US – Page 8 – FinTech and Blockchain Law Watch

New York moves money transmitters to NMLS

Jul 13 2017

By Jeremy McLaughlin and Judith Rinearson

As of July 1, 2017, the New York Department of Financial Services (“DFS”) is using the Nationwide Multistate Licensing System and Registry (“NMLS”) to manage license applications and conduct ongoing regulation of nondepository financial institutions, including money transmitters, doing business in New York. The NMLS website is available here.

The decision by DFS should bring some additional ease to an otherwise cumbersome state-by-state money transmitter licensing regime. Applicants applying for a license in the NMLS system need only fill out a single set of applications for all states that participate (although, of course, individual state licensing requirements still differ). Money transmitters already licensed in New York will be able to transition their licenses to the NMLS system. In a June 29, 2017 press release, available here, DFS stated it had sent letters to each licensee providing detailed instructions on how to accomplish the transition.

DFS has lauded the move to NMLS as bringing efficiency to its regulatory oversight responsibilities, including enhanced consumer protection. According to a May 11, 2017 DFS press release, the move to NMLS will “allow DFS to provide better supervision of the money transmitter industry by linking with other states to protect consumers.”

RegTech: A U.S. regulator’s view on artificial intelligence in risk assessment

Jun 29 2017

By C. Todd Gibson and Evan Glover

On 21 June at the OpRisk North America 2017 conference in New York, Scott W. Bauguess, Acting Director and Acting Chief Economist of the U.S. Securities and Exchange Commission’s (“SEC”) Division of Economic and Risk Analysis (“DERA”) gave a keynote speech on the use of artificial intelligence by regulators. A transcript of the speech can be found here. Bauguess provided some interesting background on the utility and use of big data and machine learning at the SEC to identify potential misconduct by market participants and investment managers, and the emerging use of artificial intelligence.

Bauguess’ speech discussed the SEC’s use of AI in its regulatory framework, initially discussing machine learning. The SEC currently applies topic modeling methods, such as Latent Dilchlet Allocation (“LDA”). LDA reviews text-based documents (e.g., registration disclosures) and reports on where, and to what extent, particular words appear in each document. This occurs either by: analyzing the probability of words across documents, and within documents, to define the topics they represent (“unsupervised learning”); or incorporating human judgement and direction into the programming of the machine’s algorithms (“supervised learning”).

U.S. Regulation CC amendments reallocate risks for remote deposit check payments

Jun 19 2017

By John ReVeal

More than three years after proposing amendments to the Regulation CC to add new indemnities for remotely deposited checks (cheques), new warranties for electronic checks and electronic returned checks and new indemnities for electronically-created items, the U.S. Federal Reserve has at last issued final rules. These new rules also modify the expeditious return rules, including by making electronic returned checks subject to those requirements. The final rules were issued on May 31, 2017, and will take effect on July 1, 2018.

Perhaps the rules of most importance to the banking and emerging payments industries are those providing for indemnities for remotely deposited checks. An inherent problem with remote deposits is that the person depositing the check retains the original paper check and can negligently or intentionally deposit or cash it again. The bank on which the check is drawn will usually refuse to pay it twice, as it should. This leaves the writer of the check, the bank that accepted the remote deposit, and the bank or check cashing store that accepted the original paper check arguing over who should take the loss. Under current rules, unless the parties have entered into side agreements to allocate losses, the bank or check store paying the original check can normally bring a Uniform Commercial Code (UCC) holder-in-due-course claim against the check writer and that person has no remedy unless recovery is possible from the negligent or crooked payee that cashed the item twice.

To read the full alert, click here.

Going Dark: The use of anonymizing technologies in Dark Web crimes

Jun 18 2017

Like an iceberg, the majority of the internet is concealed from plain sight. The “Dark Web,” or websites and content that use anonymizing networks to provide untraceable access to unindexed sections of the web, comprises a segment of what lies beneath that which is visible through a Google search. Cliff Histed and Nicole Mueller contributed an article to American Lawyer on this topic. The article contains insight into the concerns shared by former FBI Director, James Comey, as well as European law enforcement authorities.

To read the article, click here.

Banks moving to improve consumer data sharing

Jun 13 2017

By Susan P. Altman

Banks are actively responding to consumer demand for convenient, high quality banking services by making it more appealing for consumers to share their personal information. A recent article in American Banker discusses announcements by Spanish banking group BBVA and Bank of America of new efforts to provide rich supplies of customer data to third party developers and others.

BBVA announced the launch of its open banking program to make eight of its application programming interfaces (APIs) available to developers, who would in turn create new value added services. The new services are expected to provide enhanced customer experiences by improving conversion, onboarding processes, payment management, identity verification, and consumer analytics, among other things. The new applications based on these APIs are only granted access to personal consumer information if the customer expressly accepts the service’s activation, thereby letting the consumer control with whom they want to share their data. The open APIs strategy is a key element of BBVA’s efforts to become an innovation engine for other companies to develop uses which never would have occurred to the bank acting alone. The program is currently available in Spain, with rollout in the U.S. coming later this year, followed by additional country rollouts.

Silk Road website founder loses appeal of conviction and life sentence

Jun 05 2017

By Nicole C. Mueller and Clifford C. Histed

On May 31, 2017 the United States Court of Appeals for the Second Circuit unanimously affirmed the conviction and life imprisonment of Ross Ulbricht for drug trafficking and crimes associated with his creation and operation of the online marketplace known as Silk Road. Among others challenges, Ulbricht argued on appeal that he should have been allowed to introduce evidence regarding former government agents who pled guilty to stealing Bitcoins as they investigated Silk Road and Ulbricht. The Second Circuit disagreed, finding that while “the shocking personal corruption of these two government agents disgraced the agencies for which they worked,” it had nothing to do with whether Ulbricht operated Silk Road. The Second Circuit similarly found Ulbricht’s other arguments unavailing, namely that (1) the government’s violated his Fourth Amendment rights through the use of pen registers and trap and trace devices to monitor IP addresses associated with internet traffic to and from Ulbricht’s wireless home router, and the search and seizure of his laptop and Facebook, Google accounts; (2) he was denied a fair trial due to the preclusion of certain testimony and evidence; and (3) it was improper for the court to consider six drug-related deaths relevant to his sentencing.

The changing nature of payments in the US and UK

May 11 2017

By Judith Rinearson

Rarely does a FinTech lawyer have the opportunity to experience payments regulations in two very different locations. US K&L Gates Partner, Judith Rinearson, had the opportunity to do just that when she spent 20 months in London working as a payments regulatory lawyer. Her insightful commentary on the two different approaches to payments regulations was recently published in the UK’s Law 360.

To read the article, click here.

Blockchain Has a Perception Problem

Apr 20 2017

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.

NetSpend Settles FTC Claim Regarding Prepaid Debit Cards

Apr 20 2017

By Julia B. Jacobson and Eric A. Love

NetSpend Corporation has reached a settlement with the U.S. FTC about the FTC’s claims that NetSpend’s advertisements deceived consumers about the availability of funds deposited on general purpose reloadable prepaid cards (GPR Cards).

On its website, NetSpend indicates that its target customers are those without a traditional bank account or who “rely on alternative financial services.” According to the FTC’s November 2016 complaint, NetSpend’s advertising promises “guaranteed approval” and “immediate access” to funds that are “always available.” Instead, the complaint alleges, cardholders experienced delayed or denied access to funds on their GPR Cards and NetSpend depleted account balances by charging inactivity fees and often delayed resolving and providing provisional credit for account errors. The FTC also noted in its complaint that thousands of customers “complained about NetSpend’s practices to government authorities, Better Business Bureau and NetSpend itself.”

The Future is Arriving Quickly: Global Asset Manager Migrating to Computer-Based Management

Apr 02 2017

By C. Todd Gibson

On 29 March, a large asset manager announced a strategic overhaul of portions of its active equity management approach, focusing on the use of quantitative modeling over “traditional” human active management. Click here for a copy of the press release.

Just a couple of weeks ago, our Pittsburgh office hosted its inaugural artificial intelligence program, The Artificial Intelligence Gateway For the Investment and Business Community that featured keynote speakers and panel discussions regarding the increasing awareness of artificial intelligence (AI) across all industries and the impact this new form of technology will have on business. It was fascinating to hear from our keynote speakers about how AI actually works, how AI is used in self-driving cars, and future use of AI in various industries, from manufacturing to financial services. In addition, one of the panels, focused on robo-advice and AI, where we discussed technological growth and how AI might be used in the investment management industry and some of the related regulatory and fiduciary issues.

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