September 2016 – Page 2 – FinTech and Blockchain Law Watch

Who bears the risk? Federal Court holds that a purchaser of unsecured consumer loans is the “true lender”

Sep 09 2016

By Irene C. Freidel and David D. Christensen

A California federal court has held that the purchaser of consumer loans is the “true lender” and thus subject to state usury laws, even though a separate entity funded and closed the loans in its own name. The recent decision, however, is another reminder that US state and federal regulators, as well as plaintiffs’ attorneys, may be able to pierce these partnerships where the financial institution funding and closing the loan does not bear substantial risk on those loans.

U.S. Banking regulators issue a “Joint Fact Sheet on Foreign Correspondent Banking”: Is this a response to global fears of US “DeRisking”? And if so, does it go far enough?

Sep 07 2016

By Judith Rinearson

This summer, “de-risking” has become a hot topic. De-risking is the term used to describe the process many banks have taken to cancel bank accounts and correspondent banking relationships with customers whom they deem to be too risky, or not worth the cost of ensuring compliance. Losing a bank account relationship can be devastating for small businesses and many emerging payments companies have found it increasingly difficult to obtain banking service due to perceptions that providing banking services for “fintechs,” blockchain companies and other innovative payments companies would be “high risk”.

The concerns about derisking are not limited to its impact on small businesses; it has also impacted on small countries. IMF President Christine LaGarde noted in July 2016 that “regulators in key financial centers need to clarify regulatory expectations …and global banks need to avoid knee-jerk reactions and find sensible ways to reduce their costs.”

Roboadvisers are Go: ASIC guidance for digital advice

Sep 04 2016

By Daniel Knight and Claire De Koeyer

The Australian Securities and Investments Commission (ASIC) this week released Regulatory Guide 255: Providing digital financial product advice to retail clients (RG). The RG clarifies how financial product advice obligations apply to providers of digital advice.

ASIC supports the development of a healthy and robust ‘digital advice’ or ‘robo-advice’ market in Australia, while recognising the need to protect consumers.

As with other advice providers, robo-advisers will need to hold an Australian Financial Services Licence (AFSL) or be authorised by an AFSL holder and will be subject to a range of duties, including the duty to act in the best interests of their clients.

Bitcoin operators exposed to cyber threats

Sep 01 2016

By Cameron Abbott and Rebecca Murray

Reuters has reported that a third of bitcoin trading platforms have been hacked, and nearly half have closed since they entered the scene 6 years ago. This increasing risk for bitcoin holders is compounded by the fact there is no depositor’s insurance to absorb the loss. That approach heightens cybersecurity risks and also exposes the fact that bitcoin investors have little choice but to do business with under-capitalized exchanges.

This issue was evident when Bitfinex was hacked earlier this month and an estimated $70 million in bitcoin was stolen. The virtual bank’s customers were forced to share the losses resulting in a generalized loss percentage of 36.067%. Read our blog post on this hacking here.

Experts say trading venues acting like banks such as Bitfinex will remain vulnerable. These exchanges act as custodial wallets in which they control users’ digital currencies like banks control customer deposits. However, unlike their brick-and-mortar counterparts, when customers’ bitcoin accounts are hacked, there is currently no third party that can step in to deal with the theft. As a result, these underfunded exchanges require nearly perfect security.

Given this it is not surprising that certain governments around the world are exploring the possibility of central bank issued digital currencies using distributed ledger technology which could compete with the private digital currency systems such as bitcoin. Read more on this here.

The politicization of encryption: party “platforms” or “platitudes”?

Sep 01 2016

By Tyler Kirk

In the United States, the political stage is set for what may turn out to be one of the most infamous presidential elections in America’s history. As noted in an earlier blog post, the regulation of encryption by U.S. legislators and regulatory agencies may have a damaging impact on FinTech, and in particular, on the adoption of blockchain and other distributed ledger technologies. In this post, we look at the relevant Party Platforms to learn what, if anything, they say about encryption.

Archive:September 2016