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FCA comment on ICOs

Dec 20 2017

By Rizwan Qayyum

The UK Financial Conduct Authority (FCA) has released a feedback statement on the Distributed Ledger technology discussion paper from April 2017 (DP17/3).

As a part of this, they commented on ICOs, noting:

“On the Initial Coin Offering (ICO) market, the FCA will gather further evidence and conduct a deeper examination of the fast-paced developments. Its findings will help to determine whether or not there is need for further regulatory action in this area beyond the consumer warning issued in September”

The feedback is available here.

ASIC broadens Fintech Cooperation with Canadian Regulators

Dec 19 2017

By Jim Bulling, Michelle Chasser and Edwin Tan

The Australian Securities & Investments Commission (ASIC) has announced a new Cooperation Agreement with the Canadian Securities Administrators (CSA), a year after entering into a similar agreement with the Ontario Securities Commission. The CSA is made up of the following Canadian regulators:

Autorité des marchés financiers (Québec);
British Columbia Securities Commission;
Alberta Securities Commission;
Financial and Consumer Affairs Authority of Saskatchewan;
Manitoba Securities Commission;
Financial and Consumer Services Commission (New Brunswick); and
Nova Scotia Securities Commission.

UK Investment Management Industry and FinTech

Dec 14 2017

By Jonathan Lawrence

The UK Treasury recently published its Investment Management Strategy II Report. Building on its 2013 strategy report ‒ which mainly focused on how to improve the UK as a fund domicile ‒ this report sets out the UK government’s strategy to build upon the success of the UK’s investment management industry in the long-term.

One chapter is devoted to FinTech. The government is keen to see FinTech and asset management firms utilising the Financial Conduct Authority’s (FCA) Project Innovate, engaging early with the regulator to gain tailored regulatory support and test innovative products in a safe place. It also encourages the sector to take advantage of the FinTech bridges established between the UK to its global partners. Since 2015, the government has established four ‘FinTech Bridges’ – with Singapore, the Republic of Korea, China and Hong Kong. FinTech Bridges provide opportunities for firms to scale up their UK FinTech innovations, internationally. By establishing links between government, regulators and private sectors, FinTech bridges reduce the barriers to entry in a new jurisdiction and link UK FinTech firms to international investment opportunities. The UK’s FinTech Bridges all contain regulatory co-operation agreements negotiated between the FCA and their regulatory counterparts.

SEC Cautions “Utility Token” Sponsors and ICO Market Intermediaries

Dec 14 2017

By Robert M. Crea

On December 11, 2017, the SEC released a cease-and-desist order against a purported “utility token” sold by Munchee Inc. (“Munchee”) and a statement by Jay Clayton on Cryptocurrencies and Initial Coin Offerings. Two takeaways:

The SEC will scrutinize so-called “utility tokens” under the Howey test, and Chairman Clayton believes that most token sales he’s seen constitute securities offerings. The familiarity of the Munchee utility framework to other token offerings coupled with Chairman Clayton’s Statement could very well chill the market for utility tokens seeking to avoid application of federal securities laws.
The SEC expects intermediaries operating in crypto, specifically law firms, accountants, consultants and broker-dealers, to be “gatekeepers” of investor protection.

We will be providing a fuller analysis in the next several days.

UK Treasury looking to regulate cryptocurrencies

Dec 10 2017

By Jonathan Lawrence

The UK Treasury is looking to regulate cryptocurrencies. Stephen Barclay, the economic secretary to the UK Treasury, recently answered a Parliamentary question as to what steps his department was taking to regulate (a) Bitcoin and (b) other cryptocurrencies. Mr Barclay answered that the UK government is currently negotiating amendments to the European Union (EU) Fourth Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas. He said that the UK government supports the intention behind these amendments. They expect these negotiations to conclude at an EU level in late 2017/early 2018. This development follows a recent UK Financial Conduct Authority warning on cryptocurrencies.

France’s Financial Markets Authority considers its options for regulating initial coin offerings

Dec 10 2017

By Claude-Étienne Armingaud, Emilie Oberlis, Alexandre Balducci, Sidney Lichtenstein and Alban Michou-Tognelli

The French Financial Markets Authority, the Autorité des Marchés Financiers (“AMF”), recently published a white paper requesting the views of stakeholders on the best means of regulating the fundraising activities based on cryptocurrencies and blockchain technology and is also launching a digital-asset research program called UNICORN (“Universal Node to ICO’s Research & Network”). In doing so, the AMF is following in the footsteps of the French Ministry of Finance, which published a draft document aimed at adapting the French legal framework to the use of blockchain technology on 19 September 2017 (see our coverage here).

The white paper focuses on initial coin offerings (“ICOs”) which are fundraising activities used to finance technology-based projects at an early stage of development. Participants to an ICO transaction receive tokens issued by the project initiator, in exchange for their investment in cryptocurrency or fiat currency. These tokens (a) have different characteristics depending on the transaction; (b) confer different rights to their owners; and (c) are intended for a technologically-oriented and informed audience that has a good understanding of (i) the nature of the project, (ii) the underlying technology, and (iii) the risks associated with the project.

UK FCA Announces Next Sandbox Cohort

Dec 07 2017

By Jonathan Lawrence

On 5 December, the UK Financial Conduct Authority (FCA) announced the firms that were successful in their applications to begin testing in the third cohort of the FCA’s regulatory sandbox. The sandbox allows firms to test innovative products, services or business models in a live market environment. The sandbox was a first for regulators worldwide. Since it opened, the sandbox has supported almost 70 firms in testing innovative products and services. The FCA is seeing more applicants from outside London and a broader range of firms. The FCA has also opened the application window for its fourth sandbox cohort.

New SEC Cyber Unit Obtains Emergency Action Against ICO

Dec 07 2017

By Robert M. Crea and Evan J. Glover

On December 4, 2017, the Securities and Exchange Commission’s (“SEC”) new Cyber Unit obtained an emergency asset freeze to halt a Canadian initial coin offering (“ICO”) called PlexCoin that had raised up to $15 million from thousands of investors. The SEC filed its complaint (“Complaint”) in the Eastern District of New York, alleging that the sponsor and his company, PlexCorps, marketed and sold securities to investors in the U.S. and elsewhere under a variety of false pretenses, including that PlexCoin would yield a 1,354% profit in less than 29 days. The complaint seeks permanent injunctions, disgorgement plus interest and penalties.

LabCFTC’s First Primer Covers Bitcoin, other Virtual Currencies, Virtual Tokens and ICOs

Dec 04 2017

By Anthony Nolan and Eric A. Love

The U.S. Commodity Futures Trading Commission’s (CFTC) New York-based LabCFTC has released a twenty-page primer (the “Primer”) about virtual currencies, virtual tokens and initial coin offerings (ICOs). It’s the first in a series of educational primers that LabCFTC will issue in the coming months about innovations in the FinTech industry.

The Primer answers important questions about how CFTC regulations apply to virtual currencies, virtual tokens and ICOs. Notably, the Primer reiterates that Bitcoin and other virtual currencies are appropriately categorized as commodities and also states that virtual tokens can in some instances be commodities or derivatives contracts even if they are also considered to be securities under the U.S. securities laws. The Primer notes that, in applying U.S. commodity futures laws to virtual tokens, the CFTC will look beyond form and examine the “actual substance and purpose” of particular activities.

Bank of England Stress Tests Reveal FinTech Competition

Dec 04 2017

By Jonathan Lawrence

The Bank of England (BofE) published its 2017 UK bank stress test results on 28 November. The BofE found that incumbent institutions are probably underestimating the impact that increased FinTech competition could have on their profitability:

Diminishing revenue from overdraft products. Currently, unarranged overdraft fees are one of the biggest contributors to UK banks’ annual pre-tax profits. FinTechs, like personal financial management services, should help people better manage their money to avoid becoming overdrawn, and aggregation platforms will increasingly redirect customers to cheaper credit options, diminishing their need for overdraft facilities and reducing banks’ returns on such products. Banks may be doubly hit if the UK Financial Conduct Authority decides to impose a strict price cap on the overdraft fees banks can charge customers.

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