FinTech and Blockchain Law Watch – Page 30 – At the Crossroads of Law, Innovation and Commerce

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

Dec 04 2017

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.

ASIC Changes to Licence Processing Timelines and Fee Regime

Nov 30 2017

By Jim Bulling, Michelle Chasser and Edwin Tan

The Australian Securities & Investments Commission (ASIC) has announced changes to its service charter standard for processing licence applications effective immediately. Under the updated standard, ASIC will decide 70% of licence applications within 150 days, and 90% of applications within 240 days. The previous timeframes were 60 days and 120 days respectively. ASIC has attributed this increase to an increasingly robust and risk-based approach to its assessment of licence applications.

In addition, a new fees-for-service regime will commence on 1 July 2018. It will apply to document compliance reviews, licence applications or variations, applications for registration, requests for changes to market integrity rules or procedures and applications for relief. There will be fee increases across the board for lodging ASIC forms, with the exception of certain registry activities which will now be exempt from payment of fees.

Initial Coin Offerings “Horrify” a Former SEC Commissioner

Nov 30 2017

By Robert Crea

On Sunday, November 26, 2017, the New York Times published an interview with Joseph Grundfest, former SEC Commissioner and current Stanford law professor. Professor Grundfest is sharply critical of the posture of initial coin offerings under U.S. federal securities laws. Given his persuasive voice on securities law matters and his influence in Silicon Valley, this interview may very well serve as a sobering wakeup call to the ICO marketplace.

Some notable quotes:

“ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi. . . .It’s more than the extent of the violation . . . . It’s the almost comedic quality of the violation.”
“These are not hard cases . . . . You don’t need teams of accountants poring over complex financing documents [to bring enforcement actions].”
“We’re waiting to see a whole bunch of enforcement actions in this space, and we wonder why they haven’t happened yet. . . .I hope what [the SEC is] doing is planning on a sweep of 50 ICOs.”

The article may be found here.

Unresolved risk issues with the proposed open banking reforms

Nov 29 2017

By Jim Bulling, Michelle Chasser and Edwin Tan

The Australian Government has announced its intention to mandate that ADIs provide open access to customer and small business data with a commencement date still to be determined. Treasury has been tasked with undertaking a review of the proposals put forward by the Productivity Commission, and is due to report back to the Government by the end of 2017 as to its recommendations on implementation of the proposals and recommended timeframe.

While everyone is excited about the benefits that will flow from open banking, there have been concerns raised about the security and privacy risks raised by an open banking regime. In relation to privacy, the Productivity Commission has suggested that the solution is to amend the existing Privacy Act to include a new class of protected information known as “consumer data”. However there are significant gaps in the existing Privacy Act that would pose real problems in connection with the protection of customer data. For instance, the Australian Privacy Principles do not apply to small businesses with turnover of less than $3.0m and this may exempt many FinTech players from any privacy obligations.

New Technology Targeting U.S. Loan Market in Attempt to Increase Liquidity

Nov 28 2017

By Vanessa Spiro and Susan Altman

Loan market participants may soon be able to use blockchain technology and tokenized cash to achieve swifter settlement of loan trades. Both Synaps Loans and Finastra plan to introduce new blockchain-based platforms next year. They join the platform created by ClearPar and HIS Markit, which plans to reduce or eliminate wire transfers by promoting tokens that can ultimately be exchanged for cash.

The main objective of the technology is to reduce settlement time. Long settlement times result in costly use of capital and render the market less liquid in the eyes of regulators. The time between the agreement on material terms of the trade and the trade settlement date for syndicated loans is much longer–the median recently was 12 days- than that for other asset classes, such as equities. Several processes, such as implementation of the “delayed compensation” rules to incentivize quick settlement, have attempted to reduce settlement time. However, market protocol requires an exchange of finalized assignment documents among buyer, seller and agent bank, collection of “know-your-customer” information by agent bank, borrower consent, receipt of underlying loan documentation, agent bank verification of loan ownership and transfer of ownership on the loan registry. Even under the best circumstances there are inadvertent delays, including those caused by blackout dates for amendments and absences by workers processing requests.

MAS releases “A Guide to Digital Token Offerings”

Nov 28 2017

By Nicholas Hanna and Samantha See

On 14 November 2017, the Monetary Authority of Singapore (the “MAS”) released “A Guide to Digital Token Offerings” providing general guidance on the application of the securities laws administered by the MAS in relation to offers or issues of digital tokens in Singapore.

The main consideration is whether the digital token is designed in a way that would make it a product regulated under Singapore’s securities laws i.e. if it behaves like a share, debenture or some other form of security. If a token does not function like a security, then technically, neither will the security laws apply.

UK Government Measures for FinTech – Autumn 2017 Budget

Nov 28 2017

By Jonathan Lawrence

The UK Chancellor of the Exchequer, Philip Hammond, included three measures in his 2017 Autumn Budget on 22 November of interest to the FinTech industry:

Regulators’ Pioneer Fund: The aim is to help unlock the potential of emerging technologies. The new £10 million fund is designed to help regulators to develop innovative approaches aimed at getting new products and services to market.
Tech Nation: To secure the position of the UK in digital innovation, the Government will invest £21 million over the next 4 years to expand Tech City UK’s reach – to become ‘Tech Nation’ – and support regional tech companies and start-ups. Tech Nation will roll out a dedicated sector programme for leading UK tech specialisms, including FinTech and Artificial Intelligence. Regional hubs will be located in: Cambridge, Bristol and Bath, Manchester, Newcastle, Leeds and Sheffield, Reading, Birmingham, Edinburgh and Glasgow, Belfast, and Cardiff.
AI: The government plans to create a new Centre for Data Ethics and Innovation, to enable safe, ethical, and ground-breaking innovation in AI and data-driven technologies. This advisory body is designed to work with the Government, regulators, and industry to help lay the foundations for AI adoption. The Government will also invest over £75 million to progress key recommendations of the independent review on AI, create new AI fellowships, and provide initial funding for 450 PhD researchers.

EU supervisor warns about risks of ICOs and calls for regulatory compliance

Nov 22 2017

By Giovanni Campi and Ignasi Guardans

Following the rapidly increasing use of Initial Coin Offerings (ICOs), the European Securities and Markets Authority (ESMA) issued two statements to warn investors on ICOs’ risks and to encourage companies involved in ICOs to comply with the relevant European legislation.

ESMA defines an ICO as “an innovative way of raising money from the public, using coins or tokens”. In an ICO, businesses issue tokens and sell them in exchange for traditional, or more often, virtual currencies like Bitcoin or Ether. The tokens are created and disseminated using distributed ledger or blockchain technology (DLT).

Cryptocurrency CFD Warning

Nov 20 2017

By Jonathan Lawrence

The UK Financial Conduct Authority (FCA) has recently issued a consumer warning about contracts for differences (CFDs), including financial spread bets, with cryptocurrencies as the underlying investment.

CFDs are complex financial instruments which allow speculation on the price of an asset. CFDs are typically offered with leverage which means a consumer only need to put down a portion of the investment’s total value. However leverage also multiplies the impact of price changes on both profits and losses. Cryptocurrency CFDs allow investors to speculate on a change in price of a cryptocurrency such as Bitcoin or Ethereum. They have experienced significant price volatility in the past year which, in combination with leverage, places consumers at risk of suffering significant losses.