All Things FinReg

Digital Asset Developments

In this new series, we will provide an overview of recent noteworthy developments in the digital asset space around the world. The start of February was a busy period for regulators in the United States, where the US Securities and Exchange Commission (SEC) settled charges against an exchange in connection with its staking services and where other regulators issued digital asset guidance. Both the United Kingdom and Dubai Virtual Asset Regulatory Authority introduced plans to regulate digital asset activities. The Hong Kong Monetary Authority released a framework for stablecoin regulation, but it is unclear whether a new law will be adopted or existing laws will be amended to incorporate the framework.


Staking as a Service: In perhaps the biggest news, on February 9, the SEC announced settled charges against Kraken, alleging that it failed to register the offer and sale of its cryptoasset staking-as-a-service program. While the SEC has posted the complaint it filed in the Northern District of California where it outlines theory of its case, the settlement order has yet to made publicly available. The only details to date from the SEC’s press release are that Kraken will (1) immediately cease offering or selling securities through cryptoasset staking services or staking programs; and (2) pay $30 million in disgorgement, prejudgment interest, and civil penalties.

Custody: As discussed in our recent blog post, the New York State Department of Financial Services recently issued guidance on custodial standards for those with a BitLicense or that are registered as New York state limited purpose trust companies that engage in a virtual currency business activity. The guidance comes amid increased scrutiny of custody practices in light of recent high-profile collapses of digital asset exchanges.

DeFi and Threats to Financial Stability: In a February 7 blog post, the Office of Financial Research (OFR) identified three ways in which decentralized finance (DeFi) could become a threat to financial stability if it continues to grow in size and scope without the guardrails that exist for traditional finance. In particular, the OFR argues that (1) effects from price declines of digital assets could spill over into traditional financial markets; (2) rapid withdrawals of digital assets could create losses for traditional financial institutions; and (3) disruptions would have immediate consequences if digital assets were widely used as payment.

Insider Trading: On February 7, a former employee of a cryptocurrency exchange pled guilty to two counts of conspiracy to commit wire fraud in connection with a scheme to commit insider trading in cryptocurrencies by using confidential information about which cryptocurrencies were scheduled to be listed on the exchange’s platforms. The US Department of Justice (DOJ) made the charges in July 2022 and the guilty plea marks the first conviction under federal law for insider trading in cryptocurrency assets. We note that the DOJ did not charge the employee with, and he did not plead guilty to, securities fraud. 

NFTs and Free Speech: On February 8, a jury verdict in the “MetaBerkins” trial held that the sale of non-fungible tokens (NFTs) of Birkin bags infringed on Hermes’ trademark and the NFTs were not treated as art with free speech protection. The jury returned a verdict of approximately $130,000 against the creator of the NFTs associated with digital images of Hermés Birkin handbags covered in fake fur.


HM Treasury Proposes to Regulate Crypto: On February 1, the UK government announced plans to robustly regulate cryptoasset activities. The consultation paper associated with these plans sets out proposals for this future regime and marks the next phase of the government’s approach to regulating cryptoassets. This consultation closes at 9:00 am on April 30, 2023.

In UK Appeals Court, Bitcoin Developers May Owe Fiduciary Duties to Bitcoin Holders: A disputed claimant to the pseudonymous Satoshi Nakamoto identity claims to have lost a private key for billions of dollars’ worth of bitcoin. The claimant argued that the developers named as defendants control and run the four relevant bitcoin networks, and it would be simple for them to secure the claimant’s assets by moving them to another address that the claimant can control. In short, the claimant argued that the developers should be recognized as a new ad hoc class of fiduciary, owing fiduciary duties to the true owners of bitcoin cryptocurrency, and that in this case the duties extend to implementing the necessary software patch to solve the claimant’s problem and safeguard the claimant’s assets from the thieves (i.e., to revise the consensus protocol and grant the claimant access to the coins). The lower court rejected this before trial, but the appellate court reversed, holding that the developers of open software may owe a fiduciary duty to their users, collectively, and that additional facts must be developed at trial.


Dubai Publishes Virtual Asset Regulations: The Dubai Virtual Asset Regulatory Authority published its 2023 Regulations for Virtual Assets and Related Activities. These regulations apply across the emirate, including in special development zones and free zones, but excluding the Dubai International Financial Centre. Among other points, the regulations require registration before engaging in virtual asset activity, including issuance, and prohibit the issuance of anonymity-enhanced cryptocurrencies.


Hong Kong Proposes to Regulate Stablecoin: The Hong Kong Monetary Authority (HKMA) issued a consultation conclusion to the discussion paper on cryptoassets and stablecoins, proposing to regulate certain activities relating to stablecoins and describing the expected regulatory scope and key regulatory requirements. The following activities would be regulated as they pertain to stablecoins (the regulated activities): (1) establishing and maintaining governance rules of a stablecoin arrangement; (2) issuing, creating, or destroying a stablecoin; (3) stabilization and reserve management arrangements of a stablecoin; and (4) providing wallet storage for stablecoins. A license will be needed to conduct a “regulated activity” in Hong Kong or an activity that concerns a stablecoin that purports to reference the value of the Hong Kong dollar, to actively market a regulated activity to the Hong Kong public, or to the extent that the HKMA believes that the entity’s regulation is in the public interest. Although the HKMA intends to regulate stablecoins that purport to reference one or more fiat currencies, given “the higher and more imminent monetary and financial stability risks that they may pose,” HKMA will build in flexibility to regulate other stablecoin structures under the framework in the future.