FinTech and Blockchain Law Watch – Page 50 – At the Crossroads of Law, Innovation and Commerce

Developing smart contracts for the financial services industry

Nov 03 2016

With promised benefits such as risk reduction (through blockchain execution), cost reduction and enhanced efficiencies it is easy to understand why the use of smart contracts in the financial services industry is highly anticipated.

The Commonwealth Bank of Australia has successfully used smart contracts in relation to trade finance and the ASX is considering there use in clearing and settlement systems. However, before smart contracts can operate successfully, a few factors must still be addressed:

Immutability: ‘Immutability’ is a key feature of a smart contract stored on a blockchain. A smart contract’s program code does not change once stored on the blockchain – in essence it is permanent. While immutability creates certainty in a smart contract, it does not allow for flexibility. Methods to modify and correct terms of smart contracts are being developed.
Due diligence and accuracy: One risk presented by smart contracts is the possibility that the terms and conditions agreed upon by the contracting parties are not accurately programmed in the smart contract code. In this respect, it is likely that the due diligence process for smart contracts may evolve to be collaboration between both legal and IT professionals.
Legal recognition and framework: In Australia, there is uncertainty about enforceability of a smart contract. A hybrid model using smart contracts for verification and performance combined with using traditional contracts to record the terms and conditions of an arrangement could be a possible solution.
Contractual confidentiality: While smart contracts on a public blockchain generally preserve the anonymity of the contracting parties, it is possible that terms of the smart contract, including those that are highly confidential may be accessible to third parties. Possible solutions, such as the use of private blockchains, are currently being explored.

What happens when electronic signatures are affixed without authority?

Nov 03 2016

By Jim Bulling and Julia Baldi

A recent NSW Supreme Court decision, Williams Group Australia Pty Ltd v Crocker [2016] NSWCA 265, found that a personal guarantee was not enforceable against an individual where the electronic signature had been affixed without the knowledge or authority of the individual.

This finding applied notwithstanding that the electronic signature was a ‘genuine’ signature uploaded to the relevant execution system “HelloFax”, and that Williams Group Australia Pty, who sought to rely on the signature, had no knowledge of any impropriety with respect to the affixation of the signature.

The Court appeared to approve existing authority which provided the placement of a ‘genuine’ electronic signature on a document without any authority would likely amount to forgery at common law. Such a forgery could not be ratified, and would render the contract void.

The case is a reminder for any person seeking to rely on electronically signed documents to have in place adequate steps and protections to ensure all electronic signatures have been affixed with proper authority. Even a ‘genuine’ electronic signature may be unenforceable against an individual if it is affixed without proper authority.

Blockchain Fuels Crypto Valley Zug

Nov 02 2016

By Susan P. Altman

Blockchain startups are fueling growth of innovative companies in the small canton of Zug, Switzerland, dubbed the “Crypto Valley” (and yes, it’s written as “CryptoValley” in German, and not translated into “CryptoTal”). This approximately 20-mile valley between Zurich and Zug is home to the Ethereum Foundation and more than a dozen other blockchain technology companies. Crypto Valley has a long way to go before it catches up to blockchain investment levels seen in Silicon Valley or the other top investment countries of UK, Israel, Sweden, Germany and Argentina. What is driving Crypto Valley’s growth?

CoinDesk reports that the laissez-faire philosophy that makes Swiss banks so valuable is the same philosophy driving the development of Crypto Valley. Switzerland, with its deeply decentralized government, appears to be a fertile environment in which innovation can flourish. For instance, Zug’s local government is experimenting with permitting citizens to pay for government services up to 200 Swiss francs (just over USD 200) with bitcoin. Switzerland has a host of other advantages for blockchain innovation: a stable, neutral political system, low taxes (especially in Zug), a renowned culture of financial privacy, and an available talent pool. It will be interesting to watch whether and how the decentralized political and economic environment of Switzerland accelerates the decentralized promise of blockchain technology.

The future of Fintech event, San Francisco, 1 November

Oct 28 2016

K&L Gates will be co-hosting an event with the Silicon Vikings in San Francisco on Tuesday November 1st. This will be a panel session with presenting companies including: Checkbook, bitwage, StratiFi and Qwil. An event not to be missed.

The panel will include:

Sanjiv Das, Professor of Finance, Santa Clara University
Jacob Sisk, VP Payments & Data Science, CapitalOne
Tyler He, Business Development, Tencent
Moderator & Event Chair: Shikhar Das, Assistera

Details of the event:

Date/time: Tuesday, November 1st, 6.00 pm – 8.30 pm
Location: K&L Gates, 4 Embarcadero Center, Suite 1200, San Francisco, CA 94103 (google maps)
Register: Click here for more details or to register to attend

For any queries, please contact K&L Gates partner, Lars Johansson.

A guide to doing FinTech business in the U.S. and Germany

Oct 28 2016

“Getting the Deal Through” is a publication that provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.

The inaugural edition of Fintech serves as a resource to help fintech entrepreneurs and their advisers and investors around the world navigate the often complex key legal and regulatory issues on which we are most often asked to advise. Two of the chapters were authored by K&L Gates lawyers.

The Germany chapter is authored by Dr. Hilger von Livonius, Dr. Friederike Gräfin von Brühl and Dr. Thomas Nietsch.

The United States chapter is authored by Judith Rinearson, Robert Zinn, Anthony Nolan, C. Todd Gibson and Andrew Reibman.

To read this publication, click here.

Blockchain’s Smart Contract Solution Wins EY Startup Challenge

Oct 28 2016

By Susan P. Altman

The world is abuzz with news about blockchain development and technology lawyers need to understand the implications. The rise of smart contracts, or automated implementation of portions of real-life contracts by transferring assets between parties, is one of those interesting implications. A smart contract is neither smart, nor a contract, but can be regarded by lawyers as a technological solution that automates some transfer between parties to a contract, such as payment or release of information, upon the occurrence of a triggering event. At its most basic, a smart contract consists of fixed program code, a storage file and an account.

Recent news about a startup company making headway with smart contract technology development is worth noting. Adjoint, Inc., based in Boston, is trying to market a solution where financial transactions are automated through smart contracts and work with many proprietary interfaces. The solution provides a consensus protocol (a protocol used in blockchain to get all the processes to agree on a specific value for verification) that allows companies to deploy and analyze a network of smart contracts on top of a mathematically verified distributed and encrypted ledgers.

More regulatory sandboxes

Oct 26 2016

By Jim Bulling and Michelle Chasser

Bank Negara Malaysia (BNM) has released details of the framework for Malaysia’s regulatory sandbox. The finalisation of the framework follows a consultation which began in July.

Under the sandbox framework BNM may consider granting regulatory exemptions to applicants for the purpose of testing an innovative product, service or solution for a period of up to 12 months.

Applicants wishing to apply for the sandbox should have innovations which are ready for testing and have the potential to:

improve the accessibility, efficiency, security and quality of financial services;
enhance the efficiency and effectiveness of Malaysian financial institutions’ management of risks; or
address gaps in or open up new opportunities for financing or investments in the Malaysian economy.

Are robo-advisers required to act in their clients best interests?

Oct 24 2016

By Jim Bulling and Michelle Chasser

In Australia, robo-advisers providing personal financial product advice must comply with the statutory fiduciary duty to act in the client’s best interests. The Australian Securities and Investments Commission (ASIC) has made it clear that the duty is technology neutral and applies to robo-advisers as well as traditional advisers. ASIC also clearly stated its position that robo-advisers are able to comply with the duty (Regulatory Guide 255)

Robo-advisers in the US do not currently have the same clarity as their Australian counterparts. US advisors are subject to fiduciary duties from a number of sources depending on the type of advice given and the type of adviser giving it. The Massachusetts Securities Division (MSD) has stated that robo-advisers and traditional advisers have the same fiduciary duty. However, MSD and the Securities and Exchange Commission (SEC) have raised questions over robo-advisers’ ability to comply with the duty and hold themselves out to be fiduciaries. MSD is particularly concerned that from its research it appeared to be usual for robo-advisers not to perform any significant due diligence on their client’s circumstances which is needed to make appropriate investment decisions. The SEC is currently working on a fiduciary rule for advisers with plans to release the proposal in April 2017.

In the UK, the Financial Conduct Authority (FCA) has developed the Principles for Businesses (PRIN) which includes the requirement to pay due regard to the interests of customers and treat them fairly. The FCA has stated that the PRIN applies to all regulated firms including robo-advisers. The FCA established an Advice Unit to provide particular guidance to robo-advisers in June 2016.

A digital currency for Australia

Oct 24 2016

By Jim Bulling and Meera Sivanathan

Digi.cash recently launched Australia’s first digital dollar. The e-currency, which is digitally ‘minted’ as electronically signed coins and banknotes can be used on various devices including smartphones and computers. Digi.cash currently operates under an exemption ruling by the Reserve Bank of Australia, which limits the total obligations to make payments under the facility to $10 million.

There is no doubt that digital currencies have potential uses in several areas of the Australian economy. More recently, Australia’s big banks have indicated interest in possible adoption of digital currencies. Keeping this in mind, there are a few key opportunities and risks associated with the use of digital currencies that corporations might wish to consider: Read More

ING takes first step towards open banking in UK

Oct 24 2016

By Jonathan Lawrence

The Dutch multinational banking and financial services corporation, ING, is returning to the UK by launching a mobile app to help customers manage their money across multiple accounts. Last week ING unveiled Yolt, an app that aggregates data from accounts at different financial institutions, with their customers’ approval. As ING does not provide loans or take deposits in the UK, its new app will only include information on accounts held at other banks and credit card companies. It is one of the UK’s first examples of a bank providing a platform for customers to manage money held by rivals.

The UK Competition and Markets Authority called in August 2016 for high-street banks to adopt a digital standard called “open banking” by 2018. This will allow customers, if they agree, to have their account details and transaction history shared with third parties. For more details on the CMA report, click here.