FinTech Law Watch

At the Crossroads of Law, Innovation and Commerce

 

1
Regulators tighten the reigns on robo advisory firms
2
A Positive Step Forward or Much Ado About Nothing Yet Again? SEC FinHub Releases a “Framework for ‘Investment Contract’ Analysis of Digital Assets” and Historic No-Action Letter on Digital Assets for TurnKey Jet
3
Australian Government announces the establishment of the national blockchain roadmap
4
American Bar Association Publishes White Paper on Digital and Digitized Assets
5
The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 2)
6
The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 1)
7
Senate Committee publishes report and recommendations on regulation of Australian buy now pay later industry
8
Surge In Cryptocurrency Exchange Hacking Activity
9
California Regulator Seeking Comments on “Agent of the Payee” Exemption to Money Transmission Law
10
Crypto founder’s death elevates taking a secret to the grave to the next level

Regulators tighten the reigns on robo advisory firms

By Jim Bulling, Felix Charlesworth and Andrew Fay

In December 2018, the US Securities and Exchange Commission (SEC) settled an enforcement action with Wealthfront, one of the industry’s leading robo advisors. This came after Wealthfront made false statements about its software’s ability to implement a ‘tax-loss harvesting’ strategy. Wealthfront failed to properly execute the strategy, resulting in losses to a significant number of clients. Wealthfront ultimately agreed to pay a $US 250,000 penalty.

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A Positive Step Forward or Much Ado About Nothing Yet Again? SEC FinHub Releases a “Framework for ‘Investment Contract’ Analysis of Digital Assets” and Historic No-Action Letter on Digital Assets for TurnKey Jet

By Margaret N. Rosenfeld, Robert M. Crea, Jonathan M. Miner and Steven B. Levine

In a flurry of activity today, the U.S. SEC’s Strategic Hub for Innovation and Technology (“FinHub”) issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets” and the SEC’s Division of Corporation Finance (“CorpFin”) issued a historic No-Action Letter to Turnkey Jet, Inc. (“TurnKey Jet”) in connection with its offer and sale of digital assets.  The Framework doesn’t contain anything substantially new for U.S. securities law practitioners who have been giving guidance to companies regarding digital assets (or utility tokens, security tokens or digital securities depending upon your term of choice) for some time, but serves as a good reminder of the SEC staff’s thought process in this area for those new to the space. 

And in case you missed Footnote 1 to the Framework, Bill Hinman (SEC Director of CorpFin) and Valerie Szczepanik (SEC Senior Advisor for Digital Assets and Innovation) released a Statement on the Framework reminding everyone that the SEC has not approved or disapproved of the content and it is not a rule or regulation.  These types of Frameworks are often how the internal staff at the SEC get the ball rolling on regulatory innovations (recall the legendary Project Aircraft Carrier of 1998). The Framework applies the factors set forth in the U.S. Supreme Court’s Howey case to digital assets, without going further. Therefore, it’s worth questioning whether Director Hinman has lost the argument internally at the SEC that he posited in his June 2018 Digital Asset Transactions remarks, in which he included “does application of the Securities Act protections make sense” in his list of considerations for assessing whether a digital asset offering is an investment contract.

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Australian Government announces the establishment of the national blockchain roadmap

By Jim Bulling & Felix Charlesworth

On 18 March 2019, the Federal Australian Government announced its plan to establish the national blockchain roadmap (Roadmap) which intends to focus developing regulation, skills and capacity building, innovation, investment and international competitiveness in the emerging local blockchain industry.

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American Bar Association Publishes White Paper on Digital and Digitized Assets

By Clifford C. Histed

On March 13, 2019, the American Bar Association’s Derivatives and Futures Law Committee published a white paper called Digital and Digitized Assets: Federal and State Jurisdictional Issues.  As stated in its preface, this White Paper was prepared by members of the Jurisdiction Working Group of the Innovative Digitized Products and Processes Subcommittee (“IDPPS”) and their colleagues, who generously contributed substantial time and effort to this ambitious undertaking. The authors have sought to provide a comprehensive explanation of federal and state laws that may apply to the creation, offer, use and trading of digital assets in the United States, along with summaries of key initiatives outside the United States. The White Paper also recommends an analytic framework for considering potential issues of jurisdictional overlap between the Commodity Futures Trading Commission and the Securities and Exchange Commission under the separate federal statutes they each are responsible for administering.

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The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 2)

By Daniel S. Cohen

On March 6th, the Chamber of Digital Commerce held its Fourth Annual D.C. Blockchain Summit. One of the first panels featured a discussion on the current and future contours of the digital asset regulatory regime with Daniel Gorfine, Director of LabCFTC; Kavita Jain, FINRA’s Director of the Office of Emerging Regulatory Issues; Jessica Renier, Senior Advisor on Domestic Finance for the Treasury Department; and Valerie Szczepanik, the SEC’s Senior Advisor for Digital Assets & Innovation.

Ms. Szczepanik explained that the SEC staff is developing guidance regarding digital assets but declined to provide a timetable for its release. She noted that whether a digital asset is a security will, as it does now, depend on whether it is an investment contract in light of its individual facts and circumstances. Ultimately, the SEC is seeking to promote financial innovation, capital formation, and wealth creation but in balance with investor protections.

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The Future of Digital Asset Regulation: Key Regulators Give Their Thoughts at the D.C. Blockchain Summit (Part 1)

By Daniel S. Cohen

On March 6th, the Chamber of Digital Commerce held its Fourth Annual D.C. Blockchain Summit. SEC Commissioner Hester Peirce and CFTC Chairman J. Christopher Giancarlo headlined the event. After the cheers for “Crypto Mom” and “Crypto Dad” died down, Commissioner Peirce and Chairman Ginacarlo shared their general views on next steps for digital asset regulation and principles by which regulators should oversee emerging financial technologies.

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Senate Committee publishes report and recommendations on regulation of Australian buy now pay later industry

Jim Bulling and Felix Charlesworth

Following on from the Senate Hearings in January 2019, the Economic References Committee (Committee) published its Report on credit and financial services targeted at Australians at risk of financial hardship.

In addressing the current regulation of the buy now pay later (BNPL) industry, the Committee raised its concerns about the ease of accessibility of BNPL services to consumers experiencing financial hardship. Despite BNPL businesses, such as AfterPay and Zip.co stating that they already had algorithms in place to detect whether it was appropriate to provide services to an individual, the Committee stated that “clearly more needs to be done to ensure consumers are protected, and company algorithms alone are not sufficient.”

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Surge In Cryptocurrency Exchange Hacking Activity

By Jim Bulling and Edwin Tan

Cryptocurrency exchanges have always been a prime target for hacking activity due to the vast amounts of cryptocurrency and money held within each exchange.  Finding and exploiting weaknesses in exchanges can be very profitable for hackers, and such hacking activity has grown exponentially year on year.

In late December 2018, Coindesk published an article revealing that the amount of cryptocurrency stolen from exchanges increased 13 times in 2018 compared to 2017.  Analytics firm Chainalysis reported that approximately $1 billion worth of cryptocurrency was stolen from digital currency exchanges in 2018.

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California Regulator Seeking Comments on “Agent of the Payee” Exemption to Money Transmission Law

By Jeremy M McLaughlin

Several states exempt from their money transmission law, either through statute or regulatory guidance, an “agent of the payee.”  California is one such state.  In general, the exemption applies to a party that a payee has appointed as its agent for purposes of receiving payment from a payor.  The Department of Business Oversight (“DBO”), the agency that enforces California’s money transmitter law, has invited comments on a proposed rule making regarding the scope of the exemption.  Comments are due by April 9, 2019.

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Crypto founder’s death elevates taking a secret to the grave to the next level

By Cameron Abbott and Ella Richards

In an age where cyber security breaches are a near daily occurrence, and where we’re frequently reminded to keep our passwords secret and safe, the story that’s emerged regarding the fate of over AU$190 million of crypto-currency following the death of Gerald Cotten, the founder of Quadriga CX, is a little ironic to say the least.

The untimely death of the 30-year-old in December brought with it an unexpected sober reality – Mr Cotten was the only person with access to Quadriga’s coin reserve. No really … the ONLY person… you can see where this is going can’t you?

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