Welcome to Shearman & Sterling’s FinTech Blog, where we provide you with insight on key trends in the FinTech ecosystem. Here you can find relevant information with the latest on digital banking, FinTech regulation, digital assets, blockchain, AI, and more.
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CFTC Requests Feedback on Ether and the Potential Introduction of Ether Derivatives Contracts
12/13/2018In order to further its understanding of Ether and its use on the Ethereum Network, the Commodity Futures Trading Commission (CFTC) earlier this week issued a request for input (RFI) on several topics related to the virtual currency. The RFI poses a number of questions in respect of Ether, including its functionality, underlying technology, governance, markets, cybersecurity and custody, among other things. In addition, the CFTC asks several questions regarding Ether’s susceptibility to market manipulation and the potential introduction of Ether derivatives contracts.
The CFTC said the requested feedback will inform the work of the CFTC and its LabCFTC initiative to enhance the agency’s oversight of virtual currency markets and develop regulatory policy. The CFTC also noted that it hopes to gain a greater understanding of the similarities and differences between Ether and bitcoin, along with potential risks and opportunities uniquely posed by Ether.
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SEC Pushes Bitcoin ETF Decision to February
12/12/2018On December 6, 2018, the Securities and Exchange Commission (SEC) announced that it is delaying a decision on whether to approve a proposed rule change requested by the Cboe BZX Exchange that would allow it to list and trade shares of an exchange-traded fund (ETF) issued by the VanEck SolidX Bitcoin Trust. The SEC said it would make a final decision on the proposal by February 27, 2019.
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Three Central Banks Explore Advantages Of Wholesale Central Bank Digital Currencies
11/27/2018On November 15, 2018, the Bank of England, the Bank of Canada and the Monetary Authority of Singapore published a joint report entitled, "Cross-Border Interbank Payments and Settlements." Referring to current industry projects to address existing problems in cross-border payments affecting end-users, commercial banks and central banks, the report analyzes these issues and discusses proposed new models for processing cross-border transactions. The report sets out three models for cross-border payments and settlements and discusses the key considerations and dependencies of each model. Each model is then assessed against the existing identified challenges in cross-border payments.
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SEC Charges Digital Asset Trading Platform Founder for Operating Unregistered Exchange
11/12/2018On November 8, 2018, the Securities and Exchange Commission (SEC) accused the founder of a digital asset trading platform of failing to register as a national securities exchange. Without admitting or denying the charges, the founder agreed to pay $300,000 in disgorgement and a $75,000 penalty, and to cease and desist from future violations of Section 5 of the Securities Exchange Act of 1934 (Exchange Act).
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UK Crypto-Assets Task Force Outlines the Path to Crypto-Asset Regulation
11/06/2018The U.K. Crypto-Assets Task Force has published its Final Report. Established in March 2018 by the U.K. Chancellor of the Exchequer as part of the U.K. government's FinTech Sector Strategy, the Task Force comprises representatives from HM Treasury, the U.K. Financial Conduct Authority (FCA) and the Bank of England.
The Task Force engaged with over 60 firms and other stakeholders to seek their views on topics including: the trajectory of the industry, the risks, benefits and underlying economic value of crypto-assets and the U.K.’s future regulatory approach. Stakeholders were of the view that there is a lack of regulatory clarity in the U.K. and that regulation should be introduced to support the legitimate players in the crypto-assets market. It is also crucial in mitigating risks. There were also calls for regulatory and tax frameworks to be aligned.
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New AML Recommendations for Virtual Assets
10/25/2018Citing an “urgent need” to step up global efforts to prevent the use of virtual assets for crime and terrorism, the Financial Action Task Force (FATF) updated its recommendations for the regulation of virtual assets. Among other things, the FATF recommended broader definitions of “virtual assets” and “virtual asset service providers” to include exchanges, wallet providers and certain initial coin offering service providers.
The FATF is an inter-governmental policy-making body responsible for promoting the implementation of legal, regulatory and operational anti-money laundering (AML) and combatting the financing of terrorism (CFT) standards. Its recommendations are not binding law, but rather a set of standards intended for member nations to incorporate within their rulemakings. FATF President Marshall Billingslea has said that the organization also plans to issue AML/CFT rule recommendations in respect of virtual assets and clarify how the FATF expects such rules to be enforced by June 2019. Additionally, the FATF plans to review the scope of activities covered under its amended recommendations and glossary within the next 12 months and consider whether further updates are necessary.
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EU Supervisory Authority Reports on ICO and Crypto-Asset Risks and Potential Regulation
10/19/2018The European Securities and Markets Authority (ESMA) has published an own-initiative report prepared by its Securities and Markets Stakeholder Group (SMSG). The purpose of the report is to provide advice to ESMA on steps it might take to contain the risks of initial coin offerings (ICOs) and crypto-assets, on top of existing regulation.
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Fidelity Investments Announces Launch of Digital Assets Business
10/16/2018Fidelity Investments yesterday announced the launch of Fidelity Digital Asset Services, LLC (Fidelity Digital Assets), a new company that will provide custody, trade execution and client services for digital assets to institutional investors, including hedge funds, family offices and market intermediaries. Fidelity Investments said that it plans to leverage its existing infrastructure to support the new company and further market adoption of digital assets. Fidelity Digital Assets reportedly will have its services “generally available” to the market at some point during early 2019.
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Financial Stability Board Recommends Vigilant Ongoing Monitoring of Crypto-Assets
10/10/2018The Financial Stability Board has published a report entitled "Crypto-asset markets: Potential Channels for future financial stability," in which it outlines its findings following its assessment of the crypto-asset markets in 2018.
The FSB has considered the primary risks present in crypto-assets markets as low liquidity, volatility, leverage risks, as well as technological and operational risks (including cyber security risks). The FSB considers that crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value or a mainstream unit of account. Based on the available information, the FSB considers that crypto-assets do not pose a material risk to global financial stability at this time. However, the FSB's report highlights that there could be financial stability implications from these primary risks through a variety of transmission channels including: (i) confidence effects; (ii) financial institutions' exposures to crypto-assets, related financial products and entities that are financially impacted by crypto-assets; (iii) the level of market capitalisation of crypto-assets; and (iv) the extent of their use for payments and settlements.
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Federal Judge Affirms CFTC’s Authority to Police Virtual Currency Fraud
10/03/2018On September 26, 2018, the U.S. District Court for the District of Massachusetts issued an order confirming that the Commodity Futures Trading Commission (CFTC) maintains the authority to police virtual currency fraud. The order was issued in response to a motion to dismiss charges against My Big Coin Pay, Inc. and several individuals for operating a fraudulent virtual currency scheme through which they solicited customers to purchase a virtual currency known as My Big Coin (MBC).
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SEC Division of Investment Management Publishes Feedback from Cryptocurrency ETP Inquiry
10/02/2018In January, the Securities and Exchange Commission (SEC) Division of Investment Management published a widely cited open letter to the industry in which the Division asked a series of questions about how it should consider risks associated with bitcoin- and other cryptocurrency-backed exchange-traded products (ETPs). The SEC staff expressed concerns about whether the bitcoin markets were sufficiently mature and liquid for registered funds to invest in that class of asset, and flagged several other issues related to valuation, liquidity, custody, ETP arbitrage and potential manipulation, among other things.
Now the Division is starting to post feedback it received from that inquiry. To date, the SEC has posted six letters: one from an exchange, one from a trade association, one from an investment manager and several from individual market participants. Presumably, this is the leading edge of what will be more and more responses over time.
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Congressman Davidson Hosts Roundtable on Digital Asset Regulation
10/01/2018At a roundtable hosted lasted week by Ohio Congressman Warren Davidson, lawmakers sought feedback from market participants on flaws and inefficiencies in the current digital asset regulatory framework. The roundtable, titled “Legislating Certainty for Cryptocurrencies,” included 48 representatives from a variety of digital asset and financial services firms, who pressed Congress for greater regulatory clarity in respect of digital assets.
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Congressman Emmer Proposes Legislation in Support of Blockchain Technology and Digital Assets
09/26/2018Minnesota Congressman Tom Emmer, one of the co-chairs of the Congressional Blockchain Caucus, last week announced plans to introduce three bills designed to support blockchain technology and digital assets. The legislation would call for the U.S. to prioritize the growth and development of blockchain technology and digital assets, exempt blockchain entities that never take control of consumer funds from certain registration and licensure requirements and provide a safe harbor for taxpayers with forked digital assets.
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SEC Again Delays Bitcoin ETF Decision
09/25/2018On September 20, 2018, the Securities and Exchange Commission (SEC) in a filing said that it is seeking additional comments on a proposed rule change requested by the Cboe BZX Exchange that would allow it to list and trade shares of an exchange-traded fund (ETF) issued by the VanEck SolidX Bitcoin Trust. This is the second time the SEC has delayed a decision on the proposal, which was first proposed on June 20, 2018.
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UK Parliamentary Committee Calls For Urgent Regulation of Crypto-Assets
09/21/2018The U.K. House of Commons Treasury Committee has published a report calling for crypto-assets to be regulated in the U.K. as a matter of urgency. The Treasury Committee considers that the current "ambiguity of the UK Government and regulators' position is clearly not sustainable" and is recommending that an amendment be made to the Regulated Activities Order to bring crypto-assets within the U.K. regulatory perimeter, supervised by the Financial Conduct Authority. The Committee does not specify in the report the activity related to crypto-assets that should go into the RAO, but recommends that it should at least include the issuance of crypto-assets through Initial Coin Offerings and the provision of crypto-exchange services. This will, according to the Committee's report, address anti-money laundering risks and consumer protection, aligning investor protections with those adopted in the U.S.
The Committee is also seeking the certain action be taken by the Government and the U.K. regulators.
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Agencies Issue Multiple Digital Asset-Related Enforcement Orders
09/20/2018The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) last week issued three digital asset-related enforcement orders, and the SEC also suspended trading in two securities that track the value of digital assets. The orders mark an uptick in digital asset enforcement from previous months and suggest that regulators and self-regulatory organizations are still keeping a close eye on the nascent digital asset investment industry.
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SEC Order Shows Free Tokens Do Not Get a Free Pass From Securities Laws
09/07/2018The Securities and Exchange Commission cracked down on another initial coin offering, despite the fact that the parties were unable to raise any money. The SEC found that the efforts to fund oil exploration and drilling in California through the issuance of digital tokens called “Tomahawkcoins” or “TOM,” by Tomahawk Exploration LLC and David T. Laurance constituted an illegal securities offering in which they made materially false claims about the exploration prospects, the firm and Mr. Laurance’s background.
Read MoreCategories : Cryptocurrencies/Virtual Currencies, Enforcement, FinTech Regulation, ICOs, SEC, US Federal Regulation -
FinCEN Director Kenneth A. Blanco Delivers Speech on Cryptocurrency
08/13/2018On August 9, 2018, Kenneth A. Blanco, Director of the U.S. Treasury Department Financial Crimes Enforcement Network, delivered some brief remarks on FinCEN’s approach to cryptocurrency and financial innovation. Director Blanco began by noting that although innovation in financial services can be “a great thing,” it is nevertheless a double-edged sword. He observed that while major money services businesses are considering how to incorporate blockchain payments to expedite remittances to locations around the world, they continue to be faced with challenges related to the potential misuse of cryptocurrency, including for money laundering and other illicit purposes. The speech then covered FinCEN’s efforts in regulating and supervising cryptocurrency.
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SEC Denies BZX Application to List Bitcoin Trust; Commissioner Peirce Dissents
07/31/2018On July 26, 2018, the Securities and Exchange Commission denied an application for a rule change that would have allowed the Bats BZX Exchange, Inc. to list and trade shares of the Winklevoss Bitcoin Trust, primarily because it viewed Bitcoin, the underlying asset, to be vulnerable to fraud and market manipulation. The Securities Exchange Act of 1934 directs the Commission to disapprove a proposed rule change of a self-regulatory organization, such as BZX, if the Commission finds that the proposed rule change is inconsistent with the requirements of the Exchange Act and the rules and regulations applicable to the SRO.
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NFA Proposes Disclosure Requirements for Members Engaging in Virtual Currency Activities
07/27/2018The National Futures Association last week proposed an interpretive notice that would require its members to disclose the potential risks involved when dealing with virtual currencies and virtual currency derivatives. The notice, titled “Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities,” reflects the NFA’s concern that customers may not fully understand the nature of these products, the potentially significant losses that could be sustained or the limitations of the NFA’s oversight of virtual currency activities.
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FINRA Requests that Firms Disclose Digital Asset Activity
07/24/2018Earlier this month, the Financial Industry Regulatory Authority called on its members to notify FINRA if they, or any associated persons or affiliates, engage, or plan to engage, in any activities related to digital assets. In the notice to members, FINRA also asked firms to inform their regulatory coordinators up until July 31, 2019, if they, or any associated persons or affiliates, begin to engage in activities related to digital assets that have not been previously disclosed.
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CFTC Issues Customer Advisory on Purchasing Digital Assets
07/19/2018On July 16, 2018, the Commodity Futures Trading Commission issued a customer advisory on the risks of purchasing digital assets. The advisory, titled “Use Caution When Buying Digital Coins or Tokens,” recommends that customers thoroughly research any potential purchases of digital assets without regard to how those digital assets are described (e.g., utility tokens or consumption coins).
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Senior SEC Official Clarifies Whether and When Digital Assets Are Securities
07/05/2018
In wide-reaching remarks at the Yahoo Finance All Markets Summit: Crypto on June 14, 2018, William Hinman, the director of the SEC’s Division of Corporation Finance, affirmed that lawyers and promoters should focus on to the economic substance of a digital transaction, rather than to the label in analyzing whether the U.S. securities laws apply.
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UK Financial Conduct Authority Sets out Good Practice for Handling Financial Crime Risks from Crypto-Assets
06/11/2018The U.K. Financial Conduct Authority has published a "Dear CEO" letter to U.K. authorized banks, setting out its views on best practice that banks should adopt for handling the financial crime risks that may be posed by so-called crypto-assets. The FCA uses this term to refer to any publicly available electronic medium of exchange that features a distributed ledger and a decentralized system for exchange. Crypto-assets include crypto-currencies, a well-known example of which is Bitcoin. The FCA acknowledges that crypto-assets can be used without any criminal motives. However, the fact that crypto-assets can be held relatively anonymously and can be readily transferred between countries can make them attractive for criminal purposes. Banks should adopt proportionate measures to mitigate the risk that they are used to facilitate financial crimes involving crypto-assets.
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CFTC Publishes Guidance on Listing Virtual Currency Derivative Products
06/01/2018On May 21, 2018, the Commodity Futures Trading Commission published guidance signaling how CFTC-registered trading platforms can enhance surveillance practices, reporting, risk management and self-certification in respect of virtual currency derivative products, among other things. The guidance also summarizes the CFTC’s priorities and expectations in its review of these products.
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CME and Bloomberg Launch Virtual Currency Indices
5/30/2018Three new indices tracking various virtual currencies could be a signal that the asset class is one step closer to mainstream acceptance. The CME Group launched the Ether Reference Rate (ERR) and the Ether Real Time Index (ERTI) with Crypto Facilities Ltd., which track the performance of Ether against USD. Bloomberg also launched the Bloomberg Galaxy Crypto Index with Galaxy Digital Capital Management LP, which tracks a basket of leading virtual currencies against USD.
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NASAA Cracks Down on Fraudulent ICOs and Enters into Information Sharing Agreement with the CFTC
5/30/2018At the North American Securities Administrators Association Conference on May 21, 2018, NASAA, an association of state and provincial securities administrators in the United States, Canada and Mexico, announced a joint effort among its members to halt fraudulent initial coin offerings and virtual currency-related investment products. The so-called “Operation Cryptosweep,” which was launched this past April, consists of NASAA members from 44 jurisdictions in the United States and Canada and has to this point led to nearly 70 inquiries and 35 pending and completed enforcement actions, with more expected in the coming months.
Read MoreCategories : CFTC, Cryptocurrencies/Virtual Currencies, Enforcement, ICOs, SEC, State Regulation, US Federal Regulation -
Ether and XRP Face Heightened Regulatory Scrutiny
05/22/2018Over the past several months, rapid growth of market interest in digital assets has invited significant regulatory attention. While much of the focus to this point has been on initial coin offerings, questions have recently been raised as to whether the issuance of some of the most popular virtual currencies, including ether and XRP, constituted illegal securities offerings.
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Federal Reserve Board Governor Speaks on Cryptocurrencies, Digital Currencies, and Distributed Ledger Technologies
5/18/2018On May 15, 2018, Federal Reserve Board Governor Lael Brainard delivered a speech at the Decoding Digital Currency Conference, sponsored by the Federal Reserve Bank of San Francisco, outlining some of her own thoughts on cryptocurrencies, digital currencies, and distributed ledger technologies.
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SEC Commissioner Pushes for Hands-Off Approach to Token Regulation
05/02/2018Securities and Exchange Commission Commissioner Hester Peirce spoke on the agency’s oversight of tokens and initial coin offerings before the Medici Conference on May 2, 2018. In her speech, she pushed for a hands-off approach to token regulation and noted the importance of regulators keeping an open mind when regulating the space.
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Senior SEC and CFTC Officials Support Balanced Approach to Token Regulation
04/26/2018
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NY Attorney General Announces Cryptocurrency Exchange Inquiry
04/17/2018New York Attorney General Eric T. Schneiderman sent letters to thirteen cryptocurrency exchanges requesting certain key information on their operations, fee structures, internal controls, and customer safeguards. The letters also signaled the launch of the Attorney General’s broader “Virtual Markets Integrity Initiative.”
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CFTC Halts Fraudulent Binary Options Scheme Involving Virtual Currency
04/16/2018On April 16, 2018, the Commodity Futures Trading Commission (CFTC) filed a complaint charging two individuals and several companies with operating a fraudulent binary options scheme involving virtual currency and accepting customer funds without registering as a futures commission merchant.
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FCA Clarifies Its Position on Virtual Currency Derivatives
04/06/2018
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Gemini Co-Founders Cameron and Tyler Winklevoss Propose Virtual Commodity Self-Regulatory Organization
03/13/2018On March 13, 2018, virtual currency exchange Gemini released a proposal to create the first SRO for U.S. virtual commodity exchanges. The so-called Virtual Commodity Association (VCA), as envisioned, would be a non-profit, independent regulatory organization that would operate to foster responsible virtual commodity markets by requiring members to implement specified sound practices and supervising members’ implementation of such practices. The VCA would also encourage greater cooperation with relevant regulators in an effort to assist with the maturation of the virtual commodity industry.
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SEC Issues Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
03/07/2018On March 7, 2018, the SEC issued a statement warning investors of potential risks involving digital asset exchanges. The statement aims to protect investors trading digital assets through online platforms and serves as a warning shot to exchanges dealing in digital assets that may be securities.
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Federal Court Upholds That Virtual Currencies Are Commodities
03/06/2018On March 6, 2018, the United States District Court for the Eastern District of New York confirmed that virtual currencies are commodities within the anti-fraud jurisdiction of the Commodity Futures Trading Commission (CFTC). The order, which came in the form of a preliminary injunction, follows the CFTC’s January 18, 2018 civil enforcement action against Patrick K. McDonnell and his company CabbageTech, doing business as Coin Drop Markets (CDM), alleging that McDonnell had induced customers to send money and virtual currencies to CDM in exchange for virtual currency trading advice and purchasing on customers’ behalf. The CFTC also alleged that McDonnell and CDM misappropriated investors’ funds.
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Wyoming State Legislature Passes Several Measures to Foster Virtual Currency and Blockchain Innovation
03/06/2018The Wyoming state legislature recently passed the following virtual currency- and blockchain-focused bills intended to ease regulatory burdens at the state level for blockchain and digital asset ventures.
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CFTC Issues First Customer Advisory on Virtual Currency Pump-and-Dump Schemes
02/15/2018The Commodity Futures Trading Commission has issued its first customer advisory regarding pump-and-dump schemes in virtual currency markets. The CFTC warned customers to exercise extreme caution when investing in virtual currency listings promoted on social media, reportedly backed by famous high-tech business leaders and investors or accompanied by posts creating false urgency or telling investors to purchase right away.
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Top Federal Securities and Commodities Regulators Testify on Virtual Currency Regulation Before Senate Committee
02/07/2018A cross-functional team of partners including Jay Baris and Nathan Greene of the Investment Funds group, Donna Parisi and Geoffrey Goldman of the Derivatives group, Lona Nallengara of the Capital Markets group, and Reena Sahni of the Financial Institutions Advisory and Financial Regulatory group authored an article entitled, “Top Federal Securities and Commodities Regulators Testify on Virtual Currency Regulation Before Senate Committee.” The article highlights the February 6 SEC and CFTC discussion with a Senate committee regarding the role of their respective agencies in regulating virtual currencies and virtual currency-related activities.
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Cryptocurrencies: A Big Week for U.S. Regulatory Attention
01/25/2018Jay Baris and Nathan Greene, partners in the Investment Funds group, authored an article entitled “Cryptocurrencies: A Big Week for U.S. Regulatory Attention,” summarizing a seemingly sudden burst of regulatory actions taken by the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission and a state regulator over the span of just a few days in January.
Read MoreCategories : CFTC, Cryptocurrencies/Virtual Currencies, Enforcement, Federal Regulation, SEC, State Regulation -
CFTC Discusses Approach to Virtual Currency Futures Markets
01/04/2018The Commodity Futures Trading Commission has released a backgrounder on the federal oversight of virtual currencies and its approach to regulating the virtual currency derivatives markets. Because virtual currencies have been deemed a commodity, certain derivative and other transactions in virtual currencies may be subject to CFTC oversight under the Commodity Exchange Act.
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