On September 11, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) each separately initiated their first enforcement action for violations of broker-dealer regulatory requirements under U.S. securities laws in digital asset markets. These actions echo all prior agency actions and alerts indicating that where a “security” is involved, both agencies will expect digital asset market participants to fully comply with U.S. securities laws. Additionally, they serve as a serious reminder to all persons acting as “brokers” or “dealers” (together, “broker-dealers”) that just because digital asset securities are unconventional securities with unconventional compliance challenges does not mean that either the SEC or FINRA will lower its compliance expectations. Continue Reading The SEC and FINRA Bring the First Enforcement Actions Against Broker-Dealers for Violations in Digital Asset Markets, Providing Reminder of Compliance Obligations
On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws. This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens. As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts for how cryptocurrencies and ICOs will be viewed by courts and federal regulators in cases to follow. Continue Reading Federal Court, SEC, and FINRA Scrutinize Cryptocurrencies and ICOs
This week, the New York Department of Financial Services (“NYDFS”) announced approval for its two licensed FinTech-oriented state trust companies, Gemini Trust Company LLC and Paxos Trust Company LLC (formerly known as itBit Trust Company), to offer a new type of cryptocurrency referred to as a Stablecoin. The Gemini Dollar (“GUSD”) and Paxos Standard Token (“PAX”) are designed to be collateralized one-for-one by the U.S. dollar, and will permit payment for other assets traded on blockchains with instant settlement and minimal transaction costs. As described, GUSD and PAX are issued only when a customer of Gemini or Paxos deposits a corresponding amount of U.S. dollars, which are always held in a reserve account by the issuer on behalf of GUSD and PAX holders. At all times under this framework, Gemini or Paxos are required to hold, in a fiduciary capacity, at least as much fiat currency as GUSD and PAX in circulation. Continue Reading New York Department of Financial Services Approves Gemini and Paxos Virtual Currency “Stablecoins”
Artificial intelligence and machine learning (for simplicity, we refer to these concepts together as “AI”) have been hot topics in the financial services industry in recent years as the industry wrestles with how to harness technological innovations. In its report on Nonbank Financials, Fintech, and Innovation released on July 31st, the Treasury Department (“Treasury”) generally embraced AI and recommended facilitating the further development and incorporation of such technologies into the financial services industry to realize the potential the technologies can provide for financial services and the broader economy.
On July 31st, the Office of the Comptroller of the Currency (“OCC”) announced that it would begin accepting applications for a special purpose national bank charter (“FinTech Charter”) from nonbank financial technology companies that offer bank products and services, meet the OCC’s chartering requirements (the “FinTech Charter Policy Statement”) and adhere to the OCC’s supplemental Licensing Manual (the “Comptroller’s Manual Supplement” or the “Supplement”). Hours earlier, the Treasury Department released its fourth and final report in response to President Trump’s Executive Order 13772. The report, entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”, recommends that the OCC move forward with the FinTech Charter.
While the OCC announced it would begin accepting applications, it did not answer some key questions about the new FinTech Charter. Among those questions is what businesses will be permissible in the FinTech Charter? Neither the OCC’s statement nor the Comptroller’s Manual Supplement defined the permissible businesses for FinTech Charters. Follow-up discussions have confirmed that payments and other similar businesses are considered in scope, but that no final decision has been made by the OCC on whether the new FinTech Charter will be available for virtual currency-focused businesses.
Please click here to read the full alert memorandum.
On July 31st, the Treasury Department (“Treasury”) released its fourth and final report in response to President Trump’s Executive Order 13772. The report, entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” (the “Report”), only briefly addresses distributed ledger technologies, blockchain and digital assets, but takes broad aim at perceived regulatory challenges to innovation. The Report argues for a significant rethinking of state and federal regulation across data access, licensing, payments and many other issues. Continue Reading Treasury Report Recommends More Consistent Regulation to Spur Innovation
Today, Treasury released its long-awaited FinTech report entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”. While the report provided only a very truncated discussion of distributed ledger technologies, blockchain, and digital assets, it discussed at length other key innovation and technology issues that are impacting the market for financial services. While DLT and digital assets appropriately garner many headlines, the innovative potential of new technologies for how financial services are accessed, delivered, bundled, analyzed, marketed, and regulated offers great opportunities as well as risks. The focus of the Treasury FinTech report on these fundamental issues no doubt will spur even more examination of our changing financial environment. Continue Reading Treasury Releases FinTech Report, and OCC Immediately Relaunches a National FinTech Charter
On Wednesday, July 25th, Pamela Marcogliese, a partner at Cleary Gottlieb, moderated a panel for Women in Derivatives on the role of artificial intelligence (“AI”) and machine learning in the financial industry featuring experts such as Dr. Sherry Marcus, Managing Director and Co-Head of Data Science Core at BlackRock, Asita Anche, Managing Director, Head of Systematic Market Making, Risk Centralization & Data Science at Barclays, Kristina Fan, CEO & Founder at 7 Chord (a FinTech start-up specializing in AI for credit trading) and Claudia Perlich, a Senior Data Scientist at Two Sigma and Adjunct Professor at NYU. Continue Reading Cleary Gottlieb Partner Pamela Marcogliese Moderates Panel on Machine Learning and Artificial Intelligence in Finance
The New York Department of Financial Services (“NYDFS”) recently announced approval of significant new activities for FinTech-oriented businesses. Over the past week, NYDFS has granted the following approvals:
- Additional virtual currencies available for trading through Paxos Trust Company LLC (formerly known as itBit Trust Company), a NY-chartered trust company; and
- Approval of BitLicenses for Xapo, Inc. and Square, Inc. which would authorize them to offer custody and exchange services, respectively, for Bitcoin to residents of New York.
These announcements demonstrate the breadth of state regulation of virtual currency operations through expansion of exchange services to new emerging currencies and through custody and related services. Continue Reading New York Department of Financial Services Approves Significant Expansions of State-Regulated Virtual Currency Businesses
On Thursday, June 14th, the SEC Director of Corporation Finance, William Hinman, stated his view that current secondary market trades of Ether are not now securities transactions as part of a speech on the treatment of digital assets under the securities laws. While he expressly set aside the question of whether the capital-raising that initially accompanied the sale of Ether in 2014 was a securities offering, he confirmed previous suggestions that Ether is a prime example of a digital asset that may once have been offered as a security, but is now “something else” that is not regulated by the securities laws. While Hinman’s views are not binding on the Commission, his remarks strongly suggest the Commission’s willingness to consider whether certain digital assets that may be initially offered as securities over time can later lose their status as securities—a view that is shared by at least one CFTC commissioner. Continue Reading SEC Director of Corporation Finance States That Secondary Market Sales of Ether Are Not Securities Transactions Now, but “Something Else”