Kik Settles Unregistered Token Sale for $5 Million

By Trevor A. Levine and Patrick Kratzenstein on 6 November 2020 Posted in FinTech Trends, Regulatory Compliance

On October 21, 2020, the United States District Court for the Southern District of New York (SDNY) entered a final judgment on consent against Kik Interactive Inc. (Kik) after the Court previously determined that Kik failed to comply with the registration requirements of the Securities Act of 1933^[1] (Securities Act) as previously alleged by the Securities and Exchange Commission (SEC).[2] In the settlement, Kik agreed to (i) pay a $5 million penalty to the SEC, and (ii) provide the SEC with 45 days’ notice before Kik participates in any issuance, offer, sale, or transfer of any of digital asset within the next three years of this final judgment.

Thoughts on how to limit fraud risks in the APAC region

By Hagen Rooke on 2 June 2020 Posted in FinTech Trends

The cryptocurrency and digital-asset ecosystem in the Asia-Pacific region has seen rapid growth over recent years and is generating opportunities for novel business models, but is also giving rise to various types of fraud. While fraud risk in this sector is being mitigated by service providers such as cryptocurrency exchanges and digital-wallet operators implementing practical safeguards for the protection and monitoring of assets and transactions, and while comprehensive regulatory frameworks are being introduced across the region to address operational risk, fraudulent actors remain able to exploit cybersecurity and control weaknesses. Consequently, it remains paramount for industry participants to put in place calibrated and risk-based fraud mitigation measures, and to have the capability to investigate fraud effectively where it does occur.

Read the full client alert on reedsmith.com.

Telegram Abandons TON Blockchain

By Trevor A. Levine, Herbert F. Kozlov and Christine T. Parker on 22 May 2020 Posted in FinTech Trends, Regulatory Compliance

Earlier this month, Telegram Inc. announced that it was abandoning its development of the Telegram Open Network (TON). The move comes after the SEC won a preliminary injunction against Telegram in the Southern District of New York in March that blocked Telegram from launching TON and its native cryptocurrency, the Gram. The Court determined that the SEC had shown that there was a substantial likelihood it could prove that Telegram’s plan to distribute Grams into a secondary market constituted an unregistered securities offering. In a blog post accompanying the announcement, Pavel Durov, the founder of Telegram, acknowledged that the Court’s decision was the reason for TON’s shutdown. Durov expressed frustration that a U.S. court could prevent a foreign based project from commencing, stating, “The U.S. can use its control over the dollar and the global financial system to shut down any bank or bank account in the world.” For more on the Court’s decision, please read our alert.

Final report from the European Banking Authority regarding security risk management and ICT released

By Howard Womersley Smith on 2 December 2019 Posted in FinTech Trends, Regulatory Compliance

Last week (28 November 2019), the European Banking Authority (EBA) released the final version of its report entitled ‘EBA Guidelines on ICT and security risk management’ (the Guidelines) (link here) on the mitigation and management of financial institutions’ (FIs) information and communication technology (ICT) and security risks. We highlight below some of the key takeaways.

Read our full report on our sister site, the Technology Law Dispatch.

Basel Committee on Banking Supervision publishes report on implications of open banking

By Howard Womersley Smith on 25 November 2019 Posted in FinTech Trends, Regulatory Compliance

On 19 November 2019, the Basel Committee on Banking Supervision (BCBS) published its report on open banking and its implications for banks and banking supervision. The report builds on the BCBS’ previous findings on open banking and application programming interfaces (APIs) in its 2018 report (“Sound practices on the implications of FinTech developments for banks and bank supervisors”). We highlight findings from the report from a data protection perspective below.

Read the full report on our sister site the Technology Law Dispatch.

Reed Smith handles DBS Bank – Google payments processing partnership

By Hagen Rooke, Charmian Aw and Howard Womersley Smith on 18 November 2019 Posted in Payments

Reed Smith successfully represented DBS, Southeast Asia’s largest bank, in structuring and closing a strategic business partnership with Google. The arrangement will see Google make DBS payment systems available on Google’s G Pay platform, which will allow DBS customers using that platform to send and receive funds, and pay merchants.

The transaction was led by a Reed Smith cross-border team that included Singapore lawyers Hagen Rooke and Charmian Aw, and UK lawyer Howard Womersley Smith.

The Firm played a key role in structuring and negotiating the deal terms and in drafting the transactional documents. The advice provided by the Reed Smith team encompassed commercial, regulatory, data privacy and security, and intellectual property issues. Reed Smith’s relationship with DBS is led by New York partner David Adelman, the former US Ambassador to Singapore.

Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style Reed Smith Pte Ltd (hereafter, Reed Smith). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith’s Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.

Wyoming and Colorado Emerging as Leading Digital Asset Venues in the U.S.

By Herbert F. Kozlov and Arthur C. Surratt III on 28 October 2019 Posted in FinTech Trends, Regulatory Compliance

Intro and Background:

Technology innovation tends to happen at a rapid pace, as companies take on a “fail fast” approach to ensure that products are responsive to market demands. If technology advances at the speed of sound, the legal structures and regulations often struggle to keep up. In the blockchain and digital asset space, an antiquated regulatory framework does not attract innovative businesses or capital.

Wyoming Makes Its Move:

This year, Wyoming enacted a series of new laws to create a sound and “user-friendly” regulatory regime for digital assets and digital banking. This regime results in Wyoming being regarded as a leading venue for locating digital asset businesses

Wyoming’s new structures separate digital assets into three classes: digital securities, digital consumer assets, and virtual currencies. The first two categories, digital securities and digital consumer assets, track the current framework from the Howey test, which categorizes assets as either a security or a utility. The third category, virtual currencies, adds a definition of the unique nature of cryptocurrencies. Wyoming also codifies that all of these digital assets constitute intangible personal property.

SEC Obtains TRO against Telegram Group Inc.

By Herbert F. Kozlov, C. Neil Gray and Arthur C. Surratt III on 18 October 2019 Posted in FinTech Trends, Regulatory Compliance

On October 11, 2019 the U.S. Securities and Exchange Commission (SEC) filed an emergency action in the United States District Court for the Southern District of New York, and obtained a temporary restraining order against Telegram Group Inc. and its wholly-owned subsidiary, TON Issuer Inc. According to the SEC’s complaint,[1] the two offshore entities were conducting an unregistered offering of securities in the form of digital tokens in the U.S. and overseas that has raised more than $1.7 billion to finance the companies’ business, including the development of their own blockchain—the “Telegram Open Network” or “TON Blockchain”—and the popular mobile messaging application Telegram Messenger. In addition to the temporary relief already obtained, the SEC seeks, among other relief, an order preliminarily and permanently enjoining defendants from engaging in the conduct alleged, directing defendants to disgorge their ill-gotten gains, with interest, and imposing civil money penalties.

Alice v. CLS Bank: no friend to FinTech patents based on abstract ideas

By Lisa A. Chiarini and Herbert F. Kozlov on 18 October 2019 Posted in FinTech Trends

In a recent decision, the U.S. District Court for the Southern District of New York invalidated Western Express Bancshares, LLC’s (Western Express) U.S. Patent No. 8,498,932 relating to a method of transferring funds through a bankcard. The court’s decision nixed Western Express’ assertion of patent infringement claims against Green Dot Corporation (Green Dot) for the sale and offering of CashBack Visa® Debit Cards, Reloadable Prepaid Visa® Cards, Load Go Prepaid Visa® Cards, and Reloadable Prepaid Mastercard® Cards. Green Dot moved to dismiss the action on the ground that the ’932 Patent is invalid under the landmark 2014 U.S. Supreme Court decision in Alice Corp. v. CLS Bank. That case held that patent claims directed to an abstract idea without any inventive concept are ineligible for a patent under Section 101 of the U.S. Patent Code.

The court in Western Express found that the ‘932 Patent is “broadly directed to a ‘method of funds transfer […]’ [and that the] concept of transferring money through a bankcard is similar to other ‘fundamental economic practices’ that the Supreme Court and the Federal Circuit have held [to be unpatentable] abstract ideas.” Western Express Bancshares, LLC v. Green Dot Corporation, No. 19-cv-4465, 2019 WL 4857330, at *5 (S.D.N.Y. Oct. 2, 2019). The court also found that the patent lacked an inventive concept because it “relies on existing technologies and infrastructures that are inherent to the industries of banking and retail.” Id.

This decision comes on the heels of the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office invalidating five Nasdaq patents relating to electronic securities exchanges under the Alice test. These recent PTAB and district court decisions demonstrate that FinTech patents may not be grounded within the contours of patentable subject matter under Alice and its progeny, and may provide defendants with some measure of protection against charges of infringement.

MIAX continues to win FinTech patent battle with Nasdaq

By R. Eric Hutz, Lisa A. Chiarini and Herbert F. Kozlov on 16 October 2019 Posted in FinTech Trends

Miami International Holding Inc. et al. (MIAX) attained five victories within two weeks before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office. In successive final written decisions issued in October, the PTAB declared that five Nasdaq patents related to electronic securities trading systems are invalid under 35 U.S.C. Section 101. Section 101 defines patent-eligible subject matter. The PTAB determined that all five Nasdaq patents (U.S. Patent Nos. 6,618,707; 7,246,093; 7,921,051; 7,747,506; and 8,386,371) were directed to abstract ideas, which are excluded from patent protection under the statute. MIAX awaits the PTAB’s decision on an additional patent (U.S. Patent No. 7,933,827) challenged by MIAX. One remaining related Nasdaq patent is still under review by the PTAB.

The PTAB’s proceedings were triggered by Nasdaq’s assertion of patent infringement claims against MIAX in the U.S. District Court for the District of New Jersey in September 2017. Nasdaq alleged that MIAX had violated the challenged Nasdaq patents and used Nasdaq trade secrets to launch MIAX’s competing options exchanges.

MIAX has vigorously disputed all of Nasdaq’s claims, and the NJ District Court has stayed all of the litigation pending final determination of the Nasdaq patents.

In an unrelated lawsuit, Nasdaq has sued yet another exchange, Investors Exchange (IEX), claiming that IEX infringes other Nasdaq patents related to electronic securities trading. That case was filed in March 2018 and is also pending in the U.S. District Court for the District of New Jersey. IEX is also challenging Nasdaq’s patents under Section 101. The five PTAB decisions in MIAX’s favor may help to pave the way for IEX as well as help sharpen the focus of what is and what is not patent-eligible in the FinTech industry for FinTech companies seeking patent protection or defending themselves against infringement allegations involving FinTech patents.