Insights

03/04/17

Fintech Update: April 2017

G+T is launching a new update that will aim to cover key legislative, regulatory and industry developments impacting business in the fintech space.  This month’s update discusses key regulatory developments in the world of distributed ledger technology (DLT), AML/CTF regulation and banking licencing.

While not discussed in this update, industry participants may also be interested in the recent passage of legislation which has given rise to crowd-sourced equity funding (an update on that topic is available here). The legislation opens up a new funding source, provides a clear regulatory scheme for intermediaries operating crowd-sourced equity funding platforms and offers some protections to retail investors.  Importantly, that legislation also introduced an expanded regime of exemptions, available to the Minister, when entities would otherwise need to obtain either Australian market licences or clearing and settlement licences.  Any fintech businesses considering operating a platform that resembles a market or providing a sale facility, by allowing participants to buy and sell on the platform, should consider whether this new regime of exemptions might offer a means to obtain an exemption from licensing requirements for the platform.

AUSTRAC’s Innovation Hub

In early March 2017, the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) launched its Fintel Alliance.  The Alliance, the first of its kind in the world, is a public-private partnership between government agencies (including the Australian Federal Police, NSW Police, Australian Security Intelligence Organisation and the Australian Competition and Consumer Commission) and the private sector (including the big four banks, Macquarie, PayPal and Fintech Australia).  Employees of all organisations work alongside each other out of an Operations Hub, based at AUSTRAC’s head office, to combat money laundering and terrorism financing.  The employees will co-design methodologies to test AUSTRAC’s data trove.

As part of the Fintel Alliance, AUSTRAC has also announced an Innovation Hub targeted at improving the fintech sector’s relationship with Government and regulators.  The Hub will feature a regulatory sandbox for fintech businesses to test financial products and services without risking regulatory action or costs.  One of the central aims of the hub is to design ‘smarter regulation’, to reduce compliance burdens and increase sector resilience against risks.  Aidan O’Shaughnessy of the Australian Bankers Association said at the launch that “The Innovation Hub is very important in this period of substantial regulatory reform.”

ASIC releases information sheet regarding distributed ledger technology

During the Australian Securities and Investments Commission (ASIC) Annual Forum, ASIC released Information Sheet 219 Evaluating distributed ledger technology for both existing licensees and new market entrants.  The information sheet informs businesses considering operating market infrastructure or providing financial or consumer credit services using DLT of how ASIC will assess whether a proposed DLT solution is compliant with licence conditions. 

The assessment mechanism features six questions by which ASIC will evaluate potential use of DLT.  Those questions are: how will the DLT be used, what DLT platform is being used, how the DLT is using data, how the DLT is run, how does the DLT work under the law and how does the DLT affect others.  Appendix 1 to the information sheet provides particulars regarding each of the questions in the assessment mechanism, detailing the information of which ASIC would like to be informed.  The assessment mechanism in the information sheet can be used to determine whether ASIC is likely to have concerns about the proposed implementation of a DLT solution by a fintech business. 

Amendments proposed to Delaware’s corporate law to facilitate use of distributed ledger technology to manage company registers

The Corporate Council of the Delaware State Bar Association's Corporation Law Section has released a proposed piece of legislation that, amongst other things, would establish a legal basis for using DLT to create and manage corporate records.  Delaware is a popular site for companies to base their headquarters, due to favourable tax treatment, accounting for more than half of all Fortune 500 companies. 

The primary issue identified in implementing a DLT solution to manage corporate records was that a distributed ledger does not involve a central database.  The current law is drafted based on corporate records being centralised.  The proposed amendments are designed to facilitate a shift to decentralised record-keeping.  In sum, the proposed amendments are to overcome the following legislative hurdles to implementation of DLT solutions:

  • a definition of a stock ledger is proposed to be introduced to provide that it is “one or more records administered by or on behalf of the corporation” to reflect the decentralised nature of record-keeping using DLT;
  • as DLT is accessible across many systems in real time, it is proposed that any records “administered by or on behalf of the corporation” may be kept on any information storage device “or one or more electronic networks or databases (including one or more distributed electronic networks or databases)”; and
  • the proposed legislation also amends various sections which require written notices instead be given by “electronic transmission” (which is defined as “any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process”).

The legislation has limits, for example, it does not facilitate the implementation of a ledger for corporations which have certificated stock, as shares in those corporations remain represented by certificates.  The current requirements that the ledger be convertible into paper form within a reasonable time and that certain information also be recorded in the ledger are both preserved.  The proposed legislation, if approved by the Corporation Law Section, is expected to be introduced to the Delaware General Assembly.

The draft legislation is relevant to Australia as the proposed amendments reflect the difficulty associated with implementing decentralised solutions where the rights and interests of parties have been drafted on the basis that an intermediary facilitates transactions.  Any arrangements, which may implement a DLT solution, should incorporate flexibility such that rights and interests are able to accommodate the decentralised nature of the DLT solution as opposed to relying on an intermediary.

Draft fintech banking licensing manual released in the US

Finally, a new licensing regime is proposed in the US to allow fintech firms to enter the national banking industry.  Fintech firms in the US currently are not regulated federally and need to obtain state-by-state approvals, with money transmission subject to different regulation in 48 separate states.  This has impeded the growth of fintech firms in the US. 

The Office of the Comptroller of the Currency (OCC), a bureau within the US Treasury with responsibility for national bank regulation, has published a draft supplement to the Comptroller’s Licensing Manual that provides details regarding proposed acceptance and evaluation of applications from fintech companies for issuance of Special Purpose National Bank (SPNB) charters.  The grant of a SPNB charter would permit fintech businesses to enter the federal banking system in the US.  The SPNB charter for fintech businesses proposed by the OCC permits a national bank to pay checks or lend money (or modern equivalents of those activities), provided the bank does not take deposits and is not insured by the Federal Deposit Insurance Corporation. 

The OCC is inviting comments on the draft supplement up to 14 April 2017.

 

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