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This periodic update provides information on a number of recent significant legislative and regulatory developments in the funds and financial services industry.
This update delves into the key legislative and regulatory developments occurring in the fintech space in the past month. Amongst other developments, in Australia, the Government and the Australian Securities and Investments Commission (ASIC) have both reinforced their commitment to fintech innovation by respectively introducing legislation to end the double taxation of digital currency and implementing new cooperation agreements with foreign regulators. Globally, leading bodies such as the World Economic Forum, the Financial Stability Board and the International Monetary Fund have released in-depth papers on the impact, risks and benefits of innovative new technology to the financial system.
While not discussed in this update, industry participants may be interested in the recent ASIC consultation papers released in relation to the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) and the Corporations Amendment (Crowd‑sourced Funding) Regulations 2017 (Cth). An update we prepared on these topics is available here. The consultation period ends on 3 August 2017.
Fintech fact: Coindesk discovered that by March 2017, the aggregate market cap for cryptocurrencies reached US$25 billion with over $21bn in Bitcoin and Ethereum.
Over the last month, ASIC has signed fintech cooperation agreements with the Hong Kong Securities and Futures Commission (SFC), the Japan Financial Services Agency (JFSA) and the Malaysia Securities Commission (MSC).
The agreements will enable ASIC to refer innovative fintech businesses to the SFC, JFSA and MSC for advice and support via the Fintech Contact Point, FinTech Support Desk and alliance of FINtech community respectively, while businesses from these countries will in turn be referred to ASIC’s Innovation Hub.
The agreements also provide a framework for information sharing between ASIC and the Asian regulators, providing for communication of regulatory and relevant economic or commercial developments within each jurisdiction, crucial since all four regulators have been actively promoting fintech through various measures.
ASIC has already signed various cooperation or information sharing agreements with the UK, Singapore, Canada, Kenya and Indonesia, which you can read about in our earlier Fintech Update here.
The Government has released exposure draft legislation and explanatory material for amendments removing the double taxation of digital currency where digital currency refers to “fungible digital units of consideration, that do not have a value based on the value of any other thing or associated entitlements.”
As discussed in our Budget update, the proposed change means that digital currency will be treated like money for GST purposes, making it easier for digital currency businesses to operate in Australia. Currently, digital currencies are taxed twice: once when purchased and again when used in exchange for other goods and services. Under the new law, digital currencies will only be taxed once.
The legislation will have a retrospective start date of 1 July 2017. Public consultation is open until 26 July 2017. Please contact us if you wish to discuss.
The World Economic Forum has released a white paper titled “Realising the Potential of Blockchain”, proposing a global governance system for the technology rather than a state-based approach. Exploring governance needs across the platform, the application and the ecosystem as a whole, the paper advocates for a multi-stakeholder approach using a “global solution networks” framework.
At the platform level, the paper investigates the current scalability and standards issues in relation to cryptocurrency. At the application level, the paper calls for more oversight, skilled talent and user-friendly interfaces. Finally, at the overall ecosystem level, the paper explores current regulatory restraint, legal structures and scientific research into the technology. The paper also introduces what it deems to be the eight stakeholders in the ecosystem: innovators, venture capitalists, banks and financial services firms, developers, academics, non-governmental organisations , government agencies and individuals.
The Financial Stability Board (FSB) has released a report on the potential financial stability implications of fintech, identifying ten key supervisory and regulatory issues, including:
While the FSB acknowledged that “there are currently no compelling financial stability risks from emerging Fintech innovations” – perhaps in part due to the small size of the fintech sector – there is still a clear need for increased global cooperation to mitigate any risk that could impede the development of beneficial innovations. Such global cooperation would also provide avenues for authorities to share information and experiences, helping to safeguard financial stability while encouraging innovation.
The International Monetary Fund (IMF) released a staff discussion note titled “Fintech and Financial Services: Initial Considerations”, which largely focused on how emerging fintech innovations and technology could affect cross-border payments and the potential for central bank issued digital currencies.
The paper considers cross-border payments “especially ripe for change” and could see benefits from new technologies. Whilst domestic payments are settled by domestic banks and the central banks, the paper notes that cross-border payments require ad-hoc arrangements often between commercial banks. Specifically, the paper proposes that blockchain and decentralised ledger technology (DLT) could improve how such payments are made, by considering potential benefits to back-end processes, compliance and means of payment.
With respect to digital currency, the paper also suggested that a central bank digital currency could improve efficiency and significantly reduce some transaction costs, especially for individuals and small enterprises. However, the IMF also warned that the potentially erratic valuation of virtual currencies may introduce risks.
The United Kingdom’s Financial Conduct Authority (FCA) released its final report on its asset management market study, emphasising the importance of competition in the sector. Finding that price competition is weak in a number of areas, the FCA also noted that fund objectives were not always clear to investors and that fund performance was not always reported against an appropriate benchmark.
In particular, the FCA examined the barriers to competition in relation to product development and innovation in the asset management market. The FCA found that innovative developments in investment products and strategies were more likely to have an ‘evolutionary’, rather than ‘revolutionary’, effect on competition in the medium to long term. The FCA noted that they did not see innovation in the ways active management firms charge for their services.
The FCA also found limited evidence of significant structural or regulatory barriers to entry in the asset management market however respondents to the study cited the volume and complexity of regulation, data protection rules, financial promotion rules and the potential ramifications of EU withdrawal as barriers to innovation. This suggests a disconnect between regulator and industry, while also highlighting some of the potential challenges that fintech entrants face in relation to disruption of the asset management sector.
The FCA has developed a package of remedies, with a three pronged approach focusing on providing protection for investors ill placed to find better value for money, driving competitive pressures on asset managers and improving the effectiveness of intermediaries.
Delaware Senate Bill 69 has been passed, allowing corporate records to be managed using DLT. This will include being able to manage a corporate stock ledger, which specifies stockholders, stores information and maintains the records of issued and transferred shares of stock. The bill will need to be signed into law by the state’s governor, which is expected to happen by the end of the month. We have previously discussed this in an earlier update here.
The bill enables the digitisation of securities administration and will also prevent shareholders of Delaware-based companies from suing over an alleged breach of fiduciary duty because of the use of blockchain technology.
This is a legislative milestone for the implementation of DLT solutions in corporate registry management and reflects the regulatory regime adjusting to technology developments in a substantive manner. We infer from the legislation certain changes that may need to be implemented in Australia’s regulation of company registers if DLT solutions are to be implemented here.
The Global Blockchain Forum – of which Australia is a founding member – held its second annual general meeting and reiterated its desire to encourage interoperability of global regulatory frameworks. The Forum members resolved to pursue three priority areas:
The Forum consists of key trade groups from Australia, the US, UK, Singapore, Canada, India, Japan, the UAE and New Zealand, and was created to assist in the development of industry best practices and improve engagement with policymakers.
In an interview, ASIC Chairman Greg Medcraft has discussed the regulator’s approach to initial coin offers (ICO), noting that the regulator is still considering its position in relation to regulation of these products. The Chairman discussed the features of ICO tokens, noting that they were unlikely to be equities:
"They’re a very interesting concept. An ICO is not equity – you're offering basically something that is the product of the entity that is doing the launch. You're taking a bet on getting that product early. How different is that if I go to Kickstarter and I buy something – a watch – and then I get that watch and sell it in the future? It's no different, is it?”
The Chairman noted that the regulator’s current approach to cryptocurrencies was that they were commodities (not currencies) and therefore were not financial products. However, ICO tokens could be securities:
"To be classified as a security it would have to have some sort of financial conditions attached to it. Financial obligations have to be offered in relation to it, either it's equity or it's a debt-like instrument or principal instrument or a derivative on that."
While the Chairman noted that ICO tokens in other jurisdictions had been considered by regulators to be outside the realm of regulated financial products, it was possible that certain ICO tokens would bear sufficient similarity to securities to fall within ASIC’s mandate. In the event that ICO tokens were within ASIC’s mandate, the Chairman noted that:
“If [ICOs] do come within our mandate, we would essentially take a technology neutral approach and say, 'Alright, how can we get comfortable about the disclosure of the party issuing the coins? Have the risks been properly disclosed that are related to it? Are there particular conflicts of interests by the issuer?”
The Chairman also noted that a cryptocurrency backed by a central bank would be of significant utility in addressing money laundering and the black economy. The implementation of a payments channel within a centralised DLT scheme would remove issues of anonymity that can arise from current cryptocurrency offerings (such as Bitcoin).