Reed Smith Partner Publishes Article in FinTech Futures on Hot Topics in Financial Regulation

Howard Womersley Smith, a Partner in Reed Smith’s FinTech practice recently published an article regarding EBA Outsourcing Guidelines and Operational Resilience, and gives his suggestions on what FinTech companies should be prioritizing in this current market.

Read the full article on FinTech Futures.

FCA publishes final guidance on cryptoassets regulation

On 31 July 2019, the United Kingdom Financial Conduct Authority (“FCA”) published its final guidance on the types of cryptoassets that fall within the FCA’s current regulatory framework, clarifying the resulting obligations for firms and regulatory protections for consumers (“PS 19/22” or “the Policy Statement”).[1]

The Policy Statement provides market participants welcome pointers as to how the FCA applies the regulatory perimeter to different types of cryptoassets. It remains the case that definitive judgements as to the regulatory classification of specific cryptoassets can only be made by assessing each cryptoasset on a case-by-case basis, taking into account its particular features.

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Reed Smith FinTech Attorneys Discuss how US Regulators Look at Digital Assets on “Innovators with Jane King”

Reed Smith Partner Herb Kozlov and Counsel Jeff Silberman recently appeared on a segment of “Innovators with Jane King” to discuss the United States regulatory landscape and future outlook regarding digital assets. The segment can be found here.

U.S. Securities and Exchange Commission Publishes Joint Statement on Broker-Dealer Custody of Digital Asset Securities

On July 8, 2019 the U.S. Securities and Exchange Commission (the “SEC”) and the Financial Industry Regulatory Authority (“FINRA”) (both, the “Regulators”) published a Public Statement titled, “Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities” (the “Joint Statement”).  The Joint Statement follows many months of discussions with certain digital asset securities industry participants seeking registration with the SEC as broker-dealers.

The Joint Statement noted the Regulators’ discussions with these industry participants have contributed to the Regulators’ ever-evolving understanding of how certain federal securities laws and FINRA rules may affect or be applicable to those industry participants.  Many of these discussions were focused on finding a custody solution for digital asset securities that would meet the possession or control standards prescribed in the SEC’s Customer Protection Rule.  As a result, the Joint Statement explored the importance and potential applicability of the Customer Protection Rule to industry participants.

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FCA proposes retail ban on cryptocurrency derivatives

On 3 July 2019, the United Kingdom Financial Conduct Authority (the “FCA”) published its consultation paper on a proposed ban on the sale, marketing and distribution to retail clients of derivatives that reference certain types of cryptoassets (“CP 19/22”).[1]

Background

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Financial Action Task Force Publishes Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers

On June 21, 2019 the Financial Action Task Force (the “FATF”), published its long-awaited Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (the “Guidance”).  The FATF is tasked with setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

U.S. Treasury Secretary Steven Mnuchin noted in his remarks that the Guidance “will enable the emerging fintech sector to stay one step ahead of rogue regimes and sympathizers of illicit causes searching for avenues to raise and transfer funds without detection.”  The Guidance will have far-reaching consequences for virtual currency exchanges, wallet providers, and other virtual currency companies and natural persons transmitting similar value as a business if implemented by the FATF’s participating government bodies.

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FINRA Issues First Litigated Enforcement Action Against Crowdfunding Portal

 On June 5, 2019, a Financial Industry Regulatory Authority (FINRA) panel handed down its first enforcement action against a funding portal. DreamFunded, a crowdfunding platform, was banned from FINRA membership, and Manny Fernandez, DreamFunded’s CEO, was barred from association with any FINRA funding portal member. DreamFunded and Fernandez were further ordered to cover $15,900 in hearing costs.

Although FINRA previously settled with another crowdfunding website in 2016, the panel’s 148-page DreamFunded decision marks the first litigated enforcement action taken by FINRA applying the crowdfunding regulations included in the Jumpstart Our Business Startups Act (JOBS Act) signed in to law by President Obama in April 2012, and represents important insight for industry participants in an area with, as yet, no regulatory guidance.

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Consultation Paper published by UK Jurisdiction Taskforce to clarify the legal status of cryptoassets and smart contracts

The UK Jurisdiction Taskforce (UKJT) recently published a consultation paper requesting submissions from stakeholders working with, or interested in, cryptoassets, distributed ledger technology (DLT) and smart contracts. Submissions will inform a legal statement by UKJT which will aim to settle questions on the legal status of cryptoassets and smart contracts. UKJT is drawn from industry, government and the judiciary and was formed to facilitate the growth of the UK legal sector.

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

R. Raphael & Sons plc fined over £1.8 million by FCA and PRA for their card services programme

R. Raphael & Sons plc (Raphaels) has received fines totalling £1,887,252 from the FCA and PRA for repeated failings in relation to inadequate systems and controls supporting the oversight and governance of its outsourcing arrangements.

Raphaels outsourced certain functions that supported payment services for its prepaid and charge card programmes in the UK and Europe to a service provider. These functions included the authorisation and processing of transactions made by users on these cards and management of the card programme (Card Services). From 2016, Raphaels had 5.3 million prepaid cards in issue in the UK and other European countries with average monthly transaction volumes of over £450 million.

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

SEC Releases Commentary Applying Howey Test to Digital Assets

On April 3, 2019, the U.S. Securities and Exchange Commission (SEC) took a first step toward providing greater clarity on the key question of how to evaluate whether transactions involving issuance or sales of digital tokens are sales of securities subject to U.S. securities laws and regulations.

To read the full client alert, please visit reedsmith.com.

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