FinTech and Blockchain Law Watch – Page 42 – At the Crossroads of Law, Innovation and Commerce

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

Mar 20 2017

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.

Some Limits on Smart Contracts

Mar 16 2017

By Susan P. Altman

Amid the excitement about the promise of smart contracts comes a wet towel over their use. Milos Dunjic argues that the Capabilities of Smart Contracts are Overblown because most people misunderstand the fundamental properties of smart contracts and propose ideas that are not implementable on a practical level. Dunjic addresses the scalability and privacy issues presented by smart contracts.

As for scalability, smart contract code must produce the identical outcome in every node that executes it. Dunjic questions whether a large number of distributed nodes all hitting a “funds transfer” API at the same time might look like a self-inflicted DDOS attack on the API. Would each call to the API receive exactly the same response from the API? Reliability must be absolute in a smart contract.

As for privacy, replicating and storing data on each blockchain participant’s computer does not look like the best way to prevent data breaches. The reality of decentralized networks is that they expand the opportunities for breach. Not surprising, Dunjic’s conclusion is that smart contracts should be used mainly for management of transactions with one database and that interaction with external environments and services should be avoided. For another viewpoint on the privacy problem with suggestions for partial solutions, see Privacy on Blockchain. We’ll watch how the smart programmers address these issues.

CFPB Delays Prepaid Account Rule Effective Date

Mar 13 2017

By Eric A. Love and John ReVeal

On March 9th, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule to delay for six months the October 1, 2017 effective date of its sweeping Final Rule amending Regulation E and Regulation Z as applied to prepaid accounts. Under the proposed rule, the Final Rule would become effective on April 1, 2018.

The proposed rule would not revise any other aspect of the Final Rule, and comes as numerous prepaid account industry participants have expressed concerns about its scope and their ability to comply with key provisions by the current October 1 effective date. Additionally, the proposed delay follows the recent introduction of legislation in Congress that would use the Congressional Review Act to repeal the Final Rule. According to the CFPB, the proposed delay would “be sufficient for industry participants to ensure they can comply” with the Final Rule and would provide the CFPB the opportunity to receive public comments about any implementation challenges that might impact consumers, the prepaid account industry and other stakeholders.

After publication in the Federal Register, the public will have 21 days to comment on the proposed rule.

Dubai Innovation Testing Licence

Mar 09 2017

By Jonathan Lawrence

The Dubai Financial Services Authority (DFSA) published a new FinTech consultation paper on 6 March 2017 entitled “Testing FinTech Innovations in the Dubai International Financial Centre (DIFC)”. The paper is the third in a series, setting out the DFSA’s approach to FinTech regulation.

The DFSA had previously determined that the current regime for regulating firms in the DIFC was flexible enough to accommodate many aspects of FinTech without introducing new rules. The latest consultation sets out the DFSA’s approach to FinTech firms that want to test innovative products and services in the DIFC. Firms meeting the qualifying criteria will receive a Financial Services Licence, referred to as an Innovation Testing Licence, which reflects the nature of the activities to be conducted during the testing phase. The DFSA will put in place limits on the FinTech testing activities to ensure appropriate controls for the safety of any customers involved. Given the limits on activities permitted during testing, FinTech firms will not have to comply with DFSA Rules where they are inappropriate at a testing stage. The testing phase is a step towards the FinTech firm obtaining a full Financial Services Licence.

The Age of Blockchain

Mar 08 2017

Tom Wallace and Tyler Kirk contributed an article to American Lawyer on the impact blockchain is having on companies around the world. The article discusses the potential business development opportunities and the ways companies can leverage the technology including what companies must do in order to capitalize on this emerging area.

To read the article, click here

SEC guidance on roboadvice

Mar 02 2017

By C. Todd Gibson and Michael W. McGrath

The US Securities and Exchange Commission’s staff has published information and guidance for investors and the financial services industry on the fast-growing use of “robo-advisers,” a catch-all term for investment advisers that use computer algorithms to provide investment advisory services online, often with limited human interaction. In light of the unique issues raised by robo-advisers, the SEC’s Division of Investment Management issued a Guidance Update on 23 February 2017 for investment advisers with suggestions on how robo-advisers can best comply with disclosure, suitability and compliance obligations imposed by the Investment Advisers Act of 1940. A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy, provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.

Paris stepping into London’s FinTech shoes?

Feb 27 2017

By Claude-Etienne Armingaud

Despite the lack of announcement by UK Government to give notification to the EU under Article 50 of the Lisbon Treaty of its decision to withdraw from the Union, France is already making its move to move into the steps of the former Fintech capital of Europe. On January 25-26, 2017, more than 1,500 people attended the second edition of the Paris FinTech Forum, encompassing more than 28 countries and 130 companies, from global players to startups.

The irony of the event location, set in the historical venue of the former Paris Stock Exchange building, was not lost to the Bank of France Governor Francois Villeroy de Galhau who wondered “Who would have imagined just a few years ago that a central banker would be speaking at a forum on innovation?” before recognizing that “For banks and insurers, the digital revolution is upsetting the traditional model for client relations” and “there are difficult choices ahead.”

FinTech in Islamic Finance public lecture

Feb 27 2017

By Jonathan Lawrence and Solomon Olukoya

The University of East London Centre for Islamic Finance, Law and Communities held a public lecture on 22 February 2017 focused on FinTech in Islamic Finance. The keynote speaker was Professor Volker Nienhaus, a Professor at the International Centre for Education in Islamic Finance in Malaysia. Professor Nienhaus dealt with four topics:

1. Islamic FinTech and crowdfunding regulations.

Research indicated that only three equity-based and two loan-based crowdfunding platforms were active and Shari’ah compliant in 2016. This was an indication that there was much more room for development in this area. FinTech in many Middle East countries is still unregulated despite recent movements in that direction via sandboxes and other methodologies.

Regulators in the UK and Ontario sign co-operation agreement

Feb 27 2017

By Jonathan Lawrence

Under a new Co-operation Agreement, FinTech businesses in Ontario and the United Kingdom will be able to seek support from their financial regulators as they aim to operate in the other’s market. Signed on 22 February 2017, the agreement allows the Financial Conduct Authority (FCA) and the Ontario Securities Commission (OSC) to refer to one another innovative businesses seeking to enter the other’s market. The regulators may provide support to innovative businesses to help reduce regulatory uncertainty and time to market.

The Agreement follows the creation of the FCA’s Innovation Hub in 2014 and the OSC’s OSC LaunchPad in October 2016. These initiatives are designed to help businesses with innovative ideas navigate the regulatory framework, support them through authorisation and facilitate their engagement with their respective regulator. The FCA and OSC have also committed to share information on emerging trends and regulatory issues pertaining to innovation in financial services.

Asia Pacific Alternative Finance Industry Survey launches

Feb 24 2017

By Jonathan Lawrence

The University of Cambridge, Monash Business School and Tsinghua University have launched the 2016-2017 Asia Pacific Alternative Finance Industry Survey with the support of twenty major industry associations across the region. This is the largest regional study to date focused on crowdfunding, peer-to-peer lending and other forms of alternative finance. Opening on 15 February 2017, this benchmarking survey aims to capture the key trends, developments, size, transaction volume and growth as well as the impact of changing regulations on the alternative finance markets across Asia in 2016.