FinTech and Blockchain Law Watch – Page 53 – At the Crossroads of Law, Innovation and Commerce

Bitcoin operators exposed to cyber threats

Sep 01 2016

By Cameron Abbott and Rebecca Murray

Reuters has reported that a third of bitcoin trading platforms have been hacked, and nearly half have closed since they entered the scene 6 years ago. This increasing risk for bitcoin holders is compounded by the fact there is no depositor’s insurance to absorb the loss. That approach heightens cybersecurity risks and also exposes the fact that bitcoin investors have little choice but to do business with under-capitalized exchanges.

This issue was evident when Bitfinex was hacked earlier this month and an estimated $70 million in bitcoin was stolen. The virtual bank’s customers were forced to share the losses resulting in a generalized loss percentage of 36.067%. Read our blog post on this hacking here.

Experts say trading venues acting like banks such as Bitfinex will remain vulnerable. These exchanges act as custodial wallets in which they control users’ digital currencies like banks control customer deposits. However, unlike their brick-and-mortar counterparts, when customers’ bitcoin accounts are hacked, there is currently no third party that can step in to deal with the theft. As a result, these underfunded exchanges require nearly perfect security.

Given this it is not surprising that certain governments around the world are exploring the possibility of central bank issued digital currencies using distributed ledger technology which could compete with the private digital currency systems such as bitcoin. Read more on this here.

The politicization of encryption: party “platforms” or “platitudes”?

Sep 01 2016

By Tyler Kirk

In the United States, the political stage is set for what may turn out to be one of the most infamous presidential elections in America’s history. As noted in an earlier blog post, the regulation of encryption by U.S. legislators and regulatory agencies may have a damaging impact on FinTech, and in particular, on the adoption of blockchain and other distributed ledger technologies. In this post, we look at the relevant Party Platforms to learn what, if anything, they say about encryption.

Monetary Authority of Singapore – consultation on proposed changes to payments regulatory framework

Aug 31 2016

By Nicholas Hanna

The Monetary Authority of Singapore (MAS), which is the regulatory authority overseeing financial matters in Singapore, issued a consultation paper on 25 August 2016 setting out proposed changes to the payments regulatory framework in Singapore together with the proposed establishment of a National Payments Council.

In a response to the lines between payments and remittance being blurred by technical innovation and the increasing number of payment providers that do not fit neatly into either of these categories, MAS is proposing to consolidate its regulation of both payments and remittance into a single framework. Currently, such services are split across the Payment Systems (Oversight) Act and the Money-changing and Remittance Businesses Act.

MAS has confirmed that the new single framework will provide for licensing, regulation and supervision of all payment services, including stored value facility holders, remittance companies and virtual currency intermediaries. The new framework is likely to be applied on an activity basis with entities being required to apply for a single licence to undertake several payment activities. Read More

Proposed FDIC guidance on marketplace lending could have far reaching impact on industry

Aug 31 2016

By Sean Mahoney

Following up on its recent Supervisory Insights article on marketplace lending and Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations, the FDIC on July 31, 2016 released its proposed Examination Guidance for Third-Party Lending. If nothing else, this series of recent developments demonstrates the FDIC’s concern with the role of banks in marketplace lending. Unlike the prior two releases, the July proposed guidance is subject to public comment, with a comment period expiring October 27, 2016.

All three issuances share a common set of fundamental concerns. These include concerns that (a) a bank may rely on a marketplace lending platform to an unjustified extent; (b) the marketplace lending activity may not fit within a bank’s corporate strategy; (c) that lending through a marketplace platform may not be consistent with the bank’s underwriting standards; (d) that the bank may not adequately assure that the activity is being conducted in accordance with applicable law; and (e) that the bank may not otherwise adequately manage risks inherent in the activity. The Proposed Guidance goes a few steps further by requiring that banks that engage in marketplace lending activities have specific, detailed policies and procedures addressing a set of prescribed parameters. Further the Proposed Guidance would mandate that contracts between a bank and marketplace lending platform provide the bank with, among other things, (i) the right to mandate that the platform adopt policies and procedures governing any activity outsourced to the platform, and (ii) rights to performance data, audits and funding information.

While the Proposed Guidance will only apply to state-chartered, FDIC-insured banks that are not members of the Federal Reserve System, it could have far-reaching effects given the increased prevalence of state-chartered banks of all types in marketplace lending. Moreover, the Proposed Guidance may strain the tension between financial innovation and comprehensive regulatory oversight inherent in much of FinTech.

Leading Australian corporate-academic partnership invests in social robotics innovation

Aug 29 2016

By Cameron Abbott and Rebecca Murray

The Commonwealth Bank, Stockland, Australian Technology Network of Universities and University of Technology Sydney have partnered to invest in research and development of social robotics. This partnership will contribute to the field of global research in social robotics by identifying opportunities and limitations in human-robot interaction and exploring commercial applications of social robotics across a number of industries. Presumably this takes the humble ATM into the new century! Read more here.

Digital Cash Settlement Systems Advance

Aug 26 2016

By Susan Altman

Four important players have just added their heft to efforts of Swiss bank UBS to develop a system to enable financial markets to make payments and settle transactions quicker and at lower cost using blockchain technology reports Reuters. Swiss bank UBS launched a “Utility Settlement Coin” (USC) as a digital cash equivalent of each of the major currencies backed by central banks last year. Although the USC concept lacks a snappy name like bitcoin, the USC is fully backed by cash assets at a central bank, the lack of that backing being the major weakness of the decentralized bitcoin currency. UBS and its technology platform provider, Clearmatics Technologies, have now been joined by BNY Mellon, Deutsche Bank, Santander and markets operator ICAP in further developing the potential of the USC. The USC initiative is an opportunity for industry thought leaders to explore the possibilities of the digital cash technology through a series of short iterative phases and platform deployments increasing the number of market participants, broadening engagement, connectivity and network effect, according to ICAP. The group intends to have active dialogue with central banks and regulators to ensure a robust and efficient regulatory structure within which the USC can be deployed. The participants expect that the USC will unlock the benefits of distributive technology to the financial industry and ultimately, to customers, including by lowering costs and increasing transaction security.

Government committed to introducing mandatory data breach notification laws

Aug 22 2016

By Cameron Abbott and Rebecca Murray

After much delay, a spokesperson for Attorney-General, George Brandis has said the government is committed to introducing the Mandatory Data Breach Notification laws this year. We will be sure to look out for it during the next term of Parliament. You can find more information on the proposed scheme and its regulatory impact on the Attorney General’s Department consultation for Serious Data Breach Notification webpage.

Bank of England Governor remarks on FinTech

Aug 22 2016

By Jonathan Lawrence

In remarks that were rather overlooked in the run-up to the Brexit vote in June, Mark Carney, the Governor of the Bank of England, talked on several FinTech topics. He mentioned five ways the Bank is enabling the FinTech transformation:

Widening access to central bank money to non-bank Payments Service Providers
Being open to providing access to central bank money for new forms of wholesale securities settlement
Exploring the use of Distributed Ledger (DL) technology in the Bank’s core activities, including the operation of Real-time gross settlement systems (RTGS)
Partnering with FinTech companies on projects of direct relevance to the Bank’s mission
Calibrating its regulatory approach to FinTech developments

UK grants FinTech a banking licence – another tier of regulation?

Aug 21 2016

By Jim Bulling and Michelle Chasser

Has the age of the digital bank arrived in the UK? Following the authorisation of Atom Bank last year, 3 additional digital banks have been issued with banking licences by the UK Prudential Regulation Authority (PRA) since May 2016.

These new licensees are the result of the PRA’s focus in recent years on lowering the barriers to entry for new banks and promote competition in the UK. As part of this focus, in 2013, PRA lowered the initial minimum capital requirements for Small Specialist Bank applicants to €1 million or £1 million (whichever is higher), plus a capital planning buffer (CPB). PRA and the Financial Conduct Authority (FCA) also launched a New Bank Start-up Unit in January 2016 to assist applicants with the authorisation process. Read More

A road map for UK FinTech standards

Aug 16 2016

By Jonathan Lawrence

New research has revealed the important role that standards could play in helping to strengthen and speed-up FinTech’s development in the United Kingdom. The research was published by the British Standards Institution (BSI), the national standards body of the UK. BSI produces technical standards on a wide range of products and services, and also supplies certification and standards-related services to businesses. The research was prepared by Finextra and gathered insights from a cross-section of FinTech companies, banks, trade associations, technology vendors.

BSI commissioned the research to investigate where standards could best support UK FinTech and help provide leadership in global standardisation following interest from the industry in 2015. This latest research shows there could be a further opportunity to complement regulation with standards, to promote the UK’s position in FinTech. The analysis found a number of priority areas where standards could help promote the streamlining of the procurement and onboarding processes between banks and FinTechs; integrating FinTechs into the standards and language of the financial services industry and providing consumer assurance and the gaining of trust.

To read the full report, please click here.