K&L Gates is excited to be a part of Money20/20, the largest global event focused on payments and financial services innovation! Join us from October 22nd – 24th in Las Vegas, U.S.
We have several exciting events and programs taking place during the conference.
A network of global charities has begun using blockchain to provide costs savings and transparency to donations. Organisations including Oxfam, Save the Children, Mercy Corps and Christian Aid are three of the 42 members of the Start Network, which trialled the use of blockchain in humanitarian projects last year. The group will work on the project with start-up fund management platform Disberse.
Disberse uses blockchain, which records all transactions in a distributed digital ledger, to try to ensure that less money is lost on exchange rate fluctuations and traditional banking fees. It will also help charities to fight fraud, by tracking all transactions. The ultimate aim would be to track every dollar in aid, from original donor to each individual assisted.
By Giovanni Campi and Jonathan Lawrence
The European Commission recently announced that it is working on setting up an EU blockchain observatory. This will be a pilot project to build up technical expertise and regulatory capacity on topics related to blockchain and distributed ledger technology (DLT).
The EU blockchain observatory is being developed under the framework of the European Commission’s Task Force on FinTech, which was established following the adoption by the European Parliament of an own-initiative report on virtual currencies on 26 May 2016. Co-chaired by the European Commission’s Directorate Generals on Financial Services (DG FISMA) and on the Digital Single Market (DG CONNECT), the Task Force was set up in November 2016 to explore policy responses to FinTech. It is expected to deliver its final recommendations in the course of 2017.
By Judith Rinearson and Eric A. Love
The U.S. GAO has issued a long-awaited report on the fintech industry, which focuses on the regulation of marketplace lenders, mobile payments, digital wealth management platforms and distributed ledger technology (“DLT” – often referred to as blockchain). For each of these fintech industry “subsectors,” the GAO report details the nature of the subsector and how it operates, as well as its potential benefits and risks. Moreover, the GAO report addresses industry trends, regulation and oversight for each subsector.
Marketplace lenders. The GAO report indicates that marketplace lenders may provide expanded and quick access to credit at lower cost than banks, although the report also notes risks related to loan term transparency and certain protections for small business borrowers. Read More
By Tyler Kirk
The International Monetary Fund (“IMF”) just wrapped up a panel on “FinTech and the Transformation of Financial Services” here in Washington, DC. Presenting 4 propositions, the IMF invited the panelists and the audience to vote on whether they agreed or disagreed with each. Following the panel’s discussion on each proposition, the votes were compared. To the exclusion of all other Fintech topics, there was an almost singular focus on blockchain in each panelist’s response to the propositions. This focus by itself is illuminating, however the audience and the panel diverged dramatically on one proposition, whether FinTech will help rather than hinder regulation of AML and combatting the financing of terrorism (“CFT”). The panel agreed, 92% to 8%, that FinTech would assist with AML and CFT efforts. The audience was essentially split, agreeing 57% to 43%. Similarly, 40% of the audience believed FinTech posed a threat to financial stability while only 17% of the experts shared that view. The takeaway here is that, while those of us who are intimately familiar with this technology clearly understand its benefits, the general electorate does not. So, does Congress? Financial regulators? Now is the time to engage counsel and shape public policy.
By Jacob Ghanty
The FCA has published a discussion paper (DP) on the potential uses of distributed ledger technology (DLT) in financial services. The purpose of the DP is to start a dialogue on the risks and opportunities in relation to DLT. The FCA has gained exposure to DLT through its Regulatory Sandbox initiative.
The FCA describes DLT as “a set of technological solutions that enables a single, sequenced, standardised and cryptographically-secured record of activity to be safely distributed to, and acted upon by, a network of varied participants.” It states that industry efforts to investigate DLT have become especially concentrated over the past 24 months and, in the second half of 2017 into 2018, it expects to see firms moving on from “Proof of Concept” to “real-world” deployment of this kind of technology.
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.
By Tyler Kirk
In this installment of “The Future of Active Funds,” we explore how an active fund can get started with using blockchain technology. As we predicted in Part 2 of this series, 2017 is shaping up as the year blockchain applications will be brought to market, revolutionizing the way securities transactions are executed. As an initial matter, blockchain will reduce the time and cost of settling transactions. Given the cost advantages of passive funds and ETFs over active funds, there is less of an incentive for passives and ETFs to become early adopters of blockchain. However, blockchain is a solution for at least one major problem faced by active fund managers, the inability to compete on a cost basis.
So, what is an easy way for an active fund to get started with blockchain? According to a recent HBR article, a “single-use” implementation is best. Active funds can begin simply by accepting investments in bitcoin and redeeming investors in bitcoin. This will allow the fund’s adviser, board, and service providers to become comfortable with the technology. Further, as we previously posted, experimentation is easy thanks to blockchain cloud services offered by Microsoft, Amazon, and IBM. However, there are legal issues such as appropriate disclosures regarding transacting in bitcoin and custody under § 17(f) of the 1940 Act. For a good primer on the technology, read our article, Blockchain 101 for Asset Managers. Bottom-line, active managers need to have a blockchain strategy or risk being left behind.
As companies continue to look for practical uses for blockchain’s distributed ledger technology, we’re seeing interesting collaborations between major banks, global technology players, and nimble startup fintech companies. To be sure, banks are still focused on blockchain as it applies to financial services. BNY Mellon recently hosted a blockchain event at which presenters discussed whether blockchain should be viewed by banks as a disrupter or an opportunity. (Naturally the bank is looking for opportunity.) Of particular interest to the lawyers is the discussion of legal risks raised by blockchain, which include problems already in existence, such as data privacy concerns across geographic jurisdictions, and new problems created by blockchain, such as identifying where an asset is when no one bank or entity is the custodian of the record.
But the banks aren’t only experimenting with, dare we say, traditional financial uses for blockchain; they’re right in the mix trying to figure out how to exploit blockchain in industries far beyond the bitcoin world. BNY Mellon has also, for example, joined Cisco, Foxconn, security company Gemalto and several blockchain startups in a collaboration to develop a shared blockchain protocol for the Internet of Things. Blockchain could potentially improve security of IoT applications and create a tamperproof manufacturing, maintenance and supply chain history, areas not typically viewed as concerns of large financial institutions. Banks are experimenting with supply chain technology. Now that’s looking for opportunity in the world of disruption.
In a recent CoinDesk Op-Ed, Josh Stark makes a useful distinction between smart contract code and smart legal contracts. He describes smart contract code as a program or script executed on a blockchain—this code being what many commentators misleadingly refer to as “smart contracts.” This (mis)use of the phrase has led lawyers to quip that smart contracts are neither smart nor contracts, they’re just code. The better term for blockchain code-enabled legal contracts is “smart legal contracts.”
Although Stark helps us a lot with terminology, his argument goes a little askew in suggesting that smart contract technology enables machine to machine commerce without enforcement by legal entities and therefore is a new tool for solving the problem of trust between trading parties. Individuals and companies are legal entities and at least two of them hold an interest behind every machine operation executing smart contract code. Just because there is no intermediary between the two (or more) parties to the transaction does not mean that traditional legal contract principles do not apply. Smart contract code speeds up and increases integrity in trading transactions by reducing friction in forming, executing and enforcing a contract. It is a new tool in our toolkit, but the toolkit is for building traditional legal contracts. Offer and acceptance, coupled with consideration, are still the basic principles of contracts, whether they are smart, stupid, oral, written or digital.
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