Payment Systems – Page 8 – FinTech and Blockchain Law Watch

Comprehensive Analysis of the CFPB’s Final Prepaid Account Rule

Nov 10 2016

By Eric A. Love, Linda C. Odom and Judie Rinearson

As noted in our previous blog post, the Consumer Financial Protection Bureau (“CFPB”) finalized on October 5 its long-awaited Final Rule for prepaid accounts under the implementing regulations for the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z). Effective October 1, 2017, the Final Rule clocks in at nearly 1,700 pages and represents the most significant change to the legal and regulatory landscape of the prepaid account industry since the Financial Crimes Enforcement Network’s issuance in 2011 of a final rule regarding prepaid access. Although the CFPB’s Final Rule retains many key aspects of the agency’s Notice of Proposed Rulemaking (“NPRM”) on prepaid accounts, the Final Rule differs from the NPRM in a number of important respects and will create a new set of compliance hurdles for the prepaid account industry.

In our alert entitled “CFPB Finalizes Expansive Prepaid Account Rule Creating New Compliance Hurdles,” we provide a comprehensive analysis of the Final Rule and highlight several notable differences between the Final Rule and the NPRM. You can read the full alert here.

Developing smart contracts for the financial services industry

Nov 03 2016

By Jim Bulling and Meera Sivanathan

With promised benefits such as risk reduction (through blockchain execution), cost reduction and enhanced efficiencies it is easy to understand why the use of smart contracts in the financial services industry is highly anticipated.

The Commonwealth Bank of Australia has successfully used smart contracts in relation to trade finance and the ASX is considering there use in clearing and settlement systems. However, before smart contracts can operate successfully, a few factors must still be addressed:

Immutability: ‘Immutability’ is a key feature of a smart contract stored on a blockchain. A smart contract’s program code does not change once stored on the blockchain – in essence it is permanent. While immutability creates certainty in a smart contract, it does not allow for flexibility. Methods to modify and correct terms of smart contracts are being developed.
Due diligence and accuracy: One risk presented by smart contracts is the possibility that the terms and conditions agreed upon by the contracting parties are not accurately programmed in the smart contract code. In this respect, it is likely that the due diligence process for smart contracts may evolve to be collaboration between both legal and IT professionals.
Legal recognition and framework: In Australia, there is uncertainty about enforceability of a smart contract. A hybrid model using smart contracts for verification and performance combined with using traditional contracts to record the terms and conditions of an arrangement could be a possible solution.
Contractual confidentiality: While smart contracts on a public blockchain generally preserve the anonymity of the contracting parties, it is possible that terms of the smart contract, including those that are highly confidential may be accessible to third parties. Possible solutions, such as the use of private blockchains, are currently being explored.

Blockchain’s Smart Contract Solution Wins EY Startup Challenge

Oct 28 2016

By Susan P. Altman

The world is abuzz with news about blockchain development and technology lawyers need to understand the implications. The rise of smart contracts, or automated implementation of portions of real-life contracts by transferring assets between parties, is one of those interesting implications. A smart contract is neither smart, nor a contract, but can be regarded by lawyers as a technological solution that automates some transfer between parties to a contract, such as payment or release of information, upon the occurrence of a triggering event. At its most basic, a smart contract consists of fixed program code, a storage file and an account.

Recent news about a startup company making headway with smart contract technology development is worth noting. Adjoint, Inc., based in Boston, is trying to market a solution where financial transactions are automated through smart contracts and work with many proprietary interfaces. The solution provides a consensus protocol (a protocol used in blockchain to get all the processes to agree on a specific value for verification) that allows companies to deploy and analyze a network of smart contracts on top of a mathematically verified distributed and encrypted ledgers.

A digital currency for Australia

Oct 24 2016

By Jim Bulling and Meera Sivanathan

Digi.cash recently launched Australia’s first digital dollar. The e-currency, which is digitally ‘minted’ as electronically signed coins and banknotes can be used on various devices including smartphones and computers. Digi.cash currently operates under an exemption ruling by the Reserve Bank of Australia, which limits the total obligations to make payments under the facility to $10 million.

There is no doubt that digital currencies have potential uses in several areas of the Australian economy. More recently, Australia’s big banks have indicated interest in possible adoption of digital currencies. Keeping this in mind, there are a few key opportunities and risks associated with the use of digital currencies that corporations might wish to consider: Read More

ING takes first step towards open banking in UK

Oct 24 2016

By Jonathan Lawrence

The Dutch multinational banking and financial services corporation, ING, is returning to the UK by launching a mobile app to help customers manage their money across multiple accounts. Last week ING unveiled Yolt, an app that aggregates data from accounts at different financial institutions, with their customers’ approval. As ING does not provide loans or take deposits in the UK, its new app will only include information on accounts held at other banks and credit card companies. It is one of the UK’s first examples of a bank providing a platform for customers to manage money held by rivals.

The UK Competition and Markets Authority called in August 2016 for high-street banks to adopt a digital standard called “open banking” by 2018. This will allow customers, if they agree, to have their account details and transaction history shared with third parties. For more details on the CMA report, click here.

CFPB Finalizes Much-Anticipated Prepaid Account Rule

Oct 17 2016

By Eric A. Love, Linda C. Odom and Judith Rinearson

On October 5, the Consumer Financial Protection Bureau (“CFPB”) issued its much-anticipated Final Rule for prepaid accounts under the implementing regulations for the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z). The Final Rule is effective on October 1, 2017 and governs “prepaid accounts” including:*

general purpose reloadable cards
mobile wallets and certain other electronic prepaid accounts
peer-to-peer payment products
student financial aid disbursement cards
tax refund cards
payroll cards
government benefit cards

To support payments innovation, avoid unnecessary regulation

Sep 12 2016

By John R. Gardner

The rapid growth of new payment system innovation in recent years in many ways mirrors similar growth in the credit card industry in the 1950s and 1960s. A review of the development of the credit card industry leading up to the significant amendments to the Truth in Lending Act in 1970, and the ultimate effect of the legislation when viewed against the concerns voiced by Congress, arguably demonstrate that the legislation was unnecessary, inefficient and anticompetitive. Accordingly, legislatures and regulators should take a cautious approach to enacting restrictions proposed in the name of consumer protection. To avoid the mistakes of the past, legislatures and regulators should carefully consider how such measures might limit competition and innovation, whether such measures would truly result in a benefit to consumers, and whether there are any less restrictive measures that would result in equivalent consumer protection.

You can read my full article here.

U.S. Banking regulators issue a “Joint Fact Sheet on Foreign Correspondent Banking”: Is this a response to global fears of US “DeRisking”? And if so, does it go far enough?

Sep 07 2016

By Judith Rinearson

This summer, “de-risking” has become a hot topic. De-risking is the term used to describe the process many banks have taken to cancel bank accounts and correspondent banking relationships with customers whom they deem to be too risky, or not worth the cost of ensuring compliance. Losing a bank account relationship can be devastating for small businesses and many emerging payments companies have found it increasingly difficult to obtain banking service due to perceptions that providing banking services for “fintechs,” blockchain companies and other innovative payments companies would be “high risk”.

The concerns about derisking are not limited to its impact on small businesses; it has also impacted on small countries. IMF President Christine LaGarde noted in July 2016 that “regulators in key financial centers need to clarify regulatory expectations …and global banks need to avoid knee-jerk reactions and find sensible ways to reduce their costs.”

Bitcoin operators exposed to cyber threats

Sep 01 2016

By Cameron Abbott and Rebecca Murray

Reuters has reported that a third of bitcoin trading platforms have been hacked, and nearly half have closed since they entered the scene 6 years ago. This increasing risk for bitcoin holders is compounded by the fact there is no depositor’s insurance to absorb the loss. That approach heightens cybersecurity risks and also exposes the fact that bitcoin investors have little choice but to do business with under-capitalized exchanges.

This issue was evident when Bitfinex was hacked earlier this month and an estimated $70 million in bitcoin was stolen. The virtual bank’s customers were forced to share the losses resulting in a generalized loss percentage of 36.067%. Read our blog post on this hacking here.

Experts say trading venues acting like banks such as Bitfinex will remain vulnerable. These exchanges act as custodial wallets in which they control users’ digital currencies like banks control customer deposits. However, unlike their brick-and-mortar counterparts, when customers’ bitcoin accounts are hacked, there is currently no third party that can step in to deal with the theft. As a result, these underfunded exchanges require nearly perfect security.

Given this it is not surprising that certain governments around the world are exploring the possibility of central bank issued digital currencies using distributed ledger technology which could compete with the private digital currency systems such as bitcoin. Read more on this here.

Monetary Authority of Singapore – consultation on proposed changes to payments regulatory framework

Aug 31 2016

By Nicholas Hanna

The Monetary Authority of Singapore (MAS), which is the regulatory authority overseeing financial matters in Singapore, issued a consultation paper on 25 August 2016 setting out proposed changes to the payments regulatory framework in Singapore together with the proposed establishment of a National Payments Council.

In a response to the lines between payments and remittance being blurred by technical innovation and the increasing number of payment providers that do not fit neatly into either of these categories, MAS is proposing to consolidate its regulation of both payments and remittance into a single framework. Currently, such services are split across the Payment Systems (Oversight) Act and the Money-changing and Remittance Businesses Act.

MAS has confirmed that the new single framework will provide for licensing, regulation and supervision of all payment services, including stored value facility holders, remittance companies and virtual currency intermediaries. The new framework is likely to be applied on an activity basis with entities being required to apply for a single licence to undertake several payment activities. Read More

Category:Payment Systems