US – Page 9 – FinTech and Blockchain Law Watch

Lendit Conference 2017

Mar 20 2017

K&L Gates sponsored and attended Lendit again this year. For this year’s conference, we added a Monday afternoon cocktail hour to our exhibitor’s booth, and were able to meet a number of old and new friends in the process. In attendance were K&L attorneys Ed Dartley, Tony Nolan, Sasha Burstein, Linda Odom, John ReVeal, and Joe Valenti. Tony participated in a panel discussion entitled “True Lender and Madden Case: Impact on Industry-2 Years In.” The panel addressed several recent court cases and legislative developments that affect the availability of federal preemption to marketplace loans originated or purchased by non-bank lenders.

We found this year’s conference to be something of a coming of age for the marketplace lending industry. There was a sense that the industry is maturing, and that was reflected in the panel discussions and the networking of attendees. We found the conference to be as valuable for the re-connecting with existing associates and business colleagues as for the introductions to new ones.

As we continue to work with clients in virtually every aspect of marketplace lending, we find Lendit and other conferences to be a unique opportunity to interface with industry participants on cutting-edge developments, catch up with clients, and generally stay abreast of this fast-moving industry. Finally, please join us for Altfi Europe Summit 2017 in London on March 30, where we will be sponsoring and speaking at that marketplace lending event.

OCC Releases Draft Licensing Manual for Evaluating Fintech Bank Charter Applications

Mar 20 2017

By Anthony Nolan

The Office of the Comptroller of the Currency today issued its draft licensing manual in furtherance of its proposal to grant national bank license to fintech companies. This provides additional detail on evaluating charter applications from fintech companies that engage in the business of banking. This is an interesting riposte to the Republican letter asking the OCC to delay the fintech charter process. A link to the OCC’s press release appears here.

CFPB Delays Prepaid Account Rule Effective Date

Mar 13 2017

By Eric A. Love and John ReVeal

On March 9th, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule to delay for six months the October 1, 2017 effective date of its sweeping Final Rule amending Regulation E and Regulation Z as applied to prepaid accounts. Under the proposed rule, the Final Rule would become effective on April 1, 2018.

The proposed rule would not revise any other aspect of the Final Rule, and comes as numerous prepaid account industry participants have expressed concerns about its scope and their ability to comply with key provisions by the current October 1 effective date. Additionally, the proposed delay follows the recent introduction of legislation in Congress that would use the Congressional Review Act to repeal the Final Rule. According to the CFPB, the proposed delay would “be sufficient for industry participants to ensure they can comply” with the Final Rule and would provide the CFPB the opportunity to receive public comments about any implementation challenges that might impact consumers, the prepaid account industry and other stakeholders.

After publication in the Federal Register, the public will have 21 days to comment on the proposed rule.

SEC guidance on roboadvice

Mar 02 2017

By C. Todd Gibson and Michael W. McGrath

The US Securities and Exchange Commission’s staff has published information and guidance for investors and the financial services industry on the fast-growing use of “robo-advisers,” a catch-all term for investment advisers that use computer algorithms to provide investment advisory services online, often with limited human interaction. In light of the unique issues raised by robo-advisers, the SEC’s Division of Investment Management issued a Guidance Update on 23 February 2017 for investment advisers with suggestions on how robo-advisers can best comply with disclosure, suitability and compliance obligations imposed by the Investment Advisers Act of 1940. A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy, provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.

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

Feb 06 2017

By Tyler Kirk

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.

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.

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.

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

The Future of Active Funds Part 1: Will Blockchain Save Actively Managed Mutual Funds?

Jan 06 2017

By Tyler Kirk

With the rise of passive products in the mutual fund industry, active managers have suffered staggering outflows. On July 9, 2016, Barron’s published an article titled, The Future of Mutual Funds, addressing what Morningstar calls, “Flowmegeddon.” According to Barron’s, investors withdrew US$308B from actively managed mutual funds and invested US$375B into low-cost passive mutual funds and ETFs for the 12 month period ending in May 2016. Focusing on active shops during that same period, the median outflow of the 10 best performers was US$598M and the same for the bottom 10 shops was US$3.8B. Thus, performance alone will not save actively managed funds, costs need to be cut.

On December 13, 2016, the Wall Street Journal reported that 60 mutual fund executives met inside OppenheimerFunds’ Manhattan office to discuss outflows from active shops. Named the “Seismic Shift Senior Leadership Forum, one of the proposed solutions was to reduce fees. Could blockchain be the answer?

In an October 21, 2016 article, Ignites Europe reported that service provider International Financial Data Services (“IFDS”) had carried out a test where mutual fund shares were bought using its mobile application. The transaction was processed, recorded on the blockchain, and added to IFDS’s registry. According to IFDS, mutual funds could cut costs by as much as $100M by distributing shares directly to investors through the blockchain. IFDS could bring its blockchain to market as soon as 2017.

Additionally, blockchain can be used for back-office processes as well as the recording of transactions for compliance and regulatory purposes. Combining blockchain with smart contracts may introduce efficiencies in the sec-lending and repo markets for funds.

Yet, there are regulatory and operational risks. How would funds meet recordkeeping and custody rules? Would no-action or exemptive order relief be required from regulators? Further, cybersecurity and protecting PII will have to be paramount. Nevertheless, in spite of the risks, active shops that implement blockchain operations correctly are likely to see significant first-mover advantages, and they just might discover the right combination of performance and cost savings.

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