FinTech Law Watch

At the Crossroads of Law, Innovation and Commerce

 

1
ASIC publishes report on its review of the ‘buy now, pay later’ industry
2
FCA Fighting Cryptoasset Risks
3
Stakeholder Report on ICOs and Crypto Assets
4
K&L Gates Links with Global Legal Blockchain Consortium
5
Australian Gift Cards – Additional Consumer Protections
6
Blockchain and Data Protection: Trustless Should Not Mean Distrusted
7
UK’s Green FinTech Challenge
8
Global AML Regulator Amends Its International Standards for Virtual Assets
9
Fintech Trends – Shift From ICOs to STOs
10
UK Cryptoassets Taskforce Final Report

ASIC publishes report on its review of the ‘buy now, pay later’ industry

By Jim Bulling, Felix Charlesworth and Edwin Tan

On 28 November 2018, ASIC published Report 600: Review of buy now pay later arrangements (Report). The Report is the product of ASIC’s 10 month investigation into the industry. It examines the conduct, structure and arrangements of 6 buy now pay later providers including Afterpay and zipPay (Providers). The Report also notes that the responsible lending obligations of the National Consumer Credit Protection Act which require credit providers to, among other things, assess a consumer’s financial position, do not apply to buy now pay later arrangements.

The Report looks at the exponential growth of the industry from over 50,000 transactions in April 2016 to 1.9 million transactions in June 2018. While the average value of transactions under these arrangements has decreased, the outstanding debt in this time has roughly doubled to over $903 million.

ASIC identified the following issues which raise some cause for concern:

  • growth in revenue generated from missed payment fees from 2% to 12% over a two year period; and
  • 44% of consumers reported an annual income of less than $40,000.

In addition, ASIC also found that each of the Providers included some terms in their contracts which are potentially unfair to consumers, such as terms that give Providers a broad unilateral discretion to vary a contract, and hold consumers liable for unauthorised transactions.

At this stage, ASIC has outlined two possible steps to take going forward. These are:

  • to extend its proposed product intervention power to all credit facilities regulated under the ASIC Act in order to address potential problems causing consumer detriment; and
  • further monitoring by ASIC to determine if by now pay later providers should be regulated under the National Consumer Credit Protection Act.

As previously posted, a report by the Senate Economics Reference Committee into the industry is due by 22 February 2019.

FCA Fighting Cryptoasset Risks

By Jonathan Lawrence

The UK Financial Conduct Authority (FCA) Executive Director of Strategy and Competition recently delivered a speech at The Regulation of Cryptocurrencies event in London. In his remarks, Chris Woolard outlined several steps the FCA is planning to take to combat risks in the cryptoasset market:

  • to help firms better understand the boundaries of current regulation in relation to cryptoassets, the FCA will consult on perimeter guidance by the end of 2018, helping to clarify which cryptoassets fall within the FCA’s existing regulatory perimeter, and those that fall outside;
  • HM Treasury (HMT) is to then consult on whether the regulatory perimeter requires an extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter;
  • the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities;
  • to combat financial crime risks, HMT will undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the existing directive, the fifth EU Anti-Money Laundering Directive (5AMLD);
  • HMT will first consult and then legislate on how to transpose 5AMLD and broaden the scope of anti-money laundering and counter-terrorism financing regulation; and
  • HMT plans to complete further analysis on whether regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate and then consult in early 2019 on whether and how exchange tokens, as well as related actors such as exchanges and wallet providers, could be regulated effectively.

Stakeholder Report on ICOs and Crypto Assets

By Jonathan Lawrence

The Securities and Markets Stakeholder Group (SMSG) of the European Securities and Markets Authority (ESMA) has published a report on initial coin offerings (ICOs) and crypto assets. The goal of the report is to give advice to ESMA on steps it can take to contain the risks of ICOs and crypto assets (on top of existing regulation). The report mainly focuses on risks for investors as the SMSG states that there are no obvious market stability risks yet in this respect.

The first part of the report defines relevant concepts including crypto asset, virtual currency, cryptocurrency, token and ICO. There is taxonomy of crypto assets including payment tokens, utility tokens, asset tokens and hyrbids. The report also includes an overview of recent ICOs and of existing regulations of crypto assets, ICOs and sandboxes in 36 jurisdictions, including the European Union member states and Switzerland. The SMSG gives specific recommendations to ESMA on potential regulatory changes.

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K&L Gates Links with Global Legal Blockchain Consortium

Global law firm K&L Gates LLP has joined the Global Legal Blockchain Consortium (GLBC), an organization of legal and technology industry stakeholders focused on increasing the security, productivity, and interoperability of blockchain technology.

To date, more than 120 large companies, law firms, software companies, and law schools have joined the GLBC to help in developing standards and policies that govern the use of blockchain technology in the business of law. Specific issues on which the consortium focuses include data integrity, authenticity, security, and privacy for contracts and documents; interoperability between corporate legal departments and law firms; productivity improvements in the operation of legal departments and law firms; and augmentation of existing legal technology systems.

Judith Rinearson, a partner in K&L Gates’ New York and London offices and one of the co-chairs of the firm’s FinTech practice leading K&L Gates’ involvement with GLBC, said: “We have been very strategic in how we have approached the enormous opportunities presented by the blockchain. Our membership in GLBC is a great fit in our overall strategy to harness the capabilities of the blockchain in order to benefit our clients.”

Last year, K&L Gates announced plans to implement its own private blockchain to assist in the exploration, creation, and implementation of smart contracts and other technology applications for future client use, a commitment that very few, if any, other major law firms have made.

Lawyers in the firm’s FinTech practice are part of a cross-disciplinary, global team focused on helping clients navigate regulatory, policy, and business issues surrounding the FinTech space, such as consumer financial services regulation, e-commerce regulation, fund formation, cybersecurity, finance, and intellectual property matters.

For more information please contact Becca Hatton at +1.202.778.9897 or becca.hatton@klgates.com.

Australian Gift Cards – Additional Consumer Protections

By Jim Bulling, Edwin Tan and Elise Hamblin

Every year, Australian consumers suffer an estimated loss of $70 million through gift cards expiring before use. On 18 October 2018, the Treasury Laws Amendment (Gift Cards) Act 2018 (Gift Card Act) was passed in an effort to reduce this loss.  Fintech card issuers should be aware of the upcoming changes and start making preparations to ensure that they continue to be compliant with the regulatory requirements.

What will change?

The Gift Card Act amends the Australian Consumer Law to create a national regime where:

  • gift cards must have a minimum expiry period of three years;
  • expiry information on gift cards must be prominently displayed; and
  • the charging of fees (except certain prescribed fees) after a gift card has been supplied will be prohibited.

We expect that the amendments will not apply to reloadable cards.

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Blockchain and Data Protection: Trustless Should Not Mean Distrusted

By Claude-Étienne Armingaud

Amidst the international tidal wave caused by the entry into force of the EU General Data Protection Regulation (“GDPR”) in May 2018, many half, or even false truths have been spread about hindrance on a global scale of innovative technologies. However, we must keep in mind that Europe has adopted a long-standing position of technology-neutral regulations and data protection is no exception.

Indeed, from a GDPR perspective, no technology would be prohibited or regulated by nature – only its application to a specific purpose may be regulated, inasmuch as it involves personal data -whether relating to the participants and miners or the payload data itself- and falls within its broad geographical scope (see our previous Alert for more details).

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UK’s Green FinTech Challenge

By Jonathan Lawrence

The UK’s Financial Conduct Authority has launched its Green FinTech Challenge. This is aimed at firms developing green financial technology solutions that need specific regulatory support to bring their proposition to market. The Challenge is designed to support innovation and growth in the Green Finance sector as part of the UK government’s Green GB Week which started on 15 October 2018.

Firms that require specific regulatory support are invited to apply. The Challenge will provide support to a selection of firms developing innovative products and services to assist in the UK’s transition to a greener economy. It is open to start-ups, incumbents and technology providers.

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Global AML Regulator Amends Its International Standards for Virtual Assets

By Jim Bulling and Felix Charlesworth

On 19 October 2018, the global anti-money laundering and counter terrorism financing watchdog, the Financial Action Task Force (FATF), made a series of amendments to its rules framework (Standards), in response to international developments in the use and exchange of virtual assets such as cryptocurrencies and other virtual tokens.

The Standards set out the FATF’s recommended framework of rules and measures which countries, including Australia, should adopt in order to combat money laundering and terrorist financing.

As part of the revised Recommendation 15, the FATF has written “to manage and mitigate risks emerging from virtual assets, countries should ensure that virtual asset providers are regulated for AML/CTF purposes“.

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Fintech Trends – Shift From ICOs to STOs

By Nicholas Hanna and Mark Tan

In recent months, there has been a noticeable shift by token issuers away from initial coin offerings (ICOs) towards security token offerings (STOs) largely driven in part to a recent bottoming out of the retail market (including Bitcoin and Ethereum) and softening demand from retail investors for ICOs.

This trend appears to have resulted from retail investors having come to realize the inherent limitations that ICOs possess, namely the fact that tokens issued in connection with an ICO generally only have “utility” and not much inherent value. Additionally, we are now also starting to see more interest from sophisticated and/or accredited investors and funds, who also tend to prefer “security” tokens instead of “utility tokens” when looking to make an investment, due to the inherent value that the former possess.

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UK Cryptoassets Taskforce Final Report

By Jonathan Lawrence

The UK Cryptoassets Taskforce has recently published its final report.  The Taskforce comprises HM Treasury, the Financial Conduct Authority and the Bank of England and was formed in March 2018.

While the use of cryptoassets for illicit activity remains low in the UK, the Taskforce concludes that these risks are increasing and the use of cryptoassets for money laundering is growing. The UK authorities will bring all relevant firms into anti-money laundering and counter-terrorist financing regulation. This action will go significantly beyond the requirements set out in the European Union Fifth Anti-Money Laundering Directive. The UK government will consult on its proposed actions and will legislate during 2019.

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