On July 8, the staffs of the Division of Trading and Markets (TM) of the US Securities and Exchange Commission and of the Office of General Counsel of the Financial Industry Regulatory Authority, Inc. issued a joint statement on broker-dealer custody of digital assets that are also securities (Joint Statement). As explained in, and for purposes of, the Joint Statement, a “digital asset” refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” While all digital assets are not securities under the federal securities laws, a digital asset that is a security is referred to as a “digital asset security” in the Joint Statement. While the Joint Statement provides some insight on the issues under consideration by regulators regarding custody, it does not identify specific circumstances under which a broker-dealer could custody digital asset securities in a manner consistent with the financial responsibility rule applicable to broker-dealers.
We are always looking to identify good forums for keeping abreast of global fintech developments and trends. One such interesting platform was Cross-Border Fintech: Regulation & the Law 2019, held in London on June 6, where we heard some great insights into the current market trends in and the future of fintech. The conference was well attended, with representatives of many industry leaders, authorities, and industry bodies in attendance. The participation of many on the front lines of fintech from financial institutions, fintech startups, and industry bodies created a forum to share innovative ideas and trends that allowed participants—including us—to keep up with the latest innovation.
Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.
The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.
In a recently published statement, the Basel Committee on Banking Supervision (BCBS) has raised concerns relating to the risks that crypto-assets pose to the global financial system. While it acknowledges that banks do not currently have significant exposure to crypto-assets, it warns that these assets are increasingly becoming a threat to financial stability.
These concerns are founded on the volatility, constant evolution, and lack of standardization of crypto-assets, which the BCBS believes exposes banks to liquidity, credit, operational, money laundering, legal, and reputational risks. It considers that crypto-assets should not be referred to as “cryptocurrencies,” given that they fall short of being currencies that are safe mediums of exchange.
The Federal Trade Commission (FTC) will hold public hearings on March 25-26 in Washington, DC, on “Competition and Consumer Protection in the 21st Century.” Titled, “The FTC’s Role in a Changing World,” the hearings pose downstream risk to the fintech community, especially to smaller enterprises that may lack the resources and knowledge to comply with any complex new regime.
Our postings on All Things FinReg sometimes can take us far afield – in this case, to India.
Multinational companies, including those in the financial services and technology worlds, incorporate or acquire Indian subsidiaries to lower their costs and access a vast and growing market for customers and talent. If you want to be in India, however, you’ll need to understand and engage with the complex—and sometimes mystifying—local regulatory regime, because not doing so may cost you, as well as your banks and other financial services providers.
Recent action by the Consumer Financial Protection Bureau (CFPB) may bring some relief to fintech developers and the broader financial services industry as new products run into otherwise insurmountable regulatory hurdles that do not take into account or adapt to new technologies.
In a recent announcement by the CFPB’s Office of Innovation, its director has proposed the creation of a “Disclosure Sandbox” to encourage trial disclosure programs.
The greatest concern for many new developers and possible funding sources for those developers is that a new and innovative product may not be able to provide disclosures in the same way that traditional products have done, simply because consumer device sizes are shrinking while the amount of information regulators are requiring to be displayed without “clicking through” many screens is increasing. This poses a conundrum for the developer, which must reconcile competing issues and demands, including the size of a device screen, the limits of human eyesight—and patience!—and the demands of regulators.
The Joint Committee of the European Supervisory Authorities (the ESAs) issued a report on 7 January 2019 on the status of regulatory sandboxes and innovation hubs following consultations with national regulators across the European Union.
The report compares the innovation hubs and regulatory sandboxes established in 21 EU member states and three EEA states, flagging too that Hungary and Spain are in the process of establishing regulatory sandboxes.
The ongoing and accelerating pace of developments in the realm of cryptoassets in multiple jurisdictions warrants continual review and monitoring. In a report issued earlier this month on the implications of cryptoassets, the international Financial Stability Board (FSB) stated that, while cryptoassets do not currently pose a material risk to global financial stability, vigilant monitoring is needed in light of the speed of market developments. The FSB believes that due to risks such as low liquidity and the use of leverage, market risks from volatility, and operational risks, cryptoassets lack the key attributes of sovereign currencies and do not serve as a stable store of value or a mainstream unit of account. The financial stability implications of these cryptoasset characteristics include an impact on confidence in, and reputational risk to, financial institutions and regulators; risks arising from financial institutions’ exposures to cryptoassets; and risks arising if cryptoassets were to become widely used in payments and settlement. Therefore, regulators are encouraged to “keep an eye on things” as cryptoassets continue to spread throughout the world economy.