FinTech and Blockchain Law Watch – Page 46 – At the Crossroads of Law, Innovation and Commerce

The Future of Active Funds Part 3: How to Get Started with Blockchain

Feb 06 2017

In this installment of “The Future of Active Funds,” we explore how an active fund can get started with using blockchain technology. As we predicted in Part 2 of this series, 2017 is shaping up as the year blockchain applications will be brought to market, revolutionizing the way securities transactions are executed. As an initial matter, blockchain will reduce the time and cost of settling transactions. Given the cost advantages of passive funds and ETFs over active funds, there is less of an incentive for passives and ETFs to become early adopters of blockchain. However, blockchain is a solution for at least one major problem faced by active fund managers, the inability to compete on a cost basis.

So, what is an easy way for an active fund to get started with blockchain? According to a recent HBR article, a “single-use” implementation is best. Active funds can begin simply by accepting investments in bitcoin and redeeming investors in bitcoin. This will allow the fund’s adviser, board, and service providers to become comfortable with the technology. Further, as we previously posted, experimentation is easy thanks to blockchain cloud services offered by Microsoft, Amazon, and IBM. However, there are legal issues such as appropriate disclosures regarding transacting in bitcoin and custody under § 17(f) of the 1940 Act. For a good primer on the technology, read our article, Blockchain 101 for Asset Managers. Bottom-line, active managers need to have a blockchain strategy or risk being left behind.

Banks Help Blockchain Move from Bitcoin to IoT

Feb 02 2017

By Susan P. Altman

As companies continue to look for practical uses for blockchain’s distributed ledger technology, we’re seeing interesting collaborations between major banks, global technology players, and nimble startup fintech companies. To be sure, banks are still focused on blockchain as it applies to financial services. BNY Mellon recently hosted a blockchain event at which presenters discussed whether blockchain should be viewed by banks as a disrupter or an opportunity. (Naturally the bank is looking for opportunity.) Of particular interest to the lawyers is the discussion of legal risks raised by blockchain, which include problems already in existence, such as data privacy concerns across geographic jurisdictions, and new problems created by blockchain, such as identifying where an asset is when no one bank or entity is the custodian of the record.

But the banks aren’t only experimenting with, dare we say, traditional financial uses for blockchain; they’re right in the mix trying to figure out how to exploit blockchain in industries far beyond the bitcoin world. BNY Mellon has also, for example, joined Cisco, Foxconn, security company Gemalto and several blockchain startups in a collaboration to develop a shared blockchain protocol for the Internet of Things. Blockchain could potentially improve security of IoT applications and create a tamperproof manufacturing, maintenance and supply chain history, areas not typically viewed as concerns of large financial institutions. Banks are experimenting with supply chain technology. Now that’s looking for opportunity in the world of disruption.

Dubai issues loan-based crowdfunding consultation paper

Feb 02 2017

By Jonathan Lawrence

The Dubai Financial Services Authority (DFSA) issued a consultation paper “Crowdfunding: SME Financing Though Lending” on 31 January 2017. The paper proposes a regulatory framework for anyone looking to operate a loan-based crowdfunding platform in the Dubai International Financial Centre (DIFC). It is the first in a series of papers which will set out the DFSA’s approach to the regulation of FinTech more generally.

The key proposals include:

A tailored regime of rules specifically designed for loan-based crowdfunding platform operators.
Minimum standards for systems and controls.
Operational transparency and adequate disclosure to all participants – borrowers and lenders – on the platform.
Suitable checks on platform participants.
Appropriate safeguarding and segregation of client money.
The development of business cessation plans.
Enabling the transfer of rights or obligations between lenders.

The rules are benchmarked against the regimes in the United Kingdom, New Zealand, France, Netherlands and Spain, being those jurisdictions that create an individual regime for these types of platforms.

The DFSA is seeking comments from anyone who is interested in operating, investing in, or providing services to crowdfunding platforms in the DIFC. This can be done via email consultation@dfsa.ae with “CP109″ in the subject line. Comments should be submitted by 2 March 2017.

New Special Purpose National Bank Charter for FinTech Companies

Jan 31 2017

New York partners Anthony Nolan and Judith Rinearson will be speaking in a Strafford live webinar on “New Special Purpose National Bank Charter for FinTech Companies: Evaluating the Benefits and Regulatory Pitfalls on Thursday, March 16 2017 at 1:00pm-2:30pm EDT. This will focus on a recent proposal by the United States Office of the Comptroller of the Currency (OCC) to consider granting special purpose national bank charters to FinTech companies that are engaged in fiduciary activities or in activities that include receiving deposits, paying checks, or lending money. The special purpose charter offers the benefits of federal preemption and some state licensing requirements. However, there are regulatory and supervisory burdens that must be carefully considered such as activity limitations, BSA/AML requirements and minimum capital and liquidity requirements.

Bank of England Governor delivers wide-ranging FinTech speech

Jan 26 2017

By Jonathan Lawrence

Mark Carney, the Governor of the Bank of England, has given a wide-ranging speech on FinTech which he delivered at the Deutsche Bundesbank G20 conference on 25 January 2017. It was entitled “The Promise of FinTech – Something New Under the Sun?”. Whilst recognising that FinTech’s true promise springs from its potential to unbundle banking into its core function, systemic risks will evolve. The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society. Read More

Top Five Legal Trends for FinTech in 2017

Jan 25 2017

Judith Rinearson and Robert Zinn contributed an article to AmericanLawyer.com on legal trends to watch for in 2017 concerning FinTech. Trends include:

Major political change
Investments and M&A
Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF)
Blockchain & distributed ledgers
Cybercrime and data security

To read the article, click here.

Smart Contract Code versus Smart Legal Contracts

Jan 24 2017

By Susan P. Altman

In a recent CoinDesk Op-Ed, Josh Stark makes a useful distinction between smart contract code and smart legal contracts. He describes smart contract code as a program or script executed on a blockchain—this code being what many commentators misleadingly refer to as “smart contracts.” This (mis)use of the phrase has led lawyers to quip that smart contracts are neither smart nor contracts, they’re just code. The better term for blockchain code-enabled legal contracts is “smart legal contracts.”

Although Stark helps us a lot with terminology, his argument goes a little askew in suggesting that smart contract technology enables machine to machine commerce without enforcement by legal entities and therefore is a new tool for solving the problem of trust between trading parties. Individuals and companies are legal entities and at least two of them hold an interest behind every machine operation executing smart contract code. Just because there is no intermediary between the two (or more) parties to the transaction does not mean that traditional legal contract principles do not apply. Smart contract code speeds up and increases integrity in trading transactions by reducing friction in forming, executing and enforcing a contract. It is a new tool in our toolkit, but the toolkit is for building traditional legal contracts. Offer and acceptance, coupled with consideration, are still the basic principles of contracts, whether they are smart, stupid, oral, written or digital.

Automobile Companies Collide With Payment Providers

Jan 24 2017

By Jeremy M. McLaughlin

At the annual consumer electronics show in Las Vegas earlier this month, Honda demonstrated an in-vehicle payments platform. Through a partnership with Visa, Honda will enable drivers to pay for a variety of services through their car, such as for parking and fuel. The car manufacturer made clear, however, that it wanted to enable in-car payments for a variety of other services in the future.

Honda is not alone. Volkswagen Financial Services AG recently announced that it had purchased mobile payment platform PayByPhone. Ford has announced a virtual wallet service called FordPay. And on January 17, 2017, Daimler Financial Services AG announced that it had acquired PayCash Europe SA and was planning to launch its own epayments service, “Mercedes pay.” Read More

Accenture runs its largest ever fintech accelerator programme in shadow of Brexit

Jan 20 2017

By Cameron Abbott and Allison Wallace

After fielding more than 300 applicants around the globe, Accenture has selected 20 start-ups to participate in its largest ever fintech accelerator programme.

Artificial Intelligence, Blockchain and gamification technology are all key features in this year’s 12-week programme running in London.

By the end of the programme, 8 start-ups will be selected to present at the programme’s Graduation Day to a group of venture capitalists and financial industry executives. All of the start-ups will receive mentorship from representatives of 28 financial institutions.

Accenture’s Tom Graham told Finextra “the transformation requirements that the financial services industry must undertake to remain relevant arguably pose a bigger challenge than the immediate geo-political uncertainty casting a shadow over the industry”.

Paying for the Wall: Will President Trump’s Administration Scrutinize, Tax, or Seize Remittances?

Jan 20 2017

By Joseph A. Valenti, Daniel F. C. Crowley, Michael R. Komo

One of the most significant post-election questions for the financial-services industry—particularly global financial institutions that move money across borders—is what is the status of President-elect Trump’s proposal to tax electronic remittances to Mexico to pay for the wall between Mexico and the United States?

To read the full alert, click here.