Blockchain Technology Report Released by ESMA

On February 7, 2017, the European Securities and Markets Authority (“ESMA”) released a Report on Distributed Ledger Technology (“DLT”) (also known as “blockchain” technology) Applied to Securities Markets (the “Report”) that considers DLT’s effect on securities markets and fit to existing regulatory infrastructure.  The Report ultimately concludes that while many of the laws and regulations currently in place can be applied to DLT, “international regulatory engagement and cooperation are paramount . . . to ensure both that the DLT does not create unintended risks and that its benefits are not hindered by undue obstacles.”  Additionally, in an appendix to the Report, ESMA summarizes the comments of market participants to its June 2016 Discussion Paper.  Last month, the U.S. Financial Industry Regulatory Authority (“FINRA”) similarly acknowledged the need for international coordination in its own Report on DLT (see Reed Smith’s summary here).


To read a complete analysis of the report, please visit our sister site, the Financial Regulatory Report.

Blockchain Technology Report Issued by FINRA

The Financial Industry Regulatory Authority (“FINRA”) published a report on January 18, 2017, regarding Distributed Ledger Technology (“DLT”) (also known as blockchain technology) that provides an overview of different DLT use cases and related regulatory considerations for market participants (the “Report”).  The Report provides valuable guidance to both the financial services industry and the broader technology sector as U.S. lawmakers and regulators begin to focus their attention on the development of these swiftly evolving technologies.   FINRA requests public comment on its conclusions, highlighted in this article, by March 31, 2017.

To read a complete analysis of this report, please visit our sister site, the Financial Regulatory Report.

Illinois Releases Proposed Guidance on Application of State Money Transmission Law to Digital Currency Activities

On November 30, 2016, the Illinois Department of Financial and Professional Regulation (IDFPR) issued a proposed “Digital Currency Regulatory Guidance” (the Guidance) regarding the application of the Illinois Transmitters of Money Act (TOMA) to various digital currency activities. The Guidance applies only to “decentralized digital currencies,” which are not issued by a particular person or entity, do not have a central administrator, and do not have a central repository.  Therefore, the Guidance would apply to activities involving Bitcoin and most other cryptocurrencies.  The IDFPR is accepting comments on the Guidance until January 18, 2017. To read more, click here.

OCC Announces Special Purpose Charters for Fintech Firms

On Friday December 2nd, the Officer of the Comptroller of the Currency (OCC) announced that it would consider granting financial technology (fintech) firms special purpose national bank charters.  The OCC’s proposal constitutes a major development for fintech companies and the financial services industry more generally.  This move builds on recent actions taken by the OCC in an attempt to promote financial innovation, including releasing a white paper regarding responsible innovation in the financial industry in March, and announcing the creation of an Office of Innovation in October.

Under the OCC’s proposed framework, fintech companies may apply for a special purpose national bank charter—the same type of charter that the OCC has granted primarily to trust banks and credit card banks. In a release summarizing the proposal, the OCC claims that the proposed system will improve safety and soundness of fintech institutions, promote consistency in the application of laws and regulations, ensure fair treatment of customers, and strengthen the federal banking system.  Comptroller of the Currency Thomas J. Curry also explained that the banking system will be healthier if fintech companies “enter the system through a clearly marked front gate, rather than through some back door.”

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SEC Forum on FinTech Innovation Discusses Leveraging the Blockchain to Enhance Transparency, Verifiability and Governance in Corporate Processes

In a panel at the Securities and Exchange Commission’s recent forum on Innovation in FinTech, experts discussed blockchain’s potential role in corporate processes such as by providing an unalterable history of transactions, by tracking products and documents throughout their lifecycles, and by dividing the risks and costs of maintaining an authoritative system of record among multiple parties. While the blockchain presents some implementation challenges and technical limitations, it provides opportunities for cost-savings and efficiencies for industries ranging from financial markets, insurance and mortgages to music and art. To read more, click here.

Swiss Government establishing “crypto-bank” as new category of Financial Institution and creating new FinTech company license

On, November 2, 2016, during its weekly meeting, the Swiss Federal Council (the Council), the executive council which serves as the collective executive head of the government of Switzerland, requested an easing of the Swiss regulatory framework for providers of innovative financial technologies (FinTech).  The Council stated that it desires forward thinking comprehensive solutions for the emerging FinTech industry and is thus recommending an approach with three elements: (1) provisions regarding holding money in settlement accounts, which is helpful to crowdfunding services; (2) a regulatory FinTech innovation sandbox, which would include the current money laundering provisions but otherwise would not (yet) require monitoring by the Swiss Financial Market Supervisory Authority (FINMA); and (3) a new fintech license granted by FINMA, for institutions restricted to the deposit-taking business (acceptance of public funds) and thus not operating in the lending business, allowing less stringent regulatory requirements to apply rather than heavier regulatory burdens imposed on classical banks, including lower capital requirements.

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State AGs Double Down Focus on Financial Services, including FinTech

State attorneys General (AGs) continue to emerge as major regulators of financial services and show little sign of being cowed by their federal  counterparts….or efforts to preempt state authority.

This week, representatives of the consumer protection divisions of the AGs of nearly all 50 states plus officials from the FTC and CFPB met in Phoenix to compare notes and coordinate activity on a range of issues impacting consumers.  The meeting was sponsored by the National Association of Attorneys General (NAAG) which serves an educational function for AG offices, and also coordinates legal and policy issues to serve its AG members.  Issues discussed at NAAG meetings often signal the onset of increased legal and regulatory activity by AGs.

Among the issues addressed, none was more prominent that those involving consumer financial services.  Key panels at the meeting addressed state involvement in FinTech, Payday Lending and Structured Settlements.

“FINTECH – The New Frontier” in particular was keyed up for prominent discussion and included briefings by the FTC, the Utah Department of Financial Institutions and academics.  A particular theme that emerged that should be top of mind for FinTech companies is that many AGs believe they already have the tools to regulate and pursue legal matters regarding FinTech under state consumer protection statutes governing unfair or deceptive acts and practices (aka, “UDAP” laws) notwithstanding that new products may not be subject to laws specifically addressing them. Another area of concern, particularly for non-bank FinTech firms hoping for some relief from state-by-state regulatory compliance and enforcement through potential preemptive rules by the OCC, is that efforts to preempt state actions and regulations with respect to FinTech will be widely resisted by the states.

In light of this, as FinTech firms continue to expand and refine their products, they would do well to keep their eye on activities in the states.

CFPB Takes Enforcement Action Against FinTech Lender

Robert Jaworski reviews the September 27, 2016, Consumer Financial Protection Bureau (CFPB) Consent Order (the “Order”) with Flurish, Inc d/b/a LendUp (LendUp), a startup online lending company based in San Francisco that offers single-payment loans and installment loans in 24 states. The Order sends a powerful message to online lenders to make sure their legal houses are in order before opening their doors to customers. Read more.



Supreme Court Clarifies Injury-In-Fact Standing Requirement in Spokeo, Dealing Impediment to “Gotcha” Statutory Lawsuits

Article III of the U.S. Constitution limits federal courts’ jurisdiction to actual cases and controversies only.  When a plaintiff seeks to sue in federal court despite having suffered no actual injury, the Constitution’s case or controversy requirement is not satisfied and the case cannot proceed.  In other words, when a plaintiff has suffered no injury, he or she lacks standing to sue in federal court.

This principal was central to the U.S. Supreme Court’s recent decision in Spokeo, Inc. v. Robins.  In that case, the high court considered whether Plaintiff Thomas Robins satisfied the case or controversy requirement where he alleged that Spokeo committed a mere technical violation of a consumer protection statute (in this case, the Fair Credit Reporting Act or “FCRA”), but where Plaintiff did not allege any actual harm.

Plaintiff alleged that Spokeo disseminated false information on the Internet related to his wealth and education, causing him to fear that potential employers would rely on inaccurate information when evaluating his applications for employment.  Spokeo countered that Plaintiff’s fear that potential employers would rely on inaccurate information, without more, did not constitute actual harm.

A district court judge ruled in 2010 that Plaintiff lacked standing to sue in federal court because he suffered no actual injury.  In 2014, the Ninth Circuit reversed, ruling that the alleged FCRA violation amounted to an actual injury.

On Monday, in a 6-2 decision written by Justice Samuel Alito, the Supreme Court ruled that Article III requires allegations of concrete injury, notwithstanding the alleged FCRA violation.  While the Court reaffirmed that “[t]he violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury-in-fact,” the majority held that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right[.]”

“Article III standing requires a concrete injury even in the context of a statutory violation[,]” Justice Alito wrote.  “For that reason, [Plaintiff] could not … allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.”

While the decision is not a panacea to the wave of consumer protection suits being filed against FinTech companies, the Court’s endorsement of a concrete injury standard bodes ill for plaintiffs bringing “gotcha” statutory lawsuits.

Reed Smith hosts FinTech roundtable discussion

On April 25, Reed Smith hosted a FinTech lunch event at its London offices, led by partners Tamara Box, Nola Beirne, Jacqui Hatfield, Cynthia O’Donoghue, Claude Brown, Simon Grieser, Mike Young and Mark Melodia. Our external guests and Reed Smith lawyers were joined by our guest speaker Adam Afriyie, MP for Windsor and Chair of the Parliamentary Office of Science and Technology.

Adam Afriyie MP discussed the challenges and opportunities facing FinTech companies, reiterating the importance that the current government places on FinTech policy. Adam strongly believes that business enterprise, and in particular, FinTech, is the way of the future for Britain and that, from a regulatory perspective, Britain is the most enterprise- and business-friendly place on earth. He found it hard to identify problems with the regulatory environment for FinTech and shared his long term hope that, once the deficit is under control, UK corporation tax will be lowered to encourage more companies to invest in Britain. Adam challenged the floor to consider any regulatory challenges facing the FinTech market, urging the audience to think of constructive points to take to Westminster.

From the Reed Smith side, Jacqui Hatfield spoke on FCA regulation and Project Innovate, where new and established businesses (both regulated and non-regulated) are able to introduce innovative financial products and services to the market. The project is part of a regulatory ‘sandbox’, i.e., a ‘safe space,’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of pilot activities.

Reed Smith’s Cynthia O’Donoghue then discussed the wider FinTech landscape, calling for a new attitude of embracing technology to take FinTech to the next level, rather than as a ‘disruptor’. Cynthia reiterated the importance of financial services companies embracing FinTech and gave the example of insurance black boxes and banking apps on phones as examples of where FinTech is making a real difference to society. She also emphasised that all new FinTech opportunities are dependent on trust from the public. If the public doesn’t trust them, the projects won’t get off the ground.

Finally, Reed Smith’s Mike Young discussed the FinTech environment in the UK from a fundraising and development perspective. He mentioned that £500 million in fundraising was raised by FinTech companies in 2015, and that a quarter of tech mergers globally happened in the UK in 2015. This reiterated Adam’s point that the UK is the most business-friendly place in the world for regulation.

For more information on Reed Smith’s global FinTech practice, click here.

Jacqui photo