FinTech and Blockchain Law Watch – Page 54 – At the Crossroads of Law, Innovation and Commerce

FCA Feedback Statement on RegTech

Jul 25 2016

The UK Financial Conduct Authority defines RegTech as “a sub-set of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities”. In November 2015, the FCA asked for views on how it should progress and prioritise its RegTech work. It received more than 350 responses from established financial services firms, technology suppliers and FinTech start-ups and the FCA also convened roundtable meetings. The feedback statement was released on 20 July.

The main themes that emerged concerned technology that:

allows more efficient methods of sharing information
drives efficiencies by closing the gap between intention and interpretation
simplifies data, allows better decision making and the creation of adaptive automation
allows regulation and compliance processes to be looked at differently

Massachusetts issues guidelines for using third-party robo-advisers

Jul 21 2016

By Susan P. Altman and C. Todd Gibson

In April 2016, the Massachusetts Securities Division issued a policy statement with respect to the fiduciary obligations of state-registered advisers providing robo-advice. The MSD has now issued further regulatory guidance in a new Policy Statement with respect to the use of third-party robo-advisers by state-registered investment advisers. The MSD noted the significant growth in popularity of third-party robo-advisers and the increasing number of state-registered investment advisers working with third-party robo-advisers.

The new guidance describes minimum disclosure that state-registered investment advisers using third-party robo-advisers must provide to investors in order to meet Massachusetts regulatory requirements, including:

Clearly identifying the robo-advisers and explaining their services;
Notifying investors that, when applicable, they could get the services directly from the robo-adviser without paying additional fees to the state-registered investment adviser;
Describing the value provided to the investor by the state-registered investment adviser;
Specifically identifying the services the state-registered adviser cannot perform, such as having no ability to access, select, change or customize the portfolio structure or investment products at the robo-adviser;
Identifying limitations of available investment products offered to the client through the robo-adviser; and
Using customized, easy-to-understand disclosure language.

Most importantly perhaps, the investment advisers must charge an advisory fee that is reasonable in light of fees charged by others providing essentially the same services. An investor is usually charged a fee by both the investment adviser and the robo-adviser based on a percentage of the investor’s assets under management. Massachusetts state-regulated advisers will have to demonstrate the value behind the fees they charge on top of the robo-adviser’s fees, such as specialized knowledge of the products or the investor’s personal circumstances.

The Policy Statement can be found here.

Bank of England Launches FinTech Accelerator

Jul 21 2016

By Jonathan Lawrence

On 17 June 2016 the Governor of the Bank of England announced that the Bank is launching a FinTech Accelerator to work in partnership with FinTech firms to harness innovations for its own requirements as a central bank. In return, it will offer firms the chance to demonstrate their solutions for issues facing policymakers. The Accelerator will deploy innovative technologies on issues that matter to the Bank’s mission and operations. The Accelerator will appoint FinTech firms to run short Proof of Concept (POC) projects in a number of priority areas.

Some examples of current projects:

BitSight: Uses publicly available bulk data to assess firms’ cyber resilience, including looking for evidence of malware on a firm’s systems, signs of known software vulnerabilities, or weak encryption, which can be used to form a view on the information security of a firm over time. For the POC, the Bank’s own resilience will be evaluated.
Privitar: Provides tools to anonymise and desensitise data. The Bank will first test this software on a manufactured dataset to examine the analytical value of the desensitised data. It will then look to assess the capability of the tool on data held internally to establish if this will allow the Bank to provide wider access to data for researchers within the Bank.
PwC: Understanding the technology of blockchain and distributed ledger, working with PwC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled the Bank to better understand the resiliency benefits and practical limitations of the technology.

The Bank is interested in new ways of structuring and analysing large data sets and data gained in regulatory reporting. Other areas of interest are around machine learning, particularly in relation to anomaly detection and pattern recognition. The Bank would welcome expressions of interest or proposals for the Bank to participate in, or act as a silent observer or partner with an existing pilot distributed ledger network. Pilots should test how the technology functions in ‘real world’ scenarios.

Impact of Brexit and UK FinTech

Jul 21 2016

by Jonathan Lawrence, Stephen Moller, Jacob Ghanty and Tom Wallace

A month has passed since the UK referendum vote to leave the European Union. Now that the initial dust is starting to settle, we have set out to examine various potential impacts on the UK FinTech sector. We consider areas including:

regulation and passporting
data protection and data sharing
anti-money laundering and know your customer
human capital
the role of banks
London as a global FinTech centre
venture capital

For our long form insight piece, please click here.

Global equity crowdfunding developments

Jul 19 2016

By Jim Bulling and Michelle Chasser

Australia’s equity crowdfunding reforms have been delayed due to the Australian federal election. After passing the House of Representatives back in February the Corporations Amendment (Crowd-sourced Funding) Bill 2015 lapsed in May when Parliament was dissolved. As the Turnbull Government was returned to power at the election it is likely the Bill will be reintroduced shortly. While crowdfunding changes have stalled in Australia developments have been continuing in the rest of the world .

Easier crowdfunding for FinTech start-ups in the USA has moved a step closer. The Fix Crowdfunding Act and the Supporting America’s Investors Act easily passed through the US House of Representatives on 6 July 2016 with bipartisan support and will now be introduced in the Senate. The Fix Crowdfunding Act will increase the maximum amount of money that a start-up can raise through crowdfunding from US$1 million to US$5 million. The Supporting America’s Investors Act increases the number of people allowed to invest in a qualifying venture capital fund from 100 up to 500. Read More

DLT for the OTC

Jul 07 2016

By Tyler Kirk

On June 21, 2016, some of Europe’s largest financial institutions announced they had entered into a memorandum of understanding (“MOU”) under which they would work together to develop a blockchain-based settlement procedure for over the counter (“OTC”) transactions. According to the MOU, several European legislators are concerned that small and medium-sized enterprises (“SMEs”) do not have adequate access to capital. The MOU seeks to solve such concerns by bringing together European exchanges and investment banks under a common mandate to reduce the cost for SMEs raising capital in the OTC market. Blockchain may be the solution they are looking for.

Generally, blockchain is a decentralized digital ledger, and its creation established a new class of digital ledgers called, distributed ledger technology (“DLT”). Unlike current financial settlement systems, DLTs are more efficient because all transactions are mathematically provable and do not require a multi-day verification process. DLT protocols use encryption combined with distributed copies of the ledger to replace the need for a third-party to serve as the ledger’s custodian. In short, DLTs create an immutable record of the truth arrived at through distributed consensus.

Regulators notice small business loans are big business

Jul 07 2016

By Jim Bulling and Michelle Chasser

The focus in marketplace lending appears to be shifting to small business loans recently and it is clear that small business loans are big business. The European Investment Bank has agreed to make a £100 million investment in small business loans originated through Funding Circle in the UK as part of its priority to improve access to finance for small and medium businesses. In the US marketplace lenders originated around US$1.9B in 2015 up nearly 60% from 2014.

The increased volume of small business loans has not escaped the notice of US federal regulators. There are concerns that sometimes small businesses are essentially individual entrepreneurs and may not have any more tools than consumers to assess the terms of loans offered to them. The US Treasury’s recent white paper, Opportunities and Challenges in Online Marketplace Lending, made a number of recommendations including that more robust small business borrower protections and effective oversight be introduced for online marketplace lenders. A number of regulators including the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York and the Securities and Exchange Commission were contributors to that paper.

Increasing investment in blockchain initiatives

Jul 07 2016

By Jim Bulling

Over US$1B is likely to be collectively spent on bringing blockchain technology to capital markets in 2016, according to a recent survey of 134 global market participants. Of the businesses with bitcoin projects, 32% have an annual budget in excess of US$5 million, and 47% top US$2 million. This significant level of investment has been motivated by the various advantages presented by bitcoin technology and its potential to revolutionise global capital markets. Indeed, a majority of businesses surveyed predicted blockchain would create ‘meaningful change’ in capital markets within five years. Furthermore, the survey participants were mostly unconvinced that legal regulation would significantly impede blockchain adoption. As such, the nascent interest in blockchain use in capital markets seems likely to continue.

Public financial institutions are also getting involved. At a recent international summit of international bankers, the US Chairperson encouraged attendees to educate themselves on blockchain. In Canada, the central bank is working alongside private banks and R3 (a blockchain company). They are trialling a digital currency (Cad-Coin) and allowing limited participants to engage in interbank payments with blockchain technology. The Bank of England is also looking into possible applications of the technology, with the deputy governor raising the possible consequences of a digital pound in a recent speech.

Blockchain… A Threat to Safety, Soundness & Resiliency?

Jul 04 2016

By Tyler Kirk

On June 21, 2016, the U.S. Financial Stability Oversight counsel (“FSOC”) released its 2016 annual report. The purpose of the annual report is to summarize the FSOC’s current views on the U.S. financial system according to its mission to: (1) identify risks; (2) promote market discipline; and (3) respond to emerging threats. Notably, the 2016 report identified the use of blockchain as an emerging business practice requiring vigilant monitoring by financial regulators.

Since its establishment in 2010, the FSOC has issued six annual reports. This is the first time FinTech issues such as the blockchain have been identified as a potential risk to U.S. financial market stability. The FSOC noted that the use of blockchain protocols by financial institutions could positively impact the U.S. financial system by introducing efficiencies and reducing costs. However, according to the FSOC, “Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale.”

Further, the FSOC cautioned that a “considerable degree of coordination among regulators” may be required given the distributed nature of blockchain networks. Noting that the U.S. financial system is constantly evolving, Treasury Secretary Jacob Lew advocated for regulators to remain vigilant in order to maintain the safety, soundness and resiliency of the U.S. financial system. Yet, beyond vigilance, the FSOC did not recommend any specific action on blockchain by regulators, preserving the current hands-off approach.

The FSOC 2016 report can be found here.

Project Bletchley

Jul 04 2016

By Tyler Kirk

On June 15, 2016, Microsoft released a white paper introducing Project Bletchley, Microsoft’s next iteration on its blockchain as a service (“BaaS”) product. In late 2015, Microsoft announced that it would be leveraging its cloud platform, Azure, to provide a low-risk sandbox for customers to gain experience with how blockchain may be applied in various business scenarios, such as supply chain management. Bletchley is positioned as incorporating the latest innovations on the blockchain protocol in the Azure cloud service.

Generally, blockchain is a decentralized digital ledger. Blockchain differs from traditional centralized ledgers because the blockchain protocol uses encryption combined with distributed copies of the ledger to replace the need for a third-party to serve as the ledger’s trusted guardian. Further, blockchain is more efficient because all transactions are mathematically provable and do not require a multi-day verification process. The protocol is append only, and distributed, thus every participant receives an update to their copy of the ledger with the latest transactions. Yet, this revolutionary framework, blockchain 1.0, was just the beginning.