Global Fintech & Payments Blog

A CFTC Helping Hand: DSIO Offers to Review Digital Asset Products

Posted in Cryptoassets, Digital

Product innovation (including in pooled investment vehicles) is encouraged, but innovation must be consistent with the law.

By Yvette D. Valdez, Douglas K. Yatter, J. Ashley Weeks, and Deric Behar

The US Commodity Futures Trading Commission’s (CFTC’s) Division of Swap Dealer and Intermediary Oversight (DSIO) Director Joshua B. Sterling issued a statement on February 10, 2020, supporting responsible digital asset product innovation, including pooled investment vehicles seeking exposure to digital assets and digital asset derivatives. The statement included an offer to assist innovators with the evaluation of new digital asset products that may not be subject to existing National Futures Association (NFA) disclosure and document review requirements.

Operators of pools that trade futures and options, swaps, or leveraged transactions referencing commodities (including digital assets such as Bitcoin and stablecoins) are required to register as commodity pool operators (CPOs) and must comply with attendant disclosure, record-keeping, and reporting requirements (unless otherwise exempt). Regardless of whether CPOs are exempt from supervisory oversight by the CFTC, they remain subject to the anti-fraud provisions of the Commodity Exchange Act when they market and offer interests in commodity pools to investors, in addition to regulatory and enforcement authority by the US Securities and Exchange Commission. Continue Reading

EIOPA Issues Final Guidelines on Outsourcing

Posted in Digital

The final guidelines create new obligations for insurers that will impact cloud outsourcing arrangements.

By Fiona M. Maclean, Andrew C. Moyle, and Victoria Sander

On 6 February 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published its final guidelines on outsourcing to cloud service providers (CSPs) (the Guidelines). The Guidelines have been finalised following public consultation on the draft guidelines launched on 1 July 2019, and closely follow the European Banking Authority’s (EBA’s) final guidelines on outsourcing arrangements, published early last year (the EBA Guidelines). (See What EBA’s Outsourcing Guidelines Mean for Financial Institutions.) Continue Reading

Mexico Issues First License Under New FinTech Law

Posted in Investing in Fintech

The landmark authorization signals the Mexican government will likely grant similar licenses to more FinTech companies in the coming months.

By Yvette Valdez, Roderick Branch, and Daniel Gallo Mainero*

Nearly two years after the Mexican government enacted its Financial Technology Institutions Law (FinTech Law), the Mexican National Banking and Securities Commission (CNBV) issued its first license on January 22, 2020. The license authorizes NVIO Pagos México, an affiliate of Bitso, a cryptocurrency market, to operate as a financial technology institution under the new law. This landmark authorization signals that the government will likely grant similar licenses to more FinTech companies in the coming months. At least 85 entities have filed license applications with the CNBV, creating more opportunities for investors to leverage the potential of Mexico’s FinTech market within a regulated environment.

Mexico became the first Latin American country to put specific and comprehensive regulation of the financial technology sector in place when it enacted its FinTech Law in March 2018, prompting a positive reaction among investors and FinTech companies with established business models. As with new regulation in any industry, however, certain participants — specifically the majority of FinTech startups — raised questions about how the government would approach implementation and enforcement. Continue Reading

Podcast: Breaking Down Crypto Derivatives

Posted in Cryptoassets, Investing in Fintech, Payments

Latham derivatives and FinTech partner Yvette Valdez explores regulatory issues impacting cryptocurrency derivatives on the Fintech Beat podcast.

By Yvette D. Valdez

New York partner Yvette Valdez, a member of Latham & Watkins’ FinTech Industry Group, recently discussed timely issues at the intersection of cryptoassets and derivatives law on a new episode of Fintech Beat.

Valdez spoke with host Chris Brummer about a number of regulatory issues impacting cryptocurrency derivatives, including:

  • Whether cryptocurrencies or stablecoins are inherently derivatives
  • The ramifications of being deemed a derivative
  • Cryptocurrency derivatives and tokenized derivatives
  • Considerations for token developers to better navigate the regulatory field
  • The potential pitfalls of the Simple Agreement for Future Tokens (SAFT) from a commodities regulatory point of view
  • The Automated Convertible Note, a free-to-use tool developed by Latham & Watkins in collaboration with ConsenSys and OpenLaw, which addresses future token sales in a manner compliant with US securities and commodities regulations

Continue Reading

Italian Ministry Launches a Public Consultation on FinTech Sandbox

Posted in Investing in Fintech

The FinTech sandbox would aim to foster innovation in the financial, credit, and insurance sectors.

By Antonio Coletti and Isabella Porchia

The Italian Ministry of Economy and Finance has launched a public consultation on a draft ministerial decree (Draft Decree) implementing the mandate received by the Italian legislature (Decreto Crescita) to set up a regulatory sandbox to test FinTech activities in the financial, credit, and insurance sectors and establish a FinTech Committee.

FinTech Sandbox

The Draft Decree proposes that activities eligible for the sandbox include regulated or non-regulated activities that (i) use technologies contributing to the innovation of banking, financial, and insurance products and services, (ii) require an exemption from the regulatory provisions or guidelines adopted by the supervisory authorities or a joint testing and assessment from the supervisory authorities, and (iii) bring added value at least in terms of (a) benefits for final users enhancing the quality of the services, competition, access conditions, availability, protection, and costs, (b) general efficiency of the financial system and market participants, or (c) less burdensome and more efficient compliance with the financial regulations.

Before submitting an application to the sandbox, entities may present and discuss informally the project with the FinTech Committee. The proposed testing period for any admitted project has a maximum duration of 18 months, which may be extended upon request of the applicant entity. Continue Reading

Taking the Scarlet Out of the Letters I-C-O

Posted in Cryptoassets

SEC Commissioner Peirce has proposed a three-year safe harbor for qualifying token projects, but regulatory clarity remains elusive.

By Stephen P. Wink, Carolina Bernal, Shaun Musuka, and Deric Behar

SEC Commissioner Hester Peirce has been a perennial advocate of innovation in the financial services and digital asset space. Continuing that tradition, she unveiled a Token Safe Harbor Proposal in a speech at the International Blockchain Congress on February 6, 2020. The proposal would allow for a time-limited exemption for token-based projects that seek to raise capital to develop decentralized networks. The exemption would permit fledgling networks to operate unburdened by the onerous registration provisions of the US federal securities laws.

Provided that certain standards and disclosure requirements were met, the three-year grace period would ostensibly allow token developers to pursue “sufficient” decentralization of their network from the time of first token sale, such that purchasers of the token would no longer reasonably expect that that token value was being driven by a person or group via managerial or entrepreneurial efforts. Sufficient decentralization has become the holy grail of initial coin offerings (ICOs) ever since the SEC’s Strategic Hub for Innovation and Financial Technology released a framework for assessing whether a blockchain-issued token or digital asset constitutes an investment contract (i.e., security) under the Howey test. (See New SEC Token Guidance: This Is Howey Do It and Crypto — The Pursuit of Sufficient Decentralization.) Continue Reading

Singapore’s PSA Boosts Rapidly Evolving Payment Services Landscape

Posted in Payments

Upgraded legislation creates an enhanced regulatory framework for the new age of payments, including e-money and digital payment tokens. 

By Farhana Sharmeen and Simon Hawkins

After much anticipation, and following consultations with the industry at large, the game-changing Payment Services Act 2019 (PSA) has finally become operational.

The PSA, which came into effect on 28 January, is the omnibus legislation dealing with payment services and systems, which adopts an activity-based licensing framework and risk-based regulatory structure. The new legislation has been designed in recognition of the different kinds of payment services that are currently available, and with a view to anticipating the types of payment services that are likely to develop in the future. Continue Reading

Regulator Raises Concerns Over Alternative Data

Posted in Data Privacy, Cybersecurity, and AI

The FCA is considering whether alternative data could introduce new risks to market integrity.

By Rob Moulton, Fiona Maclean, Stuart Davis, and Charlotte Collins

The FCA’s recently published Insight article explores how alternative data might give rise to market abuse risks. The article reports a significant increase in spending on alternative data in recent years, leading to questions about whether access to such data might provide recipients of the data with an unfair informational advantage over other market participants.

While traditional sources of data, such as a company’s financial statements, may contain inside information and must be treated appropriately before they are made public, the nature of alternative data is less clear-cut. Alternative data does not come from the company itself, and may derive from (or be extrapolated from) a number of sources. Alternative data may allow those with access to know things about a company that others in the market do not know, or that the company itself does not know. This may be the case, even if, as is frequently the case, the pool of structured/unstructured data used by the analytics engine is in the public domain. Evidently, this could provide trading opportunities that put the holder of such information at an advantage, as compared with other market participants.

A key example of where alternative data has raised concerns recently is in relation to so-called “secret polling”. The government has had exchanges with the FCA concerning the potential use of private polling data to obtain a trading advantage in advance of election results. The regulator’s view is that, while the Market Abuse Regulation (MAR) might be engaged by such activities, MAR would only apply if the underlying information were to constitute inside information. This is unlikely to be the case, unless the information met the MAR recital 28 test of information “routinely expected by the market” to be published, such as weekly BBC opinion polls. Therefore, MAR does not restrict the sharing of polling information that is not inside information. However, this position clearly raises political questions of fairness, as those able to pay for and access the data may well gain an advantage in the market, and those providing the data may not understand the use to which it will be put. Continue Reading

World Economic Forum Launches CBDC Policy-Maker Toolkit

Posted in Cryptoassets, Digital, Payments

CBDCs will have a profound effect on the financial markets, and policy-makers must thoroughly consider the complex legal and regulatory issues.

By Stuart Davis, Andrew Moyle, and Simon Hawkins

Latham & Watkins lawyers are pleased to have contributed to the World Economic Forum’s CBDC Policy-Maker Toolkit. This resource is designed to provide a high-level decision framework to policymakers who are considering designing and deploying central bank digital currency (CBDC), a new form of digitized sovereign currency. Implementing a CBDC is a complex undertaking, and any CBDC deployment should take into account alternative solutions, risks, deployment and governance strategies, multi-stakeholder input, and other critical factors. The CBDC Policy‑Maker Toolkit offers policy-makers key guidance and information, including legal and institutional factors to be considered as part of any comprehensive CBDC analysis. Continue Reading

Digital Asset Regulation: Howey Evolves & The Pursuit of Sufficient Decentralization

Posted in Cryptoassets, Digital, Investing in Fintech, Payments

In two recent articles, Latham & Watkins lawyers examine the SEC’s guidance on the application of securities regulations to digital assets and the questions that remain unanswered.

By Stephen P. Wink, Witold Balaban, John J. Sikora, Miles P. Jennings, Emanuel V. Francone, Cameron R. Kates, and Shaun Musuka

Digital Asset Regulation: Howey Evolves

In this article, the authors provide a comprehensive look at the SEC’s evolving guidance that aims to clarify when sales of digital assets (also known as tokens) are securities transactions. The authors discuss the Commission’s early application of the Howey test to digital assets, its pronouncements and enforcement actions, and the response of commentators. They then turn to the SEC’s Framework, issued in 2019, and other current SEC actions. They close by addressing steps the SEC should take to provide market participants with greater clarity on the application of the securities laws to digital assets. Continue Reading

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