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  • Money Transmitter Licensing Changes in New Hampshire and Washington for Virtual Currencies

    State Issues

    On August 1, New Hampshire HB 436 went into effect, “exempting persons using virtual currency from registering as money transmitters” under the state’s money transmitter licensing laws. The new exemption applies to persons who “engage in the business of selling or issuing payment instruments or stored value solely in the form of convertible virtual currency” or “receive convertible virtual currency for transmission to another location.” However, the exemption provides that such persons are “subject to” certain state consumer protection laws.

    Separately, Washington SB 5031 took effect on July 23, amending the state’s Uniform Money Services Act as it relates to money transmitters and currency exchanges. With respect to virtual currencies, the amendments, among other things: (i) define “virtual currency”; (ii) subject virtual currencies to the state’s money transmitter licensing laws (the definition of “money transmission” now includes virtual currency transmissions); (iii) require businesses that “store virtual currency on behalf of others” to provide the state with “a third-party security audit of all electronic information and data systems” when applying for a money transmitter license; (iv) require virtual currency licensees to “hold like-kind virtual currencies of the same volume . . . obligated to consumers”; and (v) require virtual currency licensees to provide certain disclosures “to any person seeking to use the licensee’s products or services,” including a schedule of fees and charges, and whether the product or services are insured.

    State Issues State Legislation Fintech Digital Commerce Virtual Currency Money Service / Money Transmitters

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  • SEC Issues Investigative Report: Federal Securities Laws Apply to Virtual Organizations

    Securities

    On July 25, the SEC issued an investigative report stating that federal securities laws apply to anyone who offers and sells securities in the U.S., regardless of the manner of distribution or whether dollars or virtual currencies are used to purchase the securities. The SEC’s Report of Investigation (Report) advises users to make sure they are compliant with federal securities laws when raising capital through Decentralized Autonomous Organizations (DAO) or other forms of distributed ledgers or blockchain technology. These offering are often referred to as “Initial Coin Offerings” (ICOs) or “Token Sales.”

    The Report originates from an Enforcement Division inquiry into whether the DAO—and affiliated entities—“violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for ‘Ether,’ a virtual currency.” According to the SEC, the DAO, which has been described as a “crowdfunding contract,” has not met any of the specific Regulation Crowdfunding exemption requirements issued earlier this year by the agency. These regulations were previously discussed in InfoBytes. In its Report, the SEC stated that the individuals involved in a 2016 virtual currency offering that was later hacked will not face charges, but will rather serve as a warning to the industry that people who offer and sell securities in the U.S. must follow the law. In light of this discussion, the SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin to educate investors about the benefits and risks of ICOs, which promoters have begun to use to sell virtual currencies.

    “Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today's Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, SEC Director of the Division of Corporation Finance.

    Securities Fintech SEC Digital Commerce Virtual Currency Blockchain Coin Offerings

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  • CFTC Approves First Digital Currency Derivatives Exchange

    FinTech

    On July 24, the Commodity Futures Trading Commission (CFTC) announced its approval, by unanimous vote, of the first digital currency derivatives exchange under the Commodity Exchange Act. The CFTC issued a letter and order granting the registration, allowing the company to provide clearing services for fully-collateralized digital currency swaps, but noted that the authorization to provide clearing services for fully-collateralized digital currency swaps did not constitute or imply a CFTC endorsement of the use of digital currency generally, or bitcoin specifically. Based on the company’s representations related to having collateral already on deposit to cover the maximum possible loss, the CFTC exempted the company from certain regulations calling for, among other things, monthly stress-testing and specific daily reporting requirements. The company initially plans to clear bitcoin options.

    Fintech CFTC Digital Commerce Bitcoin Securities Commodity Exchange Act

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  • Noncash Payment Growth Highlighted in Sixth Federal Reserve Payments Study

    FinTech

    On June 30, the Board of Governors of the Federal Reserve issued its sixth payments study entitled The Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices. The study includes data on business and consumer noncash payments made in the United States in 2015. Among other things, the study details the differences between business and consumer payments in 2015 compared to those from 2000, general-purpose payment card use in 2015, and increases in use of alternative payment methods.

    According to the report, the most popular noncash payment types among consumers were, in descending order: non-prepaid debit cards, general-purpose credit cards, checks, and finally, ACH debit transfers. For businesses, however, ACH credit transfers were the most popular, then checks, general-purpose credit cards, and non-prepaid debit cards. Consumers wrote fewer than half the number of checks in 2015 than they did in 2000 but almost doubled the number of noncash payments that they made. Businesses also cut check-writing by more than half but differed from consumers by more than doubling the number of ACH transfers that they initiated during the same period.

    General-purpose or “network-branded” cards accounted for more than 65 percent of noncash payments in 2015. The data showed that 60 percent of these card accounts carried revolving debt, while 40 percent of accounts were paid in full each month.

    Information on fraudulent payments also was collected and should be available in the third quarter of this year.

    Fintech Digital Commerce Federal Issues Federal Reserve Electronic Fund Transfer ACH Payments Credit Cards

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  • Illinois Finalizes Digital Currency Regulatory Guidance

    FinTech

    On June 13, the Illinois Department of Financial and Professional Regulation (IDFPR) issued final guidance on the regulatory treatment of digital currencies with an emphasis on decentralized digital currencies. (See IDFPR news release here). As previously covered in InfoBytes, the IDFPR requested comments on its proposed guidance in December of last year in order to devise the proper regulatory approach to digital currency in compliance with money transmission definitions in the Illinois Transmitters of Money Act, 205 Ill. Comp. Stat. 657/1, et seq. (TOMA).

    The “Digital Currency Regulatory Guidance” clarifies that digital currencies are not money under TOMA, and therefore, those engaged in the transmission of digital currencies are not generally required to obtain a TOMA license. The IDFPR noted, however, that “should transmission of digital currencies involve money in a transaction, that transaction may be considered money transmission” and suggested persons engaging in such transactions request a determination regarding whether or not the activity will require a TOMA license.

    To provide additional clarity, the guidance includes examples of common types of digital currency transactions that qualify as money transmissions, as well as examples of activities that do not qualify as money transmission.

    Fintech State Issues Digital Commerce Virtual Currency Money Service / Money Transmitters

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  • Connecticut Law Expands Credit Card Fraud Statutes, Addresses Penalties for Rent Collections on Foreclosed Property

    State Issues

    On June 6, Connecticut Governor Dannel Malloy signed into law Public Act No. 17-26, which expands the statutes on credit card fraud to cover crimes involving debit cards—including payroll and ATM cards—and outlines larceny penalties for collecting rent on foreclosed property. Paper and electronic checks or drafts are excluded from the definition of debit card under revised measure. Additionally, the law specifies changes pertaining to how “notice of a card’s revocation must be sent for purposes of these crimes and expands certain credit card crimes to cover falsely loading payment cards (credit or debit cards) into digital wallets.” Regarding larceny penalties, the law provides that a “previous mortgagor of real property against whom a final judgment of foreclosure has been entered” cannot continue to collect rent after the final judgment if there is no lawful right to do so. Penalties vary from a class C misdemeanor to a class B felony depending on the amount involved. The law takes effect October 1.

    State Issues Credit Cards Debit Cards Prepaid Cards State Legislation Financial Crimes Mortgages Digital Commerce Fraud

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  • House Subcommittee on Digital Commerce and Consumer Protection Holds Hearing to Discuss Consumer Fintech Needs

    Federal Issues

    On June 8, the House Energy and Commerce Committee’s Subcommittee on Digital Commerce and Consumer Protection held a hearing to discuss financial products and services offered by the fintech industry to meet consumer needs. (See previous InfoBytes coverage here.) Committee Chairman Rep. Bob Latta (R-Ohio) opened the hearing asserting, “There are serious opportunities for companies to reach consumers with new products to help them create a rainy-day fund for the first time, pay their mortgage securely, rebuild their credit, budget and manage multiple income streams, and invest their earnings . . . Cybersecurity [specifically] is an ongoing challenge, and one the Energy and Commerce Committee is tackling head on.” The June 8 hearing included testimony and recommendations from the following witnesses:

    • Ms. Jeanne Hogarth, Vice President at Center for Financial Services Innovation (CFSI) (statement). Hogarth stated that nearly three out of five American face financial health struggles and spoke about challenges fintech entrepreneurs may face when trying to help consumers, such as (i) “facilitat[ing] interstate and regulatory comity that enables consumers to access and use fintech products and service that promote financial health”; (ii) “support[ing] consumers’ access to their own data”; and (iii) “creat[ing] opportunities for pilot testing of both financial products and services and financial services regulations.” Hogath also detailed CFSI’s Financial Solutions Lab, which identifies financial health challenges faced by consumers and encourages companies to develop ways to address these issues.
    • Mr. Javier Saade, Managing Director at Fenway Summer Ventures (statement). Saade—whose venture capital firm backs emerging fintech companies—stressed the importance of understanding and mitigating associated risks as financial innovation continues to expand. Growth is supported and encouraged, he noted, provided entrepreneurs understand that the “’fail fast and often’ approach, typical of tech-driven startups in other sectors, may not be well suited for the financial services industry.” Furthermore, Saade stated that because “nearly 30 million U.S. households either have no access to financial products or obtain products outside of the banking system . . . even modest strides in achieving economic inclusion present the single largest addressable opportunity in fintech.”
    • Ms. Christina Tetreault, Staff Attorney at Consumer Union (statement). Tetreault, speaking on behalf of Consumer Union (the policy division of Consumer Reports), stated that while financial technology such as virtual currencies, digital cash, and distributed ledgers have the “potential to increase consumer access to safe financial products and return a measure of control to consumers,” safeguards devised between lawmakers and providers must be implemented with appropriate federal and state financial regulator oversight.
    • Mr. Peter Van Valkenburgh, Research Director at Coin Center (statement). Coin Center is a non-profit organization, which focuses on “public policy ramifications of digital currencies and open blockchain networks.” Van Valkenburgh emphasized the need for Congress to (i) create a nationwide federal money transmission license as an alternative to “state by state licensing,” which, in his opinion, emphasizes the needs of individual states rather than addressing the health and risk profile as a whole; and (ii) create a federal safe harbor to “protect Americans developing open blockchain infrastructure.” Van Valkenburgh also encouraged the Office of the Comptroller of the Currency to establish federal “fintech charters” to promote a unified approach to regulating blockchain companies.

    Federal Issues Fintech OCC House Energy and Commerce Committee Blockchain Digital Commerce Privacy/Cyber Risk & Data Security

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  • NYDFS Authorizes Coinbase to Offer Trading of Digital Currencies in New York

    FinTech

    On March 22, the New York State Department of Financial Services (NYDFS) announced the approval of Coinbase, Inc.’s application to offer Ether and Litecoin to New York customers.  “Ether” is a “digital cryptography-based asset” of the Ethereum network, “similar to how bitcoin is the digital cryptography-based asset of the Bitcoin network.” Litecoin, developed as a modification of the Bitcoin protocol, is the first alternative virtual currency to Bitcoin to gain public acceptance.  NYDFS also approved Coinbase’s linked debit card service “Shift Card”—a VISA debit card that allows Coinbase users in select U.S. states and territories to use Bitcoin anywhere VISA is accepted. As discussed in a previous InfoBytes post, NYDFS recently issued a virtual currency and money transmitter license to Coinbase, which permits the company to operate as a service for buying, selling, sending, receiving, and storing Bitcoin. Financial Services Superintendent Maria T. Vullo noted, “DFS has proven that the state regulatory system is the best way to supervise and cultivate a thriving fintech industry, like virtual currency. New York will remain steadfast in pushing back against federal encroachment efforts like the OCC’s proposal to impose a one-size-fits-all national bank charter that increases risk and seeks to usurp state sovereignty.”

    Fintech Digital Commerce Bitcoin NYDFS Virtual Currency

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  • SEC Denies Application for Bitcoin ETF Due to Lack of Regulation, Potential for Manipulation

    Agency Rule-Making & Guidance

    On March 10, 2017, the SEC issued an Order disapproving of a proposed rule change by the BATS BZX Exchange (“the Proposal”), which proposed to list and trade “commodity-based trust shares” issued by the Winklevoss Bitcoin Trust. The Proposal, if approved, would have established a bitcoin exchange-traded fund (“ETF”) that market participants could invest in through the BATS BZX Exchange platform. Specifically, in rejecting the Proposal, the Commission emphasized the lack of regulation in the bitcoin market, noting both (i) that the BATS BZX Exchange platform “would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares”; and (ii) that bitcoin regulation, at present, would leave a bitcoin ETF more susceptible to manipulation than an ETF comprised of other commodities, such as gold and silver. Ultimately, the Commission concluded that, “[a]bsent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant, regulated markets related to the underlying asset—the [Commission] does not believe that a national securities exchange can meet its” regulatory obligations.

    Comments submitted in response to the original BATS BZX Exchange proposed rule change can be accessed here.

    Securities Fintech Digital Commerce Bitcoin SEC Agency Rule-Making & Guidance

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  • President of Philadelphia Fed Makes an Argument for FinTech Regulation

    Federal Issues

    In prepared remarks at the “Global Interdependence Center’s Payment Systems in the Internet Age” Conference, Philadelphia Fed President Patrick T. Harker said that regulating the evolving FinTech industry benefits not only consumers, but also the innovators. While Harker did not speculate as to whether the Fed will become involved in FinTech regulation, he stated that it is in the best interest of FinTech companies “to have an established framework in which to operate.” He cautioned, however, that “all financial systems are a matter of trust” and thus FinTech firms will “need that trust the same as any other bank or financial institution.” Harker noted that regulations will help determine which companies can survive the “down side” of a credit cycle, but implementing regulations after a “crisis. . . could mean tighter strictures and less room for innovation.”

    Federal Issues Digital Commerce Federal Reserve Fintech Agency Rule-Making & Guidance

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