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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Two Celebrities Charged in Connection with ICO Promotions
12/05/2018On November 29, 2018, the Securities and Exchange Commission (SEC) announced that it has filed and settled separate charges against professional boxer Floyd Mayweather Jr. and musical artist Khaled Khaled (known as DJ Khaled) for their failure to disclose payments they received in connection with promoting investments in initial coin offerings (ICOs). Without admitting or denying the charges, Mayweather agreed to pay $300,000 in disgorgement, a $300,000 fine and $14,775 in interest, while Khaled agreed to pay $50,000 in disgorgement, a $100,000 fine and $2,725 in interest. Mayweather also agreed not to promote “any securities, digital or otherwise,” for three years, and Khaled agreed to the same ban for a period of two years.
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SEC Settles Charges Against Two Companies that Sold Digital Tokens in ICOs
11/29/2018For the first time, on November 16, 2018, the Securities and Exchange Commission (SEC) sanctioned two companies with civil penalties for violating the securities laws in connection with issuing digital tokens in an initial coin offering (ICO). Interestingly, the Division of Corporation Finance, Investment Management and Trading & Markets issued a joint statement in support of the Division of Enforcement’s actions. Without admitting or denying the findings, the two companies consented to the SEC orders finding that they violated Section 5(a) and 5(c) of the Securities Act of 1933 for failing to register the tokens as securities. The companies agree to $250,000 penalties and to cease and desist from future violations.
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LabCFTC Publishes Smart Contract Primer
11/29/2018LabCFTC, the Commodity Futures Trading Commission’s (CFTC’s) FinTech initiative, earlier this week published a primer on smart contracts. The primer defines smart contracts and explains some of their key attributes, discusses the CFTC’s role in regulating smart contracts, outlines some potential benefits and use cases and warns market participants of potential associated risks.
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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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State Regulators Sue OCC Over FinTech Charter
11/01/2018The Conference of State Bank Supervisors (CSBS) has sued the Office of the Comptroller of the Currency (OCC) to prevent it from granting charters for special purpose national banks (SPNBs) to non-depository FinTech companies.
The CSBS filed the lawsuit upon the OCC’s announcement on July 31, 2018 that it would begin accepting these applications. The CSBS previously sued the OCC over its ability to provide SPNB charters in April 2017. The federal district court in D.C., however, dismissed the first suit for lack of subject matter jurisdiction and ripeness, stating that the OCC had not decided whether to grant SPNB charters to FinTech firms at that time.
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SEC Announces Launch of Strategic Hub for Innovation and Financial Technology
10/19/2018On October 18, 2018, the Securities and Exchange Commission (SEC) launched its Strategic Hub for Innovation and Financial Technology (FinHub), designed to engage investors and market participants on FinTech issues and initiatives.
Valerie A. Szczepanik, the SEC’s Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC's Division of Corporation Finance, will lead FinHub, which will focus on topics such as distributed ledger technology (DLT) and digital assets, automated investment advice, digital marketplace financing, artificial intelligence and machine learning. The SEC’s various divisions will assign staff with expertise in the FinTech space. FinHub will replace and build on the efforts of several of the SEC’s internal FinTech working groups.
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CFTC Commissioner Quintenz Speaks on Smart Contract Regulation
10/19/2018On October 16, 2018, Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz gave a wide-ranging speech at the GITEX Technology Week Conference in Dubai addressing a number of key issues faced by the CFTC in considering how to regulate smart contracts. While he acknowledged that there are still many questions to be answered in respect of smart contract regulation, Commissioner Quintenz expressed a number of important views that should make market participants pause before assuming that activity in smart contracts will avoid CFTC scrutiny.
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SEC Halts Fraudulent ICO that Claimed Regulatory Approval
10/17/2018On Oct 11, 2018, the Securities and Exchange Commission (SEC) announced that it halted a planned initial coin offering (ICO) and related pre-ICO sales by Blockvest LLC and its founder, Reginald Buddy Ringgold, III. In seeking an emergency court order, the SEC alleged that Blockvest had falsely claimed that it and its affiliates received regulatory approval from various agencies, including the SEC and a fake agency called the “Blockchain Exchange Commission.” Blockvest and Ringgold also allegedly used the National Futures Association (NFA) seal in making false claims about their regulated status, even after the NFA sent them a cease-and-desist letter for doing so.
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CFTC and ASIC Agree to FinTech Information Sharing Arrangement
10/09/2018The Commodity Futures Trading Commission (CFTC) and the Australian Securities and Investments Commission (ASIC) last week signed an arrangement designed to support cross-border FinTech innovation through their respective FinTech initiatives, LabCFTC and the ASIC Innovation Hub. The arrangement will facilitate information sharing between the two regulators in respect of emerging trends and developments, regulatory issues pertaining to FinTech innovations and best practices, among other things. It also includes a referral mechanism that will allow the CFTC and ASIC to refer to one another innovators that wish to operate or have questions about operating in the other’s jurisdiction. The arrangement further calls for joint proofs of concept, trials and innovation competitions, where permitted, as well as periodic meetings to update each other on FinTech and RegTech trends and developments of common interest.
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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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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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Varo Money on Track to Be First All-Mobile National Bank Following OCC Approval
09/11/2018On September 4, 2018, banking startup Varo Money (Varo) announced that its application to form a de novo national bank has been preliminarily and conditionally approved by the Office of the Comptroller of the Currency (OCC). Varo applied for the national bank charter in 2017, and its approval marks the first time an all-mobile bank has been approved for a national bank charter by the agency.
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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 -
Regulators Unveil Plans to Launch Global Financial Innovation Network
08/17/2018On August 7, 2018, the U.K. Financial Conduct Authority (FCA), the Consumer Financial Protection Bureau (CFPB) and 10 other international financial regulators and related organizations announced the launch of the Global Financial Innovation Network (GFIN). The announcement, which was accompanied by a consultation paper on the role and objectives of the GFIN, serves as part two of a whitepaper published earlier this year by the FCA on the possibility of forming a “global sandbox.” The GFIN, as proposed, would consist of three components: (i) information sharing and collaboration through a network of regulators; (ii) joint policy work and regulatory trials; and (iii) cross-border firm trials.
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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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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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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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LabCFTC Requests Input on RegTech Innovation Prize Competitions
04/24/2018On April 24, 2018, LabCFTC, the Commodity Futures Trading Commission’s FinTech initiative, requested public input for topics and ideas for forthcoming innovation competitions. The CFTC intends to use the prize competitions as an incentive to spur industry innovation in the RegTech space that can help solve public policy challenges and enhance derivatives markets. The CFTC is looking for suggestions on potential focus areas for the competitions and how the competitions could best be structured and administered.
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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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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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