FinTech and Blockchain Law Watch – Page 22 – At the Crossroads of Law, Innovation and Commerce

One Year after the “DAO Report” Three U.S. Courts Begin to Provide Crypto-Clarity

Jul 24 2018

By Clifford C. Histed and Nicole C. Mueller

One year ago today, the U.S. Securities and Exchange Commission (“SEC”) published the “DAO Report” which concluded that certain tokens issued in an initial coin offering (“ICO”) were securities under the Supreme Court decision SEC v. W.J. Howey Co. The Report stated that whether an ICO is a security offering will depend on the facts and circumstances, including the economic realities of the transaction. Confusion, private lawsuits, SEC enforcement actions, and even criminal prosecutions ensued, but three courts are about to provide clarity.

Hong Kong SFC: E-Signature Verification Proposal to Boost Online Investing

Jul 24 2018

By Jim Bulling and Edwin Tan

On 12 July 2018, the Hong Kong Securities and Futures Commission (SFC) distributed a circular providing guidance to Hong Kong intermediaries which intend to onboard and verify individual clients digitally. This guidance was drafted in response to the increasingly common occurrence of electronic transactions where a more efficient onboarding process is necessary.

Intermediaries are required to take all reasonable steps to establish the identity of their clients, including adopting a satisfactory account opening approach for their clients. If clients are not physically present for identification purposes, there will be a higher chance of risks eventuating including impersonation.

UK Law Commission: Smart Contract Research

Jul 24 2018

By Jonathan Lawrence

Published on 19 July, the UK Law Commission’s 2017-2018 Annual Report includes a section dedicated to a research project into smart contracts. The Commission is a statutory independent body. Its aims include the conduct of research and consultations in order to make systematic recommendations for consideration by the UK Parliament. The Commission defines “smart contracts” as the technology which runs on blockchain and by which legal contracts may be executed automatically, at least in part. The body says there is a compelling case for a Law Commission scoping study to review the current English legal framework as it applies to smart contracts. The project’s purpose would be to ensure that English law is sufficiently certain and flexible to apply in a global, digital context and to highlight any topics which lack clarity or certainty. The body has started its initial research and its main work will begin in summer 2018.

Surprise: New York State Court Ruling Means That NY Payroll Card Regulations Could Go into Effect After All

Jul 23 2018

By Judith Rinearson and Eric A. Love

The years-long endeavor in New York State to extensively regulate payroll cards (referred to in the NY regulations as “payroll debit cards”) recently entered a new phase when the New York State Supreme Court, Albany County, annulled the New York State Industrial Board of Appeals’ (“IBA”) February 2017 decision to revoke new payroll card regulations that had previously been issued in that state. This means that, depending on the outcome of the recently filed appeal of the court’s decision, the controversial and highly restrictive NY payroll card regulations could become effective after all.

RBA: accessibility, security and resilience are key to the future of retail payment systems in Australia

Jul 11 2018

By Jim Bulling and Felix Charlesworth

The Assistant Governor of the Reserve Bank of Australia (RBA), Michele Bullock, delivered a speech at the Bund Fintech Summit in Shanghai on the developments in the retail payments industry and the potential implications these pose for regulators.

UK FCA – Fourth Sandbox Cohort Announced

Jul 11 2018

By Jonathan Lawrence

29 businesses have been accepted into cohort four of the UK Financial Conduct Authority (FCA) regulatory sandbox to test innovative FinTech products, services, business models and delivery mechanisms. The FCA received 69 applications for cohort four. Applications came from a diverse range of firms operating across the financial services sector including in areas such as consumer credit, automated advice and insurance. 29 firms have been accepted to develop towards testing, including three firms that were accepted as part of previous cohorts but did not proceed to test. Firms that have been accepted to develop towards testing are listed here, except for one firm that has asked not to be named at this point in time. Read More

Artificial Intelligence in Wealth Management

Jul 10 2018

By Jim Bulling and Tiarna Meka

A recent report by Forbes Insights and Temenos suggests that wealth managers must embrace the development in Artificial Intelligence (AI) technology in order to sustain a long-term future. The use of AI technology allows financial advisors to provide high quality, customised client advice.

There has been a significant rise in the attitudes of wealth managers towards AI since 2016 with global statistics showing that 52% of wealth managers now view AI as essential in their business operations. In Asia-Pacific, this statistic is substantially higher with 70% of wealth managers viewing AI as essential and 80% deploying or testing AI.

Vermont Signals Broad Interpretation of Money Transmitter Law

Jun 28 2018

By Jennifer Crowder and Jeremy McLaughlin

Recently, largely due to emerging payment systems and new ways of conducting business online, there has been a trend developing among states that certain activity does not require money transmitter licensing. For example, several states have amended their statutes or issued regulatory guidance to indicate that a license is not needed if an entity is acting as an “agent of the payee” or as a “payment processor,” so long as certain conditions are met. In general, an agent of the payee is an entity that has a contractual relationship with the merchant or other ultimate payee such that payment to that entity constitutes, in effect, final payment. New York, for example, describes it as “any person authorized by a payee to receive funds on behalf of the payee and to deliver such funds received from the payor to the payee.” N.Y. Comp. Codes R. & Regs. tit. 3, § 406.2(l).

Metamorphosis: Digital Assets and the U.S. Securities Laws

Jun 28 2018

By Robert M. Crea, Anthony R.G. Nolan and Eden L. Rohrer

In the past year, the U.S Securities Exchange Commission (“SEC”) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (“ICO”) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is a security.”

However, on June 14, 2018, William Hinman, the SEC’s Director of the Division of Corporation Finance, stated that, putting aside the fundraising that accompanied the creation of Ether, “current offers and sales of Ether are not securities transactions.” This statement was based on a novel theory of evolving decentralization that may very well have significant ramifications for cryptocurrency and ICO markets.

Please see our latest K&L Gates HUB article for a discussion about the context and implications for Director Hinman’s conclusions surrounding Ether. It also analyses the specific factors he suggests weighing in determining whether a given digital asset is a security.

Are Digital Asset Transactions Always Securities Offerings?

Jun 22 2018

By Andrew Massey and Evan Glover

On June 14, 2018, William Hinman, Director of the Division of Corporation Finance at the United States Securities and Exchange Commission, shared his views on whether digital assets (such as tokens or coins) that were originally offered in a securities offering can be subsequently sold in a manner that does not constitute a securities offering. CLICK HERE for the full remarks.

In some cases where a central enterprise is no longer being invested in, or where the digital asset is used for consumption (to purchase a good or service available through the network it was created), Hinman believes such an asset would not be considered a security. However, labeling a digital asset a “utility token” does not automatically cause the digital asset to become something that is not a security. Although the Supreme Court has stated that if someone is purchasing something for consumption, it is not a security, Hinman emphasized the Supreme Court’s stance that economic substance, not labels, of the transaction guides the legal analysis.