FinTech and Blockchain Law Watch – Page 43 – At the Crossroads of Law, Innovation and Commerce

Financial Inclusion and Robust Regulation Are on the Table as OCC Pushes Ahead With Fintech Charter

Mar 26 2017

By Anthony Nolan, Judith Rinearson, Jeremy McLaughlin, and Eric Love

On March 15, 2017, the U.S. OCC issued a Draft Supplement to its Licensing Manual (Supplement) to progress its proposal to roll out a special purpose national bank (SPNB) charter for fintech companies.

The Supplement outlines the process by which a fintech company may apply for a SPNB charter, and the considerations the OCC will take into account when evaluating such applications. In addition, the Supplement reiterates the OCC’s determination that the SPNB charter would be “in the public interest” because it would provide “uniform standards and supervision,” “support[] the dual banking system,” promote “growth, modernization, and competition” in the financial system, and encourage fintech companies to “promote financial inclusion.” It also makes clear the OCC’s determination to promote financial inclusion and to rebut criticisms that the SPNB charter would represent a light touch regulatory regime. The SPNB is not a ‘bank-lite’ charter; an “applicant that receives OCC approval for a charter becomes a national bank subject to the laws, regulations, and federal supervision that apply to all national banks.”

Comments on the Supplement are due by April 14, 2017. Because the Supplement represents a significant step forward in the OCC’s push for a fintech charter, we expect that there will be many commenters. Even before the OCC’s issuance of the Supplement, the proposed charter garnered substantial interest from key Members of Congress, state regulators, industry groups, and other stakeholders. For a more detailed analysis of the Supplement, see our Legal Insight here.

CPMI publishes an analytical framework for DLT

Mar 24 2017

By Giovanni Campi and Ignasi Guardans

The Committee on Payment and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) recently released a report that focuses on the potential impact of distributed ledger technology (DLT) on payment, clearing and settlement.

In providing an analytical framework to approach DLT, CPMI hopes to enhance authorities and market participants’ understanding of this technology. The report reviews the potential implication of DLT for the efficiency and safety of payment, clearing and settlement activities. The last part also analyzes broader implications of DLT for financial markets, in terms of market architecture and connectivity.

Jury Finds Two Guilty in Bitcoin Exchange Bribery Scheme; Related Criminal Prosecutions Looming

Mar 23 2017

By Nicole C. Mueller and Clifford C. Histed

On March 17, 2017, a Manhattan federal jury convicted Trevon Gross, a pastor, and Yuri Lebedev, a software engineer, of bribery and of conspiring to operate bitcoin exchange Coin.mx as an unlawful money transmitting business. The jury also convicted Lebedev of fraud. Sentencing is scheduled for July 2017.

Lebedev and Coin.mx operator Anthony Murgio were charged in 2015. Coin.mx allegedly operated as a conduit for cybercrime-related funds, and in violation of state and federal money transmitting laws. Prosecutors argued to the jury that Murgio and Lebedev sought to trick the financial institutions through which Coin.mx processed transactions into believing its unlawful bitcoin exchange business was simply a members-only “collectibles club.” Part of the Coin.mx scheme included processing and profiting from bitcoin transactions conducted on behalf of victims of ransomware attacks by allowing the victims to buy bitcoins to pay ransom payments while generating revenue for Coin.mx. Murgio pleaded guilty before trial.

CFTC FinTech Initiative

Mar 21 2017

By Anthony Nolan

On Wednesday Commissioner (and Chairman-designate) Giancarlo of the US Commodity Futures Trading Commission (CFTC) gave a speech to the Futures Industry Association in which he identified the embrace of technological change as a key factor in economic growth. In that speech he announced that the CFTC has been conducting a review of FinTech innovation issues including those arising from a range of new digital technologies. The review is focused on three issues:

How the CFTC should leverage FinTech innovation to make it a more effective regulator;
How CFTC rules and regulations need to be updated to account for FinTech in order for the Commission to be relevant in 21st Century digital markets; and
The proper role of the CFTC in promoting US FinTech innovation in CFTC regulated markets.

Lendit Conference 2017

Mar 20 2017

By Ed Dartley and Anthony Nolan

K&L Gates sponsored and attended Lendit again this year. For this year’s conference, we added a Monday afternoon cocktail hour to our exhibitor’s booth, and were able to meet a number of old and new friends in the process. In attendance were K&L attorneys Ed Dartley, Tony Nolan, Sasha Burstein, Linda Odom, John ReVeal, and Joe Valenti. Tony participated in a panel discussion entitled “True Lender and Madden Case: Impact on Industry-2 Years In.” The panel addressed several recent court cases and legislative developments that affect the availability of federal preemption to marketplace loans originated or purchased by non-bank lenders.

We found this year’s conference to be something of a coming of age for the marketplace lending industry. There was a sense that the industry is maturing, and that was reflected in the panel discussions and the networking of attendees. We found the conference to be as valuable for the re-connecting with existing associates and business colleagues as for the introductions to new ones.

As we continue to work with clients in virtually every aspect of marketplace lending, we find Lendit and other conferences to be a unique opportunity to interface with industry participants on cutting-edge developments, catch up with clients, and generally stay abreast of this fast-moving industry. Finally, please join us for Altfi Europe Summit 2017 in London on March 30, where we will be sponsoring and speaking at that marketplace lending event.

UK Government’s digital strategy

Mar 20 2017

By Jonathan Lawrence

The UK Government’s Digital Strategy published on 1 March 2017 contains an overview of actions the Government and regulators are taking to support the UK FinTech industry:

supporting UK banks to deliver Open Banking through a fully open application programming interface (API), providing access to authorised third parties by Q1 2018. Third-parties will then be able to access consumers’ data in real-time
supporting industry to design and deliver a pensions dashboard by 2019 – a digital interface where an individual can view all their pensions in one place
working with Tech City UK on a FinTech Delivery Panel to set out a long-term strategy for UK FinTech and identify key industry initiatives. This panel comprises key representatives from the FinTech sector, existing financial services sector, and the Financial Inclusion Commission
appointing regional FinTech envoys to help the growth of FinTech across the UK. To date, regional FinTech envoys have been appointed for the North of England and Scotland
showcasing UK FinTech to investors at the annual International FinTech Conference, to take place in London on 12 April 2017

OCC Releases Draft Licensing Manual for Evaluating Fintech Bank Charter Applications

Mar 20 2017

By Anthony Nolan

The Office of the Comptroller of the Currency today issued its draft licensing manual in furtherance of its proposal to grant national bank license to fintech companies. This provides additional detail on evaluating charter applications from fintech companies that engage in the business of banking. This is an interesting riposte to the Republican letter asking the OCC to delay the fintech charter process. A link to the OCC’s press release appears here.

Regulators in the UK and Japan enter into Co-operation Framework

Mar 20 2017

By Jonathan Lawrence

The Financial Services Agency of Japan (JFSA) and the UK’s Financial Conduct Authority (FCA) have entered into a Co-operation Framework to support innovative FinTech companies in their respective markets. For the full text of the agreement by way of an exchange of letters, see Letter from the JFSA to the FCA and Letter from the FCA to the JFSA.

This Co-operation Framework will provide a regulatory referral system for innovative financial businesses that have been offered support by the JFSA or the FCA through their respective FinTech innovation functions, or would qualify for such support (an Innovator Business). The FCA launched Project Innovate in October 2014 which is led by the FCA’s Innovation Hub. The JFSA established its FinTech Support Desk in December 2015 as a one-stop contact point for FinTech businesses.

Some Limits on Smart Contracts

Mar 16 2017

By Susan P. Altman

Amid the excitement about the promise of smart contracts comes a wet towel over their use. Milos Dunjic argues that the Capabilities of Smart Contracts are Overblown because most people misunderstand the fundamental properties of smart contracts and propose ideas that are not implementable on a practical level. Dunjic addresses the scalability and privacy issues presented by smart contracts.

As for scalability, smart contract code must produce the identical outcome in every node that executes it. Dunjic questions whether a large number of distributed nodes all hitting a “funds transfer” API at the same time might look like a self-inflicted DDOS attack on the API. Would each call to the API receive exactly the same response from the API? Reliability must be absolute in a smart contract.

As for privacy, replicating and storing data on each blockchain participant’s computer does not look like the best way to prevent data breaches. The reality of decentralized networks is that they expand the opportunities for breach. Not surprising, Dunjic’s conclusion is that smart contracts should be used mainly for management of transactions with one database and that interaction with external environments and services should be avoided. For another viewpoint on the privacy problem with suggestions for partial solutions, see Privacy on Blockchain. We’ll watch how the smart programmers address these issues.

CFPB Delays Prepaid Account Rule Effective Date

Mar 13 2017

By Eric A. Love and John ReVeal

On March 9th, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule to delay for six months the October 1, 2017 effective date of its sweeping Final Rule amending Regulation E and Regulation Z as applied to prepaid accounts. Under the proposed rule, the Final Rule would become effective on April 1, 2018.

The proposed rule would not revise any other aspect of the Final Rule, and comes as numerous prepaid account industry participants have expressed concerns about its scope and their ability to comply with key provisions by the current October 1 effective date. Additionally, the proposed delay follows the recent introduction of legislation in Congress that would use the Congressional Review Act to repeal the Final Rule. According to the CFPB, the proposed delay would “be sufficient for industry participants to ensure they can comply” with the Final Rule and would provide the CFPB the opportunity to receive public comments about any implementation challenges that might impact consumers, the prepaid account industry and other stakeholders.

After publication in the Federal Register, the public will have 21 days to comment on the proposed rule.