Archive: March 2017

1
Bank of England’s FinTech Accelerator launches a new community
2
Adapt or die, the reality for retail banks during a digital revolution
3
Financial Inclusion and Robust Regulation Are on the Table as OCC Pushes Ahead With Fintech Charter
4
CPMI publishes an analytical framework for DLT
5
Jury Finds Two Guilty in Bitcoin Exchange Bribery Scheme; Related Criminal Prosecutions Looming
6
CFTC FinTech Initiative
7
Lendit Conference 2017
8
UK Government’s digital strategy
9
OCC Releases Draft Licensing Manual for Evaluating Fintech Bank Charter Applications
10
Regulators in the UK and Japan enter into Co-operation Framework

Bank of England’s FinTech Accelerator launches a new community

By Jonathan Lawrence

The Bank of England’s FinTech Accelerator launched a new community on 17 March 2017 which brings together FinTech-related organisations. The community has three aims: to share developments, trends and insights; to make sure the Bank is engaging with different FinTech firms from across the sector; and to enable firms with an interest in FinTech to network, supporting the development of the sector. Community members will be invited to meet the Bank two to four times a year to share updates on trends and developments in the sector. The Bank will also hold quarterly networking and knowledge-sharing events, and publish summaries of the topics discussed. The list of initial community members is here. Summaries of the topics discussed at these events will be made available afterwards via the Accelerator’s website.

The Bank has also decided on the firms it will be working with for the third round of its Proofs of Concept (PoCs):

  • MindBridge AI: MindBridge’s AI (artificial intelligence) auditor detects anomalies in financial transactions and reports using data science, machine learning and artificial intelligence. The Bank is using this PoC to explore the benefits of machine learning for analysing the quality of regulatory data input.
  • Ripple: The Bank is carrying out a PoC with Ripple to demonstrate the synchronised movement of two different currencies across two different real-time gross settlement systems. The aim is to show how this kind of synchronisation might lower settlement risk and improve the speed and efficiency of cross-border payments.

Adapt or die, the reality for retail banks during a digital revolution

By Cameron Abbott and Giles Whittaker

Traditional banking is a thing of the past, at least according to 203 senior retail banking executives surveyed by the Economist Intelligence Unit.

According to an Economist Intelligence Unit report for Temenos, the EU’s Second Payment Services Directive (PSD2), which will force banks to provide interfaces, APIs and data to third parties, is set to “tip the scales between banks and FinTechs for customer loyalty.” More than half of financial transactions will be made through FinTech companies rather than traditional retail banks by 2020, as the latest EU payments directive unleashes competition.

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Financial Inclusion and Robust Regulation Are on the Table as OCC Pushes Ahead With Fintech Charter

By Anthony Nolan, Judith Rinearson, Jeremy McLaughlin, and Eric Love

On March 15, 2017, the U.S. OCC issued a Draft Supplement to its Licensing Manual (Supplement) to progress its proposal to roll out a special purpose national bank (SPNB) charter for fintech companies.

The Supplement outlines the process by which a fintech company may apply for a SPNB charter, and the considerations the OCC will take into account when evaluating such applications. In addition, the Supplement reiterates the OCC’s determination that the SPNB charter would be “in the public interest” because it would provide “uniform standards and supervision,” “support[] the dual banking system,” promote “growth, modernization, and competition” in the financial system, and encourage fintech companies to “promote financial inclusion.”  It also makes clear the OCC’s determination to promote financial inclusion and to rebut criticisms that the SPNB charter would represent a light touch regulatory regime.  The SPNB is not a ‘bank-lite’ charter; an “applicant that receives OCC approval for a charter becomes a national bank subject to the laws, regulations, and federal supervision that apply to all national banks.”

Comments on the Supplement are due by April 14, 2017. Because the Supplement represents a significant step forward in the OCC’s push for a fintech charter, we expect that there will be many commenters.  Even before the OCC’s issuance of the Supplement, the proposed charter garnered substantial interest from key Members of Congress, state regulators, industry groups, and other stakeholders.  For a more detailed analysis of the Supplement, see our Legal Insight here.

CPMI publishes an analytical framework for DLT

By Giovanni Campi and Ignasi Guardans

The Committee on Payment and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) recently released a report that focuses on the potential impact of distributed ledger technology (DLT) on payment, clearing and settlement.

In providing an analytical framework to approach DLT, CPMI hopes to enhance authorities and market participants’ understanding of this technology. The report reviews the potential implication of DLT for the efficiency and safety of payment, clearing and settlement activities. The last part also analyzes broader implications of DLT for financial markets, in terms of market architecture and connectivity.

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Jury Finds Two Guilty in Bitcoin Exchange Bribery Scheme; Related Criminal Prosecutions Looming

By Nicole C. Mueller and Clifford C. Histed

On March 17, 2017, a Manhattan federal jury convicted Trevon Gross, a pastor, and Yuri Lebedev, a software engineer, of bribery and of conspiring to operate bitcoin exchange Coin.mx as an unlawful money transmitting business.  The jury also convicted Lebedev of fraud.  Sentencing is scheduled for July 2017.

Lebedev and Coin.mx operator Anthony Murgio were charged in 2015.  Coin.mx allegedly operated as a conduit for cybercrime-related funds, and in violation of state and federal money transmitting laws.  Prosecutors argued to the jury that Murgio and Lebedev sought to trick the financial institutions through which Coin.mx processed transactions into believing its unlawful bitcoin exchange business was simply a members-only “collectibles club.”  Part of the Coin.mx scheme included processing and profiting from bitcoin transactions conducted on behalf of victims of ransomware attacks by allowing the victims to buy bitcoins to pay ransom payments  while generating revenue for Coin.mx.  Murgio pleaded guilty before trial.

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CFTC FinTech Initiative

By Anthony Nolan

On Wednesday Commissioner (and Chairman-designate) Giancarlo of the US Commodity Futures Trading Commission (CFTC) gave a speech to the Futures Industry Association in which he identified the embrace of technological change as a key factor in economic growth.  In that speech he announced that the CFTC has been conducting a review of FinTech innovation issues including those arising from a range of new digital technologies. The review is focused on three issues:

  1. How the CFTC should leverage FinTech innovation to make it a more effective regulator;
  2. How CFTC rules and regulations need to be updated to account for FinTech in order for the Commission to be relevant in 21st Century digital markets; and
  3. The proper role of the CFTC in promoting US FinTech innovation in CFTC regulated markets.

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Lendit Conference 2017

By Ed Dartley and Anthony Nolan

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.

UK Government’s digital strategy

By Jonathan Lawrence

The UK Government’s Digital Strategy published on 1 March 2017 contains an overview of actions the Government and regulators are taking to support the UK FinTech industry:

  • supporting UK banks to deliver Open Banking through a fully open application programming interface (API), providing access to authorised third parties by Q1 2018. Third-parties will then be able to access consumers’ data in real-time
  • supporting industry to design and deliver a pensions dashboard by 2019 – a digital interface where an individual can view all their pensions in one place
  • working with Tech City UK on a FinTech Delivery Panel to set out a long-term strategy for UK FinTech and identify key industry initiatives. This panel comprises key representatives from the FinTech sector, existing financial services sector, and the Financial Inclusion Commission
  • appointing regional FinTech envoys to help the growth of FinTech across the UK. To date, regional FinTech envoys have been appointed for the North of England and Scotland
  • showcasing UK FinTech to investors at the annual International FinTech Conference, to take place in London on 12 April 2017

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OCC Releases Draft Licensing Manual for Evaluating Fintech Bank Charter Applications

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.

Regulators in the UK and Japan enter into Co-operation Framework

By Jonathan Lawrence

The Financial Services Agency of Japan (JFSA) and the UK’s Financial Conduct Authority (FCA) have entered into a Co-operation Framework to support innovative FinTech companies in their respective markets. For the full text of the agreement by way of an exchange of letters, see Letter from the JFSA to the FCA and Letter from the FCA to the JFSA.

This Co-operation Framework will provide a regulatory referral system for innovative financial businesses that have been offered support by the JFSA or the FCA through their respective FinTech innovation functions, or would qualify for such support (an Innovator Business). The FCA launched Project Innovate in October 2014 which is led by the FCA’s Innovation Hub. The JFSA established its FinTech Support Desk in December 2015 as a one-stop contact point for FinTech businesses.

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