davis

Background

Following the FCA’s consultation paper that offers guidance on the regulatory status of cryptoassets published in January 2019, the regulator is now engaging with the industry and other stakeholders such as law firms to finalise its guidance.

The FCA has outlined its approach to implementing key standards under the revised Payment Services Directive.

By Christian McDermott, Stuart Davis, Brett Carr, and Charlotte Collins

The FCA has published a statement on its website relating to the European Banking Authority’s (EBA’s) Opinion and draft Guidelines of 13 June 2018 on the Regulatory Technical Standards on Strong Customer Authentication and Common and Secure Communication under PSD2 (the RTS).

Background

The drafting of the RTS, which will apply from 14 September 2019, proved to be one of the most controversial aspects of the revised Payment Services Directive (PSD2) (for background on the RTS, please see Latham’s related Client Alert).