Hello Fintech Friends,

Happy New Year! As we step into the new year, we are thrilled to continue to bring you the latest in the world of fintech policy. Join us as we kick off the year with a quick roundup of the major developments from the past week, focusing on the latest in crypto regulation and enforcement both in the United States and across the globe.

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1. Crypto Regulation

The Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority (HKMA) jointly published a consultation paper on December 27, introducing a groundbreaking regulatory framework for fiat-referenced stablecoins (FRS). This marks the first official recognition of stablecoins in Hong Kong. The proposed regulation establishes a comprehensive framework, defining FRS and mandating that issuers engaged in active marketing to the public of Hong Kong obtain licensing from the HKMA. Key stipulations for acquiring a license include the full backing of circulating stablecoins with reserves equal to or exceeding the par value, the segregation and safekeeping of reserve assets, and compliance with regular disclosure and reporting obligations. The consultation paper explicitly excludes algorithmic stablecoins from eligibility for an HKMA license. The consultation period will be open until February 29, 2024.

In Japan, the government approved new amendments within its fiscal 2024 tax reform plan. The amendments specifically target companies holding third-party-issued cryptocurrencies, with a primary goal of exempting these entities from taxes on unrealized crypto gains. Scheduled for submission to the Japanese Parliament in January, the proposal awaits approval from both the House of Representatives and the House of Councilors.

Meanwhile, in an attempt to lift the United Arab Emirates (UAE) from the Financial Action Task Force (FATF)’s grey list, the UAE Financial Services Regulatory Authority officially announced that it will begin to apply the FATF's renowned Travel Rule to digital assets. Practically, this means that moving forward, Virtual Asset Service Providers (VASPs) will have to meet stricter monitoring and transparency requirements, particularly concerning anti-money laundering.

Turning our attention to Africa, the Central Bank of Nigeria (CBN) made a significant move on December 22, 2023, by issuing a circular that rescinds the prohibition previously imposed on the provision of banking services to VASPs in the country. Notably, recent amendments to the Money Laundering Act of 2022 have added VASPs to the definition of a financial institution. Yet despite lifting the ban, the CBN continues to strictly prohibit banks and other financial institutions from engaging in activities such as holding, trading, or transacting virtual currencies on their own accounts.

2. Enforcement

In a pivotal legal development, Judge Jed Rakoff of the U.S. District Court Southern District of New York granted summary judgment in favor of the U.S. Securities and Exchange Commission (SEC) in the case of SEC v. Terraform Labs. The lawsuit targeted Terraform Labs, the issuer of the Terra USD (UST) and LUNA algorithmic stablecoins, along with its founder, Do Kwon. The court concurred with the SEC's argument that Terraform Labs had offered and sold unregistered securities and security-based swaps through cryptocurrencies, including UST and LUNA. Judge Rakoff's ruling highlighted a key aspect concerning UST, noting that despite its intended peg to a price of $1 without generating returns, it qualified as a security when coupled with the Anchor Protocol. The latter system offered nearly 20% returns to UST holders who staked their coins, with $14B out of the $18.5B UST token supply being deposited in Anchor by May 2022. While the summary judgment addresses certain aspects of securities fraud, the upcoming trial, scheduled for January 29 in lower Manhattan, will focus on additional elements, such as whether Kwon misled or deceived customers about the security of Terraform's financial products.

In other enforcement news, the Department of Justice has officially decided not to pursue a second trial against Sam Bankman-Fried (SBF), the former CEO of the cryptocurrency exchange FTX. Prosecutors articulated their stance in a letter filed on December 29 in federal court in Manhattan, contending that the strong public interest in the case necessitated a "prompt resolution." Consequently, SBF will not face additional charges related to conspiracy to make unlawful campaign contributions. Prosecutors argued that a second trial would not impact the U.S. Sentencing Guidelines range for him. However, critics of the decision have denounced it as a "miscarriage of justice."

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See you next week!