Archive:January 2017

1
The world’s first listed regulated bitcoin fund
2
Update on post-implementation review of UK loan and investment based crowdfunding market
3
Indonesia’s financial services authority issues its first FinTech regulations
4
Building Smart Contracts Trust in 2017-The Lawyer’s Role
5
The Future of Active Funds Part 1: Will Blockchain Save Actively Managed Mutual Funds?
6
Retailer invests in FinTech
7
UK FCA to publish consultation paper on new rules for investment and loan-based crowdfunding platforms

The world’s first listed regulated bitcoin fund

By Jonathan Lawrence

Global Advisors (Jersey) Limited (“Global Advisors”), the investment manager of the Global Advisors Bitcoin Investment Fund PLC (“GABI”) announced on 19 December 2016 that the Channel Islands Securities Exchange (“CISE”) has approved the admission to listing of all of the redeemable participating no par value shares of the open ended fund. The CISE listing means that GABI becomes the first regulated bitcoin fund to be listed on any exchange globally.

GABI was launched in 2014 as the world’s first regulated bitcoin fund when it received certification as an Expert Fund from the Jersey Financial Services Commission. Its listing on the CISE means that it joins over 2,000 listed securities on the exchange comprising a market capitalisation of over £300 billion. It is the first digital asset-related listing on the exchange.

GABI is the third exchange listing for Global Advisors. The firm currently manages two Bitcoin Exchange Traded Certificates – COINXBT and COINXBE – on NASDAQ’s OMX in Stockholm. The firm is developing as a platform for digital assets combining digital asset management, direct market access and working with start-up firms developing distributed ledger technologies, including Glint, Gradbase and Aventus Systems.

Update on post-implementation review of UK loan and investment based crowdfunding market

By Jonathan Lawrence

The UK’s Financial Conduct Authority (FCA) has given an update on the post-implementation review of the UK loan-based and investment-based crowdfunding market since current rules came into force in April 2014. The FCA says it believes it is appropriate to modify a number of rules for the market.

For both loan-based and investment-based crowdfunding platforms the FCA has found that, for example:

  • it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings;
  • it is difficult for investors to assess the risks and returns of investing on a platform;
  • financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’; and
  • the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.

In the loan-based crowdfunding market in particular, the FCA is concerned that, for example:

  • certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;
  • the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity; and
  • the FCA has challenged some firms to improve their client money handling standards.

The FCA plans to consult on more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms. For loan-based crowdfunding the FCA also intends to consult on:

  • strengthening rules on wind-down plans;
  • additional requirements or restrictions on cross-platform investment; and
  • extending mortgage-lending standards to loan-based platforms.

The FCA’s ongoing research and investigatory work should be completed early in 2017. At that stage, the FCA will determine whether further consultation on rule changes is needed.

For the full feedback statement, please click here.

Indonesia’s financial services authority issues its first FinTech regulations

By Jonathan Lawrence

Indonesia’s financial services authority (OJK) has issued its first regulations relating to FinTech. The regulations lay out minimum capital requirements, interest rate provision and education and consumer protection rules.

Every Indonesian FinTech P2P lending firm must now register and secure a business licence from the authority. A company must have Indonesian Rupiah 1 billion ($75,000) in capital to register, and a further Indonesian Rupiah 2.5 billion ($188,000) to apply for a business licence. These figures are approximately half those that had been proposed in previously issued draft regulations. Foreign ownership is limited to 85%.

No maximum interest rate has been set, which again contradicts previous drafts of the regulations which set a cap of seven times Bank Indonesia’s seven-day reverse purchase rate per annum.

Muliaman Hadad, chair of OJK, told the Jakarta Post that the regulation was only an initial step in the authorities’ efforts to regulate and supervise the business. “What’s important is they get onto our radar because we don’t want to regulate the prudential aspects hastily. We want to provide [business] transparency guidelines first,” Hadad said. The OJK also has implemented a regulatory sandbox for firms to test services for consumers.

Bank Indonesia set up a dedicated office and regulatory sandbox in November 2016 to help FinTech developers. It will also provide services to help developers to understand Indonesia’s regulatory policies on FinTech, gather and disseminate information on developments, and hold regular meetings with authorities and international bodies interested in the use of technology in finance, Bank Indonesia said.

For a full text (in Indonesian) of the regulations, please click here.

Building Smart Contracts Trust in 2017-The Lawyer’s Role

By Susan P. Altman

In 2016 we saw a flurry of discussion, a lot of interest, and a little bit of actual experimentation with smart contracts, the computer programs that automatically execute the terms of a contract on a blockchain. What do we need to firmly launch smart contracts into the mainstream and what is the lawyer’s role? A recent article in Coindesk by executives at Tezos argues that we need to conquer three remaining barriers: 1) implementation of formal verification of the smart contract code—a mathematical technique of verifying the integrity of software code; 2) enablement of transparency of the smart contract code by using interpreted code rather than compiled code (a concept meaningful to developers that permits them to more easily inspect code on the blockchain); and 3) development of clear governance mechanisms for the smart contract.

The first two barriers must be solved by software developers. It’s the last item—development of clear governance mechanisms—that will require joining the lawyer’s legal skills with the software developer’s coding skill. Software on the blockchain is immutable, but there has to be a mechanism for correction of the inevitable software error. Here is where the lawyer will tailor the governance processes learned so well in significant outsourcing transactions: governance and committee structure, issue escalation procedures, and change request process. Smart contracts are intended to be part of real contracts, and we lawyers already know the building blocks of well-crafted contracts. Here’s to 2017!

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

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.

Retailer invests in FinTech

By Jonathan Lawrence

UK department store company House of Fraser is to invest £35m in Tandem, an app-only challenger bank. The move will enable House of Fraser to offer online banking services to shoppers.

Tandem was founded in 2014 and received its UK banking licence a year ago. It has already raised over $30m from investors, including eBay co-founder Pierre Omidyar. Founded in 2014, Tandem raised £1m last year in a crowdfunding campaign, valuing it at £65m.

Tandem competes with other new app-only start-up banks, dubbed “neobanks”, including Monzo, Starling and Atom. It currently offers a savings tool that lets people monitor spending on any bank account. It began rolling out its app in November 2016 and plans to launch credit and debit products in 2017.

House of Fraser was acquired by Chinese conglomerate Sanpower in a £480m deal in 2014. While the company already offers credit and loyalty cards through NewDay, the ability to offer app-only online banking services is a departure that could see other UK retail multiples follow suit.

UK FCA to publish consultation paper on new rules for investment and loan-based crowdfunding platforms

By Tom R. Wallace

In December 2016 the UK FCA published a statement of its intention to publish a Consultation Paper in Q1 2017 proposing new rules for investment and loan-based crowdfunding platforms.

Based on information the FCA has gathered through a consultation ending in September 2016 and its supervision and authorisation of crowdfunding platforms, the FCA’s view is that aspects of the crowdfunding market currently pose some risks to its objectives. The FCA perceives risk of regulatory arbitrage in the loan-based sector, and potential for investors to misunderstand the nature of the products offered. While respondents to the FCA’s request for feedback rightly note that many of these risks existed when the FCA established the current crowdfunding regulatory framework in 2014, the FCA counters that the market has grown in significance and complexity since then.

While investment-based crowdfunding is facilitated entirely by fully-authorised firms, most loan-based crowdfunding firms, including the largest ones, have so far operated under interim permissions. The FCA notes that, while it has identified some issues about the investment-based crowdfunding market, most of its attention at this time is on issues in relation to loan-based crowdfunding.

Taken together with its other statements on the crowdfunding sector, the FCA is giving an indication of its perspective on the issues associated with the #crowdfunding market and, pending publication of consultations on the new rules, incumbents and innovators should take care to create legal, operational and compliance structures that are likely to align with the FCA’s direction of travel in this market.

The FCA frame this as an evolution of the existing regulatory framework, not a revolution, and I find the FCA’s depth of the knowledge about, objectives for and focus on the market to be a source of optimism for the future of the crowdfunding market in the UK for investors, incumbents and innovators.

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