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The RFIA could ease tax compliance burdens for parties transacting in digital assets and defer or eliminate tax on some transactions.

 By Jiyeon Lee-Lim, Elena Romanova, Ted Gkoo, and Jacob Nagelberg

Latham & Watkins presents a blog series on the Responsible Financial Innovation Act, which was introduced in the US Senate on June 10, 2022, to create a framework for digital assets, cryptocurrency, and blockchain technology. This fifth post in the series covers taxation issues.

Taxation

Taxation issues are covered in Title II of the bill (Responsible Taxation of Digital Assets), which incorporates the new definitions for digital asset and virtual currency provided for in Title I of the bill (see discussion in this previous post).

The RFIA would modify the Internal Revenue Code (the Code) to provide new rules and extend certain existing rules to cover digital assets. It would also require that the Internal Revenue Service (IRS) issue guidance on several topics frequently requested by the digital asset industry.

The RFIA could make it easier for fintechs dealing in digital assets and stablecoins to access Federal Reserve bank services.

 By Alan W. Avery, Pia Naib, and Deric Behar

Latham & Watkins presents a blog series on the Responsible Financial Innovation Act, which was introduced in the US Senate on June 10, 2022, to create a framework for digital assets, cryptocurrency, and blockchain technology. This fourth post in the series covers banking and payment stablecoin issues.

Treasury officials believe congressional action is “highly appropriate” this year to address the risks that the latest financial stability report underscores.

By Alan W. Avery, Pia Naib, and Deric Behar

On May 9, 2022, the Board of Governors of the Federal Reserve System (FRB) published its semi-annual Financial Stability Report (Report). The Report, which covers a variety of topics, briefly repeated some familiar warnings regarding digital assets and potential risks to the wider financial system. In particular, the FRB expressed concern about funding risks posed by stablecoins.

Assertive regulators are bringing greater clarity and new challenges as they step up oversight of fintech innovation.

By Stuart Davis, Tom D. Evans, Nicola Higgs, Christian F. McDermott, David J. Walker, Brett Carr, Catherine Campbell, and Charlotte Collins

As the fast-growing fintech industry thrives, the sector has begun to attract greater regulatory scrutiny. We expect new legal and regulatory focus and oversight of those players operating on the unregulated perimeter of financial services.

While the level of supervision is set to increase and pose challenges for industry participants, a more robust regulatory environment could play into the hands of PE buyers and create opportunities for portfolio companies best able to navigate this rising regulation. In our view, PE firms must pay heed to the tone of more assertive regulators, but that approach coupled with new regulation will create a space in which firms in nascent fintech verticals can legitimately pursue their aims with greater certainty, no longer looking over their shoulders.

While the UK government is keen to stress that the new regulation will be applied proportionately, proposals are likely to result in the redirection of resources and attention of firms, and buyout firms should remain alert to changes that may impact a range of fintech investments.

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.

The HKMA’s discussion paper seeks feedback on its proposed regulatory approach to stablecoins, with responses due by 31 March 2022.

By Simon Hawkins and Adrian Fong

On 12 January 2022, the Hong Kong Monetary Authority (HKMA), Hong Kong’s principal regulator for banks and payment systems, published a discussion paper seeking the public’s views on its proposed approach to the regulation of stablecoins (Discussion Paper). The HKMA outlines its views on the development of stablecoins and proposes questions and its initial outlook for establishing an effective regulatory framework for stablecoin activities in Hong Kong.

The Discussion Paper comes three months after the HKMA issued its technical whitepaper on retail central bank digital currency in October 2021, which considers a proposed architecture for issuing e-HKD. These publications, together with recent consultation conclusions from the Financial Services and the Treasury Bureau on implementing a regulatory regime for virtual asset service providers, (see Latham’s blog post), indicate that Hong Kong regulators are moving quickly to create guardrails as financial innovation accelerates.

The US OCC allows banks, with certain restrictions, to hold assets in reserve for stablecoin issuers.

By Alan W. Avery, Todd Beauchamp, Stephen P. Wink, Pia Naib, Loyal T. Horsley, Charles Weinstein, and Deric Behar

On September 21, 2020, the US Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1172 (the Letter), giving national banks and federal savings associations (FSAs) the greenlight to hold deposits that serve as reserves for the underlying assets backing certain “stablecoins” on behalf of customers. According to the Letter, national banks and FSAs are granted this expanded authority to hold stablecoin reserves if all of the following conditions are met:

  • Deposits that constitute reserves for stablecoins are limited to stablecoin transactions involving hosted wallets.
  • The stablecoins are backed by a single fiat currency.
  • The stablecoins are redeemable by the holder on a one-to-one basis upon submission of a redemption request to the issuer.

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.

HM Treasury is planning significant changes to the financial promotion regime, including expanding its scope to certain cryptoassets, and amending the approval process for promotions of unauthorised firms.

By Stuart Davis, Sam Maxson, and Anna Lewis-Martinez

On 20 July 2020, HM Treasury published two consultation papers on a regulatory framework for approval of financial promotions and cryptoasset promotions. The consultations propose to establish a regulatory “gateway” that a firm must pass through before it is able to approve the financial promotions of unauthorised firms, and to bring certain types of cryptoassets into the scope of financial promotions regulations.

Latham fintech lawyers and key industry leaders explore the progress and potential of CBDCs, use cases for stablecoins, and the global regulatory landscape.

Many central banks around the world are currently considering central bank digital currency (CBDC). According to the Bank of International Settlements’ recent survey of 66 central banks, 80% of surveyed central banks are engaged in CBDC work in some capacity, whether that work is conceptual research, experimentation, or pilot projects, and over a third stated that it is “possible” they will issue a retail CBDC within one to six years. Additionally, stablecoins based on Ethereum have surged in use recently, which, along with other large and well-publicized stablecoin projects, has drawn the attention of regulators around the globe.