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

Possible AML implications for FinTechs

Nov 07 2016

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is encouraging FinTech businesses to make contact about Australia’s anti-money laundering and counter-terrorism financing regime (AML/CTF regime) and how it may affect their business. A dedicated online contact form has been established which allows enquiries to be made directly to the Policy and Guidance team.

Businesses which provide a ‘designated service’ are reporting entities which have obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. There are a number of designated services that a FinTech business may provide including making loans, issuing a stored value card, giving effect to remittance arrangements, issuing interests in a managed investment scheme and (in the capacity of an Australian financial services licensee) arranging for a person to receive a designated service.

Currently activities relating to digital currencies such as BitCoin are not designated services. However, in October 2016 the Attorney General’s Department released its draft project plan for the implementation of the recommendations from the statutory review of the AML/CTF regime. Under the project plan, legislative proposals to regulate digital currencies under the AML/CTF regime will be developed by the first half of 2017.

Regulators in Australia and Ontario sign co-operation agreement

Nov 07 2016

By Jim Bulling and Michelle Chasser

The Australian Securities and Investments Commission (ASIC) and the Ontario Securities Commission (OSC) have signed a co-operation agreement to promote FinTech innovation. The agreement will make expansion into the Australian and Ontarian markets easier for growing FinTech businesses.

A referral mechanism has been created under the new agreement which allows ASIC to refer Australian FinTech businesses wanting to enter the Ontarian market to OSC and vice versa. Referred businesses will receive support to understand the market’s regulatory framework and how it applies to them from dedicated staff at the relevant regulator. To qualify for support FinTech businesses will need to meet the eligibility criteria of their home regulator including being a new or early stage FinTech business which has an innovation or product which will likely provide benefits to investors and consumers.

Both ASIC and OSC have established internal teams to assist FinTech businesses with their regulatory obligations and encourage development of the FinTech industry. ASIC’s Innovation Hub was established in April 2015 and OSC recently established LaunchPad in October 2016.

ASIC and OCS have also committed to share information about emerging market trends and potential impacts on regulation.

ASIC has entered into similar co-operation agreements with the UK Financial Conduct Authority and the Monetary Authority of Singapore amongst others this year.

The U.S. Wants a Sandbox Too

Nov 03 2016

By C. Todd Gibson and Tyler Kirk

On September 22, 2016, Republican Congressman Patrick McHenry from North Carolina announced the introduction of H.R. 6118, the Financial Services Innovation Act of 2016 (the “Bill”). McHenry is the chief deputy whip and vice chairman of the House Financial Services Committee. According to the press release, the bill was introduced as part of the “Innovation Initiative” that McHenry co-launched earlier this year with House Majority Leader Kevin McCarthy, a fellow Republican from California. On October 19, 2016, the Bill was referred to the Subcommittee on Commodity Exchanges, Energy, and Credit. Before the Bill becomes law in the United States, it must be past by both chambers of Congress and signed by the President. With this Bill, America joins, among others, the United Kingdom, Hong Kong, and Malaysia in establishing FinTech regulatory sandboxes.

In its current form, the Bill takes a two-prong approach to constructing a regulatory sandbox. First, it creates a government-wide FinTech oversight regime, and second, it codifies an exclusive no-action relief mechanism for financial innovators. Under the first prong, the Bill requires federal regulators to adopt a mandate to encourage innovation in the financial industry through the creation of Financial Services Innovation Offices (“FSIOs”). Further, the Bill provides for the establishment of the FSIO Liaison Committee (“Committee”) comprised of the directors of each agency’s FSIO. The purpose of the Committee is to coordinate the regulation of companies seeking to bring new and innovative financial technologies to market (“Covered Persons”). Under the second prong, Covered Persons may petition regulators for an alternative compliance plan under an “enforceable compliance agreement,” that will provide the conditions under which the Covered Person may implement their financial innovation (including any regulatory waivers).

A borrower referral scheme may increase competition for SMEs

Nov 03 2016

By Jonathan Lawrence

From 1 November 2016, nine of the UK’s biggest banks will be obliged to pass on the details of small businesses they have rejected for finance to three internet-based finance platforms – Funding Xchange, Business Finance Compared and Funding Options. These platforms will then share these details with alternative finance providers and go on to facilitate a conversation between the business and any provider who expresses an interest in supplying finance to them.

Royal Bank of Scotland, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Bank, Bank of Ireland, Danske Bank and First Trust Bank, will all have to offer access to these finance platforms, with small businesses having to give their permission before their details are shared.

Research had shown that 71% of UK businesses seeking finance only ask one lender and, if rejected for finance, many simply give up on investment rather than seek alternative options.

Last year 324,000 UK small and medium sized businesses sought a loan or overdraft, 26% of these were initially declined by their bank and only 3% of those declined were referred to other sources of help.

The scheme was enacted by the Small and Medium Sized Business (Finance Platforms) Regulations 2015.

In April 2016, the UK government introduced the SME credit data sharing scheme which requires banks and credit reference agencies to share SME credit information equally with all providers. This increases competition in business lending by making it easier for challenger banks and other lenders to make credit decisions on businesses to help them get the funding they need.

Developing smart contracts for the financial services industry

Nov 03 2016

By Jim Bulling and Meera Sivanathan

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.