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  • Conference of State Bank Supervisors releases nationwide list of fintech innovation contacts

    Fintech

    On April 10, following a nationwide fintech forum for state banking regulators and financial services executives co-hosted by the New York Department of Financial Services and the Conference of State Banking Supervisors (CSBS), CSBS issued a press release announcing that regulators from all 50 states and the District of Columbia have designated an “Innovation Staff Contact” within each of their offices to facilitate and streamline communications between state regulators and the financial services industry. Fintech topics include money transmissions, payments, lending, and licensing. According to the president of CSBS, “State regulators see how fintech is reshaping the financial services industry. And an Innovation Contact is but the latest step that states are taking to engage with industry and modernize nonbank regulation.” Last year, as previously covered in InfoBytes, CSBS introduced “Vision 2020,” an initiative geared towards streamlining the state regulatory system to support business innovation and harmonize licensing and supervisory practices, while still protecting the rights of consumers. Additionally, this past February, CSBS announced that financial regulators from seven states have agreed to a multi-state compact that will offer a streamlined licensing process for money services businesses, including fintech firms. (See previous InfoBytes coverage here.)

    Fintech NYDFS CSBS Nonbank Supervision

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  • Electronic contracting tools provide evidence and records necessary to undermine opposing affidavits

    Fintech

    On April 3, the Court of Appeals of North Carolina upheld an agreement executed using a third-party electronic contracting service vendor, after finding that the agreement was ratified by the plaintiff’s conduct, even if an unauthorized employee executed it in the first instance. The plaintiff argued that it had never seen the contract and that an employee must have electronically signed the contract without authority. However, the defendant produced evidence and an affidavit showing that its electronic contracting vendor had sent the contract to the plaintiff’s email address, that the emails were viewed and the link to the contract was opened, and that the contract was electronically signed in the vendor’s system. The record also showed several other emails referencing the agreement sent to plaintiff and responses thereto by plaintiff. The court observed that “[w]ere this a more traditional contract negotiation, in which the parties had mailed proposed contracts back and forth, a sworn affidavit stating that [plaintiff] never reviewed or signed the contracts might be sufficient to create a genuine issue of material fact” as to plaintiff’s knowledge of the agreement and its terms, but in the electronic context, the affidavits and audit trails produced by the vendor foreclosed any genuine dispute that the plaintiff company had received the agreement and had knowledge of it before ratifying it through its actions.

    Fintech Courts State Issues ESIGN

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  • Court upholds clickwrap agreement, reiterating that general principles of contract apply

    Fintech

    On March 28, the U.S. District Court of New Mexico enforced an arbitration agreement entered into by a consumer on a website. Before completing a purchase of a product through the defendant’s website, the plaintiff had to check a box next to a statement that she had read and agreed to the terms of the hyperlinked user agreement, which included an arbitration clause. The defendant was able to present evidence that it was impossible for the plaintiff to complete the purchase without checking the box and clicking on a button to accept the agreement. Plaintiff provided testimony that she couldn’t remember ever seeing the terms of use or agreeing to them.

    The court, in upholding the agreement, reiterated that electronic contracts are still governed by traditional contract principles, including reasonable notice and unambiguous assent requirements. Because the agreement was made available, twice via hyperlink, and because the plaintiff acknowledged her awareness and assent of the agreement by clicking a button in the affirmative twice, the court held that the plaintiff had sufficient notice and had demonstrated adequate assent to the terms. This decision reinforces the effectiveness of electronic arbitration agreements and the use of hyperlinks to present documents, when presented in a manner consistent with underlying contract law.

    Fintech Courts ESIGN Arbitration

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  • GAO encourages increased collaboration in fintech regulation

    Fintech

    In March, the Government Accountability Office ("GAO") issued a report addressing aspects of the fintech marketplace, including the benefits and risks for consumers; current regulatory oversight and challenges; and recommendations for federal action. The report notes that fintech products – such as payments, lending, wealth management, and distributed ledger technologies, among others – generally produce benefits to consumers in the form of lower costs and easier access. Nonetheless, fintech innovation comes with associated risks as certain products may not be covered by existing consumer protection laws, and the extent to which fintech providers are subject to federal and state oversight varies. According to the GAO, fintech providers note that complying with the “fragmented” federal and state requirements is “costly and time consuming.” The report emphasizes the need for regulators to increase collaboration to address key concerns in the fintech market, such as financial account aggregation. The GAO also highlights the efforts other jurisdictions have taken to increase fintech innovation and recommends U.S. federal agencies consider successful foreign regulatory approaches, such as “regulatory sandboxes,” which allow fintech companies to offer products on a limited scale with certain regulatory relief.

    Of note, Arizona recently became the first U.S. state to introduce a “regulatory sandbox” for fintech products marketed and sold to Arizona consumers. See InfoBytes summary here

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  • Arizona creates first state regulatory sandbox for fintech innovation

    Fintech

    On March 22, the Governor of Arizona signed HB 2434, which creates the first state “sandbox” program for companies to test innovative financial products or services without certain regulatory requirements. Arizona’s Regulatory Sandbox Program (RSP) will be administered by the state Attorney General and requires, among other things, that applicants describe the innovation desired to be tested, including an explanation of potential benefits and risks to consumers. Within 90 days, the Attorney General will notify the applicant if they are approved for the program. Details of the RSP program include a window of 24 months to test the product, requirements for seeking extensions to that time limit, a cap on the number of individuals who may participate in testing a product, and required disclosures to consumers. Participants are required to retain records and documents produced in the normal court of business for their product, and the Attorney General is allowed to seek those records and to establish regular reporting requirements. The RSP also places additional restrictions on certain participants, including consumer lenders and money transmitters, and requires compliance with Arizona consumer financial laws and all statutory limits and caps related to financial transactions.

    The RSP is effective on April 26 and terminates on July 1, 2028.

    Fintech State Issues State Legislation Regulatory Sandbox

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  • Financial Stability Board issues letter to G20 Finance Ministers and Central Bank Governors

    Fintech

    On March 18, the Financial Stability Board (FSB) released a letter previously sent to G20 Finance Ministers and Central Bank Governors on March 13, which set forth priorities designed to “reinforce the G20’s objective of strong, sustainable and balanced growth.” Among other things, FSB presented its initial assessment that “crypto-assets do not pose risks to global financial stability at this time” due to their “small size” and “limited use for real economy and financial transaction”; however, FSB stressed that this assessment is subject to change should crypto-assets become more widely used or integrated within the regulated financial system. “Crypto-assets raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing,” the letter stated. “At the same time, the technologies underlying them have the potential to improve the efficiency and inclusiveness of both the financial system and the economy.” The letter also described priority deliverables FSB planned to implement, such as (i) Basel III banking reforms; (ii) policy to de-risk correspondent banking; (iii) a toolkit on governance measures to address misconduct risk; (iv) evaluations of certain financial reforms; and (v) a financial sector cybersecurity lexicon. The FSB also noted that it would continue to shift away from policy development and instead focus on the transparency and efficiency of its existing programs.

    Fintech Cryptocurrency G20 Financial Stability Board Basel

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  • FTC challenges virtual currency “chain referral schemes”—creates new working group

    Fintech

    On March 16, the FTC announced that a U.S. District Court for the Southern District of Florida granted a temporary restraining order against four individuals who allegedly promoted cryptocurrency “chain referral schemes” in violation of the FTC Act. According to the complaint, the defendants falsely promised that by paying a small sum in virtual currency to enroll, such as bitcoin or Litecoin, the participant could earn significant returns. Three of the defendants promoted schemes that claimed participants could turn $100 into $80,000 in monthly income based on recruiting additional participants, when in actuality most of the participants failed to recoup their initial investments. Additionally, the fourth defendant promoted another scheme, which promised virtual currency investors a fixed rate of return on bitcoin investments in a passive investment operation and a multilevel investment program which participants would receive a commission for recruiting more investors. The scheme allegedly ended within two months of opening and many investors failed to recover the initial investments.

    On the same day, the FTC announced a new FTC Blockchain Working Group, which will (i) “build on FTC staff expertise in cryptocurrency and blockchain technology through resource sharing and by hosting outside experts”; (ii) “facilitate internal communication and external coordination on enforcement actions and other related projects”; and (iii) “serve as an internal forum for brainstorming potential impacts on the FTC’s dual missions and how to address those impacts.” The announcement highlighted the properties of cryptocurrencies that make the payment form susceptible to scammers, including the fact that it can be transferred electronically without requiring validation from a trusted third party source. 

    Fintech Virtual Currency Enforcement FTC Courts

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  • District Court recognizes CFTC authority to regulate virtual currency as commodities

    Fintech

    On March 6, the U.S. District Court for the Eastern District of New York granted the CFTC’s request for preliminary injunction against defendants alleged to have misappropriated investor money through a cryptocurrency trading scam, holding that the CFTC has the authority to regulate virtual currency as commodities. The decision additionally defined virtual currency as a “commodity” within the meaning of the Commodity Exchange Act (CEA) and gave the CFTC jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. However, the court noted that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” Under the terms of the order, the defendants are restrained and enjoined until further order of the court from participating in fraudulent behavior related to the swap or sale of any commodity, and must, among other things, provide the CFTC with access to business records and a written account of financial documents.

    Find continuing InfoBytes coverage on virtual currency oversight here.

    Fintech Virtual Currency Courts CFTC Cryptocurrency Commodity Exchange Act

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  • Basel Committee on Banking Supervision publishes final guidance examining the implications of fintech on the banking industry

    Fintech

    On February 19, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, released its final report, “Sound Practices: Implications of fintech developments for banks and bank supervisors.” The report—issued after BCBS’ consideration of comments received in response to its August 2017 consultative document of the same name (see previous InfoBytes coverage on the August consultative document here)—provides BCBS’ current assessment of how fintech may shape the banking industry in the near term. The report summarizes BCBS’ analysis of historical research, data compiled from surveys of BCBS members’ frameworks and practices, and other industry feedback, and provides several key considerations for banks and bank supervisors in this space.

    The report identifies a common theme across various scenarios: the emergence of fintech may make it increasingly difficult for banks to maintain their existing operating models due to changes in technology and customer expectations. The BCBS stressed that as a result of the “rapidly changing” nature of banks’ risks and activities due to fintech developments, the rules governing these risks may need to evolve. Accordingly, the BCBS recognized that “it should first contribute to a common understanding of risks and opportunities associated with fintech in the banking sector by describing observed practices before engaging in the determination of the need for any defined requirements or technical recommendations.” It further acknowledged that “fintech-related issues cut across various sectors with jurisdiction-specific institutional and supervisory arrangements that remain outside the scope of its bank-specific mandate.”

    Additionally, the current report identifies five forward-looking scenarios describing the potential impact of fintech on banks:

    • “The better bank: modernisation and digitisation of incumbent players”;
    • “The new bank: replacement of incumbents by challenger banks”;
    • “The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks”;
    • “The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries”; and
    • “The disintermediated bank: banks have become irrelevant as customers interact directly with individual financial service providers.”

    With this issuance, revised to reflect the feedback BCBS received on its August consultative paper, BCBS has provided several “sound practices” for banks and bank supervisors to consider, along with its final ten key implications of fintech, as well as ten key considerations. Some notable considerations include:

    • Banks should have appropriate, effective governance structures and risk management processes to address key risks that may arise due to fintech developments, which may include staff development processes to ensure bank personnel are appropriately trained to manage fintech risks, as well as the development of risk management processes compliant with portions of the BCBS’s Principles for sound management of operational risk that relate to fintech developments.
    • Banks should implement effective IT and other risk management processes to address the risks and implications of using new enabling technologies. Bank supervisors should also “enhance safety and soundness by ensuring that banks adopt such risk management processes and control environments.”
    • Bank supervisors should understand the implications of the growing use of third parties, via outsourcing and/or partnerships, and maintain appropriate due diligence processes, which should “set out the responsibilities of each party, agreed service levels and audit rights” when contracting with third-party service providers.
    • Bank supervisors should communicate and coordinate with public authorities responsible for the oversight of fintech-related regulatory functions that are outside the purview of prudential supervision, including safeguarding data privacy, cybersecurity, consumer protection, and complying with anti-money laundering requirements. The recommendation removes the phrase “whether or not the service is provided by a bank or fintech firms,” which was contained in the August consultative document.
    • Bank supervisors should coordinate global cooperation between banking supervisors when fintech firms expand cross-border operations to enhance global safety and soundness by engaging in appropriate supervisory coordination and information-sharing. Recently, on February 19, the U.S. Commodity and Futures Trading Commission and the United Kingdom’s Financial Conduct Authority signed an agreement outlining a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. (See previous InfoBytes coverage here.)
    • The report stresses the importance of collaboration between bank regulators, specifically in jurisdictions where non-bank unregulated firms are providing services previously conducted by banks. The BCBS further notes that bank supervisors should review existing supervisory frameworks to consider whether potential new innovative business models can evolve in a manner that has appropriate banking oversight but does not unduly hamper innovation.

    Fintech Basel Committee U.K. CFTC

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  • CFTC announces collaboration agreement with U.K. fintech team

    Fintech

    On February 19, the U.S. Commodity and Futures Trading Commission (CFTC) and the United Kingdom’s Financial Conduct Authority (FCA) released the Cooperation Arrangement on Financial Technology Innovation (Agreement). The Agreement outlines a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. The Agreement specifies how program officials with LabCFTC in the U.S. and FCA Innovate in the U.K. will collaborate to share information, provide regulatory support to fintech businesses, and refer fintech businesses that wish to operate in the other jurisdiction to each other. In the announcement for the Agreement, CFTC Chairman J. Christopher Giancarlo stated, “we believe that by collaborating with the best-in-class FCA FinTech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.”

    Fintech CFTC UK

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