Stablecoins

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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.

The Monetary Authority of Singapore announced a new framework that seeks to ensure value stability for stablecoins regulated in Singapore.

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

On 15 August 2023, the Monetary Authority of Singapore (MAS), Singapore’s primary regulator for banks and payment services, announced its new stablecoin regulatory framework. The new framework introduces licensing and other requirements for stablecoin issuers with operations in Singapore.

This framework follows a consultation paper in October 2022, on the MAS’ proposed approach to the regulation of stablecoin issuers and intermediaries, and a consultation paper on the scope of e-money and digital payment tokens in December 2019, in which the MAS considered the need to review its regulatory approach to accommodate stablecoins with the potential to become more widely used as payment instruments. These publications, together with the Hong Kong Monetary Authority’s discussion paper on its proposed approach to the regulation of stablecoins, (see Latham’s blog post), indicate that Asian regulators continue to consider appropriate guardrails for cryptocurrencies in light of significant consumer interest.

The US Treasury opens a Pandora’s box of legal issues as it targets a decentralized finance protocol used for both licit and illicit means.

By Eric Volkman and Deric Behar

On August 8, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions against decentralized virtual currency “mixer” Tornado Cash (and 44 associated USDC and ETH addresses) — the first action of its kind against a decentralized finance (DeFi) protocol.

Mixers (or “blenders”) are centralized…

The global central bank cooperative body would bring stablecoins within the international standards for payment, clearing, and settlement systems.

 By Alan W. Avery, Stuart Davis, Simon Hawkins, Yvette D. Valdez, Stephen P. Wink, Pia Naib, and Deric Behar

On July 13, 2022, the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a joint report on the regulation of stablecoin arrangements…

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.