A report on several sessions as part of the IBA’s Annual Conference in Mexico City 2024

Reporters

Giorgio Bovenzi
Hayes Boone, New York

Theodor Haertsch
Walder Wyss, Zürich

Benjamin Leisinger
Homburger, Zürich

Klaus Löber
European Securities and Markets Authority, Frankfurt

Chairs

Giorgio Bovenzi, Hayes Boone, New York
Theodor Häertsch, Walder Wyss, Zürich
Klaus Löber, European Securities and Markets Authority, Frankfurt
Benjamin Leisinger, Homburger, Zürich

Panellists

Chris Brummer, Georgetown University Law Center, Washington, DC
Mario Hössl-Neumann, One Trading, Vienna
Linda Jeng, Digital Self Labs, Washington, DC
Miguel Gallardo Guerra, BGBG, Mexico City
Daniel S Konar II, Stellar Foundation, San Francisco
Christian Sabella, DTCC, New York
Nicole Dyskant, Dyskant Advogados, Rio de Janeiro
Lizette Neme, InStrag, Mexico City
Ben Aldersey, Financial Action Task Force, Paris
Lee Pascoe, Norton Rose Fulbright, Melbourne
Andrew M Hinkes, K&L Gates, Miami
Luis Urrutia, International Monetary Fund, Washington, DC
Mauro M Wolfe, Duane Morris, New York
Anurag Bana, IBA Legal Policy & Research Unit, London

The first session

The first session on the topic of ‘Digital Assets – What Are They and How Have They Already Become Relevant?’ delved into the evolving landscape for digital assets and the implications for financial services. Together, the panel of experts offered valuable perspectives on how digital assets are reshaping financial structures and regulatory frameworks worldwide.

The growing spectrum of digital assets

Benjamin Leisinger opened the session, outlining the types of digital assets, including cryptocurrencies, stablecoins, asset tokens and non-fungible tokens (NFTs). He highlighted the distinction between assets utilised within traditional financial frameworks, tokenised assets (securities, bank deposits, etc) and those emerging from decentralised finance (DeFi) and blockchain ecosystems. The trend of securitising digital assets and their increased adoption by traditional financial institutions is driving digital assets closer towards mainstream acceptance.

Disclosure and regulation in terms of digital finance

Chris Brummer emphasised the critical role of disclosure in regard to crypto-assets, particularly regarding transparency for investors. He also noted the growing importance of discussions around central bank digital currencies (CBDCs) and their potential overlap with cryptocurrency. His insights pointed towards regulatory shifts anticipated in light of the political developments in the United States, underscoring that the future of digital assets will be influenced heavily by regulatory clarity.

The European Union’s regulatory approach and crypto-asset trading

Mario Hössl-Neumann offered insights into the EU’s pioneering role in regard to the regulation of crypto-assets, primarily exemplified by the adoption of the Markets in Crypto-Assets (MiCA) regulation (Regulation (EU) 2023/1114), which has set an international benchmark. He discussed the regulatory challenges in regard to distinguishing and categorising digital assets and discussed One Trading’s achievement in being the first company to receive a licence from the EU for its dedicated crypto-asset derivatives exchange. He also spoke on using digital assets as collateral, a notable topic, as digital asset trading is increasingly being integrated with conventional markets.

Adapting private law to the digital ecosystem

Linda Jeng directed the audience’s attention to the challenges of reconciling private law with emerging digital ecosystems, such as distributed ledgers and DeFi. She raised key issues in regard to aligning traditional legal frameworks with smart contracts and decentralised transactions, which often challenge existing legal norms on contractual liabilities and jurisdiction.

Mexico’s crypto regulatory landscape

Miguel Gallardo Guerra addressed the current regulatory landscape for cryptocurrencies in Mexico, noting recent developments that are shaping the local market. He outlined challenges faced by crypto businesses subject to the Mexican regulations and shared his perspective on how the country’s regulatory approach may evolve to keep pace with global trends.

Conclusion

This first part of the LPD showcase emphasised digital assets as a transformative force in financial services, posing unique regulatory and legal challenges, while offering unprecedented opportunities for market innovation. The panellists collectively highlighted the need for adaptive regulatory frameworks that bridge traditional financial systems with digital advancements, foreseeing a future where digital and conventional assets coexist in a more integrated financial ecosystem. The discussion concluded with optimism for continued innovation, tempered by the awareness that clear, robust regulatory guidance will be crucial to sustaining growth and stability in the digital asset sector.

The second session

The second session on the topic of ‘The Impact of Digital Assets on the Financial System’ involved a deep dive into how DeFi is reshaping the financial landscape, as well as influencing traditional institutions and regulators.

The disruptive potential of DeFi

Daniel S Konar II introduced the session by highlighting how DeFi is reshaping financial systems. He explained the role of Layer 1 blockchains, Layer 2 scaling solutions and varying degrees of disintermediation in driving innovation. Konar contrasted the West Coast’s fast-paced, disruption-first approach with the East Coast’s stability-focused, compliance-driven mindset. He emphasised the convergence of these perspectives as traditional institutions begin integrating decentralised technologies.

Balancing innovation and financial stability

Christian Sabella addressed the challenges of integrating DeFi within traditional institutions and systems, while maintaining investor protection and financial stability. He underscored the institutional advantages of incumbents such as the Depository Trust & Clearing Corporation (DTCC), including established regulatory relationships, but noted the regulatory constraints. The panellists explored whether decentralised platforms can meet regulatory demands without compromising their innovative edge.

Latin America’s evolving regulatory landscape

Nicole Dyskant and Lizette Neme shared insights on the regulatory environment in Latin America. Dyskant outlined the regulatory contrasts across Brazil, Mexico and other key countries in the region, emphasising the risk of regulatory arbitrage and fragmented responses from different regulators. Neme focused on Mexico’s Fintech law and the challenges businesses face in navigating licensing requirements and regulatory procedures. Both panellists highlighted the importance of creating clear, adaptive legal frameworks to foster growth, while maintaining compliance. Otherwise, they concluded, the risk of regulatory arbitrage is real.

Global regulatory trends and FATF standards

Ben Aldersey provided an overview of the Financial Action Task Force’s (FATF) efforts to regulate digital asset service providers. He discussed the challenges of achieving global compliance with FATF standards, particularly in managing cross-border enforcement and aligning disparate regulatory regimes. Aldersey emphasised the importance of international cooperation to address regulatory arbitrage and the illicit use of digital assets. The panellists explored the risks associated with digital assets, including money laundering and terrorism financing. They emphasised the need for stronger anti-money laundering/know-you-customer (AML/KYC) frameworks and global coordination to mitigate these risks. Aldersey highlighted FATF’s progress in establishing standards, while Dyskant and Neme provided insights into Latin America’s efforts to combat illicit activity through regulatory measures.

Conclusion

This session underscored DeFi as a transformative force in financial services. The key takeaways included that: 

• DeFi is here to stay and has the potential to reshape the financial system;
• the gradual convergence of decentralised platforms and traditional institutions is in motion; and
• there is a need for harmonised global regulations to ensure innovation, the stability of the financial system, investor protection and in order to effectively prevent money laundering and other illicit uses of such systems. 

The panellists concluded that clear, robust regulatory guidance is essential for sustaining growth and stability in the digital asset ecosystem (and the financial system as a whole).

Keynote speech by Jon Frost of the Bank for International Settlements Americas Office, Mexico City

A keynote speech was given by Jon Frost, Head of Economics for the Americas at the Bank for International Settlements. Frost provided a wide-ranging overview of the future of digital finance, with a particular focus on the digital innovation in the financial sector taking place in the Americas. Key points included the global spread of Fintechs and Fintech investment, noting significant adoption in emerging markets. He highlighted the rapid growth of digital payments, in particular in Latin America, using the example of Brazil’s Pix system, and the radical changes taking place in financial services, including credit, insurance and wealth management, as well as digital marketplaces (such as Mercado Libre), driven by digital innovation. Frost exemplified this using statistical charts on payments taking place in different forms, such as e-money, mobile money and payments based on QR codes. He also touched on the role of CBDCs, with early adopters in the region including Jamaica, the Bahamas and the Eastern Caribbean Central Bank. Responding to questions from the floor, he acknowledged concerns about social inclusion, as well as disparities according to age, gender and income.

The third session

Session three focused on ‘Regulatory Responses and Private Law Remedies’ in connection with digital assets and the future of financial services. Giorgio Bovenzi introduced the discussion, noting that a fundamental feature common to all insolvency proceedings around the world is that the commencement of a proceeding creates an ‘estate’ that includes all of the debtor’s assets and property rights. Typically, the estate includes all kinds of property, including tangible and intangible property. However, digital assets do not sit easily within the traditional categories of personal property, that is, things in possession and things in action. So, Bovenzi posed the question to Lee Pascoe, are digital assets ‘property’ that, as such, can become subject to an insolvency proceeding as ‘property of the estate’?

Pascoe highlighted the importance of the application of property right concepts to digital assets in the insolvency proceedings of several crypto companies that failed during the past few years. Thus, Pascoe explained, if digital assets constitute property, they (1) can be subject to a bankruptcy stay, to a freezing injunction, or to a moratorium; (2) they can be administered for the satisfaction of all creditor claims; and (3) they can benefit from uniform treatment resulting from the application of cross-border insolvency principles and procedures. Pascoe discussed the multitude of jurisdictions involved in the insolvency proceedings of such crypto companies and used the bankruptcy case involving Three Arrows Capital to exemplify how the respective insolvency and cross-border insolvency regimes were utilised to address and resolve some of the key issues involved.

Bovenzi then noted that, in 2022, the US Uniform Commercial Code (UCC) was amended to introduce specific provisions regarding emerging technologies. With this in mind, he then asked Andrew M Hinkes to discuss the reasons why such amendments were deemed necessary and how they changed the regime applicable to digital assets.

Hinkes spoke about the fundamental issues originating from the global nature of digital assets and the legal efforts to harmonise the treatment of digital assets in commercial transactions. Because digital assets exist by virtue of the information that is recorded on the blockchain (as the technology that supports them) and do not adhere specifically to a legal regime, Hinkes explained that they are truly alegal. But given the growing use of digital assets in commercial transactions globally, private law acquires a significant role in supporting and encouraging those transactions. In the US, where property law questions are governed by the laws of each of the 50 states, the American Law Institute and the Uniform Law Commission suggested updating its model law to clarify and encourage such transactions via amendments to the UCC, which could then be implemented on a state-by-state basis to create a high level of uniformity and harmonisation in order to facilitate such transactions. Hinkes explained that the 2022 amendments to the UCC (which also include a new Article 12 that recognises a new category of asset, the controllable electronic record) introduced, among other things, clear ways to evidence the control of a digital asset, which in turn is the keystone for perfecting a security interest, and created a ‘take-free’ rule to enhance negotiability. The perfection of a security interest in a digital asset does not mandate or suggest a preference for intermediation. The 2022 amendments, with minor variations, have to date been enacted in 25 states and are well on their way to nationwide adoption. Hinkes also observed that globally there have been efforts to harmonise certain aspects of how the law approaches digital assets, including the UNIDROIT (the International Institute for the Unification of Private Law) Principles on Digital Assets and Private Law. As with the 2022 amendments to the UCC, the UNIDROIT principles adopted a technology-neutral, legal system-neutral, jurisdictionally agnostic solution to private law questions about digital assets and resulted in a set of principles that cover a broad range of issues including those in relation to possession, control, secured transactions, custody and more. Those principles were put forward in order to guide national lawmaking bodies as they consider approaches to facilitate cross-border commerce in regard to these cross-border assets. Hinkes concluded that, while regulators may adopt varying approaches to digital assets on a country-by-country basis, on private law matters he is encouraged by the considerable efforts that have been made to adopt harmonised approaches to facilitate commerce in digital assets, in order to bring order to the chaos of digital asset intermediary insolvencies and to clarify the relevant rights and claims in regard to those assets when used in commercial transactions.

Moving the focus to regulatory responses, Bovenzi observed that the Financial Stability Board (FSB) and the International Monetary Fund (IMF) are the organisations that coordinate, at the international level, the work of national financial authorities and set the standards that are meant to develop and promote the implementation of regulatory and supervisory policies. Bovenzi turned to Luis Urrutia to give the audience a sense of these initiatives.

Urrutia discussed the regulatory responses and the main initiatives undertaken by the FSB and the IMF, which are the organisations that coordinate the work of national financial authorities and that set the standards that are meant to develop and promote the implementation of regulatory and supervisory policies at the international level. Urrutia observed that although the purported benefits of crypto-assets have not yet materialised, they have gained increasing attractiveness as speculative instruments. Insufficient regulation may add to their popularity which, in turn, may drive financial institutions to increase their activities and positions to satisfy customer demands. This growth, however, creates significant risks, which the FSB and the IMF have identified, with both organisations leading efforts to establish uniform policies across countries. Urrutia explained that the main risks that crypto-assets have brought about, to date, relate to money laundering and the financing of terrorism. FATF member countries, plus other jurisdictions, have implemented standards requiring virtual asset service providers to be registered or licensed and be subject to anti-money laundering/counter terrorism financing (AML/CFT) measures, which is a major first step. Urrutia also posited that this initiative could help to expedite the implementation of regulations aimed at addressing financial risks, such as conduct and prudential regulation, which such entities would need to comply with. He concluded that the regulatory gaps in the legal regimes adopted by many countries remain material and can only be closed with greater regulation, oversight and cross-border collaboration among regulators and legislators.

Mauro M Wolfe outlined the response to the issues raised by digital assets from the perspective of law enforcement and regulation in the US. He started by observing that the intrinsically variable nature of digital assets, eg, as a security or commodity or as currency, and the different nature of crypto businesses, ie, money transmitters, exchanges, etc, creates a law enforcement patchwork in the US, which directly impacts which regulator has oversight and what regulations apply. The US Department of Justice has been pursuing criminal fraud perpetrated utilising crypto-assets; the US Securities and Exchange Commission has been pursuing the compliance with the Securities Act 1933 and the Securities Exchange Act 1934 in regard to crypto activities; the Commodity Futures Trading Commission has been ensuring that digital assets that qualify as commodities comply with the commodities trading regime; the Office of Foreign Assets Control, which is part of the US Department of the Treasury, has applied sanctions in the fight against criminal and other malicious actors abusing digital currencies; the Financial Crimes Enforcement Network (FinCEN), which is also part of the US Department of the Treasury, has been focused on the treatment of certain types of digital assets and their relevance in the context of AML initiatives; and finally, the State Attorneys General from many of the 50 states have focused on crypto licensing and money transmitter laws (for example, the New York Attorney General was the first state regulator to issue crypto licences, known as BitLicenses, in 2014). Finally, Wolfe highlighted that despite the borderless nature of crypto, the reach of US jurisdiction in connection with enforcement actions is often underestimated: any transaction involving US dollars, or a US financial institution, or a US network, or a US person, can form the basis for US jurisdiction and, thus, enforcement action.

Anurag Bana discussed the responsibilities that the legal profession bears when dealing with digital assets and, in particular, technological competence, the ability to provide legal opinions and the ability to get paid in digital assets. Bana explained that the IBA General Principles for the Legal Profession now contain an updated explanatory note 9.2 on technological competence (approved and adopted by the IBA Council in May 2024) and, further, that the American Bar Association’s Rule 1.1 Comment 8 in the Model Rules of Professional Conduct specifically addresses technological competence as well. He questioned to what extent lawyers are obligated to meet and uphold legal and ethical standards as increasingly complex technologies are applied to their work on digital assets. He asked: do legal responsibilities increase with the evolving global regulatory landscape and the expansion of the legal practice to address new technologies? Bana also discussed the need to develop new frameworks for legal opinions that reflect the different nature of the digital assets involved, the need to understand the operation of the system on which such digital assets are created and, overall, to understand the different risk assessments that legal opinions must address. Finally, Bana expressed concerns around the ability to utilise digital assets for the payment of legal services and the different issues that lawyers should consider when assessing the viability of such an option.

The moderator and the panelists then engaged in an open discussion about what's coming down the path and the developments that are expected to materialise in regard to their specific focus areas.