US – Page 12 – FinTech and Blockchain Law Watch

Blockchain… A Threat to Safety, Soundness & Resiliency?

Jul 04 2016

On June 21, 2016, the U.S. Financial Stability Oversight counsel (“FSOC”) released its 2016 annual report. The purpose of the annual report is to summarize the FSOC’s current views on the U.S. financial system according to its mission to: (1) identify risks; (2) promote market discipline; and (3) respond to emerging threats. Notably, the 2016 report identified the use of blockchain as an emerging business practice requiring vigilant monitoring by financial regulators.

Since its establishment in 2010, the FSOC has issued six annual reports. This is the first time FinTech issues such as the blockchain have been identified as a potential risk to U.S. financial market stability. The FSOC noted that the use of blockchain protocols by financial institutions could positively impact the U.S. financial system by introducing efficiencies and reducing costs. However, according to the FSOC, “Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale.”

Further, the FSOC cautioned that a “considerable degree of coordination among regulators” may be required given the distributed nature of blockchain networks. Noting that the U.S. financial system is constantly evolving, Treasury Secretary Jacob Lew advocated for regulators to remain vigilant in order to maintain the safety, soundness and resiliency of the U.S. financial system. Yet, beyond vigilance, the FSOC did not recommend any specific action on blockchain by regulators, preserving the current hands-off approach.

The FSOC 2016 report can be found here.

Project Bletchley

Jul 04 2016

By Tyler Kirk

On June 15, 2016, Microsoft released a white paper introducing Project Bletchley, Microsoft’s next iteration on its blockchain as a service (“BaaS”) product. In late 2015, Microsoft announced that it would be leveraging its cloud platform, Azure, to provide a low-risk sandbox for customers to gain experience with how blockchain may be applied in various business scenarios, such as supply chain management. Bletchley is positioned as incorporating the latest innovations on the blockchain protocol in the Azure cloud service.

Generally, blockchain is a decentralized digital ledger. Blockchain differs from traditional centralized ledgers because the blockchain protocol uses encryption combined with distributed copies of the ledger to replace the need for a third-party to serve as the ledger’s trusted guardian. Further, blockchain is more efficient because all transactions are mathematically provable and do not require a multi-day verification process. The protocol is append only, and distributed, thus every participant receives an update to their copy of the ledger with the latest transactions. Yet, this revolutionary framework, blockchain 1.0, was just the beginning.

CFPB Takes Aim at Marketplace Lenders

May 16 2016

By David Christensen

Last Fall, in its 2015 Rulemaking Agenda, the Consumer Financial Protection Bureau (“CFPB”) signaled its intent to “to develop rules to define larger participants in markets for consumer installment loans.”[1] Under the Dodd-Frank Act, the CFPB is authorized to issue “larger participant” rules to define entities in a particular market for consumer financial products or services. The issuance of such rules opens the door for supervisory and examination authority over such entities. Fast forward to Spring 2016, when the CFPB announced that it is accepting complaints from consumers regarding alleged problems with online marketplace loans, and it appears that the CFPB has marketplace lenders squarely in its sights.[2]

Treasury releases white paper on marketplace lending

May 12 2016

By Sean P. Mahoney

On May 10, 2016, the US Treasury issued its much anticipated white paper on marketplace lending. The whitepaper follows Treasury’s July 2015 request for information. The white paper highlighted some keys risks and made six concrete recommendations for future action.

More specifically, the white paper noted that the use of sophisticated data-driven algorithms may result in unexpected correlations that could result in disparate impacts and give rise to fair lending violations. The use of data outside of regulated credit reports also creates the risk that borrowers may have no redress if information used as a basis for an underwriting decision proves inaccurate. Treasury made it a point to note, however, that marketplace lenders that partner with banks may be subject to regulation and examination by prudential bank regulators under the US Bank Service Company Act.

FinCEN proposal to impose AML obligations on U.S. Funding Portals

May 09 2016

By C. Todd Gibson, Michael McGrath and Ken Juster

On April 4, 2016, the U.S. Financial Crimes Enforcement Network (a bureau of the U.S. Treasury Department) (“FinCEN”) proposed rules that would require “funding portals” established under new Regulation Crowdfunding to implement policies and procedures designed to prevent money laundering, terrorist financing, and other financial crimes.

Current regulations under the Bank Secrecy Act (“BSA”) define a “Broker or Dealer in Securities” as an entity registered, or required to be registered as a broker or dealer under the Securities Exchange Act of 1934. Certain funding portals that operate in compliance with Regulation Crowdfunding are exempt from such registration, and therefore fall outside of the BSA definition. FinCEN is proposing to amend the defintion of a “Broker or Dealer in Securities” to specifically include funding portals, which will have the effect of imposing the same BSA obligations on funding portals as are currently imposed on fully-registered broker-dealers, such as filing suspicious activity reports.

A copy of the proposed amendment can be found here.

SEC provides U.S. crowdfunding guidance to investors

May 03 2016

By C. Todd Gibson, Michael McGrath, Ken Juster

The SEC recently issued guidance to potential investors in crowdfunding offerings in the form of a Q&A posted on the SEC website, which can be found here. This guidance, which is intended to educate investors regarding the rules governing crowdfunding in the U.S., was issued in anticipation of the pending effectiveness of new Regulation Crowdfunding on May 16, 2016. K&L Gates has prepared a detailed summary of Regulation Crowdfunding and the exemption from broker-dealer registration available to intermediaries known as “funding portals,” which can be found here.

Intermediaries were first able to submit forms to register as a funding portal with the SEC and FINRA beginning on January 29, 2016. A list of approved funding portals is expected to be available on FINRA’s public website in the near future.

U.S. Regulatory Scrutiny of Robo-Advisers and Other Providers of Digital Investment Advice

Apr 07 2016

By C. Todd Gibson

Recently, regulators in the US have issued guidance with respect to providers of automated investment advice, including robo-advisers. On April 1, the Massachusetts Securities Division (“MSD”) issued guidance questioning whether a Massachusetts state-registered robo-adviser could fulfil its fiduciary obligations without some element of human-provided services (including initial and ongoing due diligence), stating that the registration of such advisers would be reviewed on a case-by-case basis. Of particular concern to the MSD were “fully-automated” robo-advisers, characterized as those that: 1) do not meet with or conduct significant (or any) due diligence on a client, 2) provide investment advice that is minimally personalized, 3) may fail to meet the high standard of care that is imposed on the appropriateness of investment advisers’ investment decision-making, and 4) specifically decline the obligation to act in a client’s best interests.

FINRA, the US self-regulatory organization for broker-dealers, also recently published a report after having discussions with member firms and others with respect to the use of “digital investment advice.” Although the report did not purport to create any new legal requirements or change any existing regulatory obligations for brokers, FINRA identified certain practices they believe brokers should consider when using digital tools. The report focused on digital tools (including robo-advice) used by firms to perform client services.

US investment advisers, through application of the anti-fraud provisions of the Investment Advisers Act of 1940 and interpretations of US courts and regulators, owe a general fiduciary duty to their clients. With the recent proliferation and growth of complex, automated investment advice, regulators are becoming more focused on the use of such tools in the context of existing regulatory and fiduciary obligations.

The MSD policy statement can be found here and the FINRA report can be found here.

The Federal Reserve Takes Steps Towards Developing Faster Payments and Settlement

Mar 30 2016

By Sean Mahoney

The Federal Reserve announced that it engaged McKinsey & Company to help evaluate faster payments solution proposals being solicited by the Federal Reserve from members of its Faster Payments Task Force. The Task Force consists of representatives of participants in the financial services system, including banks and technology firms. This step can be viewed as part of a process of making improvements to the US payments system. It is worth monitoring as any such improvements will likely lead to commercial opportunities.

See the press release here.

K&L Gates London Office to Host Breakfast Roundtable Forum on US Marketplace Loan Investments, March 10, 2016

Feb 24 2016

By Tony Nolan

On March 10, 2016 at 8:30am the London office of K&L Gates will host a Breakfast Roundtable on the US Regulatory Landscape for Marketplace Lending. The Roundtable will cover a range of topics that are relevant to entering into the US market, focusing particularly on ways to facilitate a broad distribution of investments.

New York partner Anthony Nolan and London partner Jacob Ghanty will lead a discussion of how US regulatory and compliance issues may affect UK lenders and investors that are considering entering the US online / P2P / marketplace lending market.

Financial Innovation Now

Jan 31 2016

By Jim Bulling and Michelle Chasser

Rival technology powerhouses Apple, Google, Amazon, Intuit and PayPal have joined forces to form an advocacy group known as Financial Innovation Now, focused on enabling technological change within the finance industry. The group will work with policy-makers and key stakeholders to promote policies and regulations that encourage greater innovation in the financial services sector as well as ensuring that policy-makers understand the advantages that technology can bring to the industry.

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