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Financial Services Law Insights and Observations


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  • Arizona Enacts Laws Providing for Legal Recognition of Certain Electronic Signatures and Other Records


    Last month, Arizona Governor Doug Ducey signed into law two pieces of legislation (S.B. 1084 and S.B. 1078), which formally grant legal recognition of electronic records and signatures under state law. Specifically, the new laws—each of which were passed unanimously by both houses of the Arizona legislature—formally acknowledge the legality of certain electronic records and signatures for the purpose of “satisfy[ing] any law that requires a record to be in writing or to be retained or both.” S.B. 1084 further details the requirements that must be satisfied when creating, sending, and accepting electronic signatures or records in order to qualify for legal recognition under the new law. As previously reported in InfoBytes, Arizona also recently enacted H.B. 2417, which recognized blockchain signatures and smart contracts under state law.

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  • Arizona Governor Signs Blockchain Records Bill


    On March 29, Arizona Governor Doug Ducey signed H.B. 2417, which recognizes blockchain signatures and smart contracts under state law. H.B. 2417 amends Title 44, Chapter 26, of the Arizona Revised Statutes, and defines “blockchain technology” as “distributed ledger technology . . . protected with cryptography . . . [that] provides an uncensored truth.” The amendment, cleared by the Senate in a 28-1 vote on March 23, addresses signatures and records and states “a signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” Furthermore, the amendment also discusses the legality and enforceability of a smart contract, defined by the bill as an “event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger . . . that can take custody over and instruct transfer of assets on that ledger.” Smart contracts, therefore, “may exist in commerce . . . and may not be denied legal effect, validity or enforceability,” thus presenting a new option of delivering information via blockchain.

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  • Federal Reserve Board Member Recognizes Blockchain Technology's Potential; Warns of Associated Risks

    Federal Issues

    On October 7, at the Institute of International Finance Annual Meeting Panel on Blockchain, Federal Reserve Board member Lael Brainard delivered a speech titled “Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement.” Brainard acknowledged blockchain technology as possibly the “most significant development in many years in payments, clearing, and settlement” and outlined its potential “to transform the way financial market participants transfer, store, and maintain ownership records of digitized assets.” Brainard highlighted payment technology changes as a particular regulatory focus and emphasized the Federal Reserve’s “responsibilities for promoting the safety and efficiency of the payments and settlements systems; supervising financial institutions engaged in payments, clearing and settlement; and safeguarding financial stability.” The following potential benefits of blockchain technology are among those discussed in Brainard’s speech: (i) faster processing and reduced costs in cross-border payments and trade finance; (ii) transparency, reduced costs, and faster settlements within securities markets; and (iii) cryptography as a secure way of transmitting and storing data. Brainard cautioned that, notwithstanding the technology’s promise, certain risks associated with financial technological developments and innovation remain, particularly in the areas of settlement, operations, cybersecurity, money laundering, and terrorist financing. Brainard concluded by highlighting the Federal Reserve’s commitment to industry engagement as blockchain technology evolves, noting that stakeholders “will work together to foster socially beneficial innovation, while insisting that risks are thoroughly understood, managed, and controlled.”

    Federal Issues Payment Systems Federal Reserve Payments Blockchain Privacy/Cyber Risk & Data Security Distributed Ledger

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  • Congressman Responds to Comptroller on Fintech


    On September 20, U.S. Representative David Schweikert (R-AZ) sent a letter to Comptroller of the Currency Thomas Curry, asking the OCC to consider a more flexible and uniform approach for regulating digital currencies and the use of blockchain technology. Specifically, the letter notes that much of the development of digital currencies does not originate within institutions that are already federally chartered. Representative Schweikert further argues that most institutions active in this area do not wish to engage in traditional lending or deposit-taking activity, and instead seek a more limited scope of regulation. Thus, the letter asks Comptroller Curry to consider the following questions as the OCC continues to formulate its policy on digital currencies: (i) can the OCC create a limited purpose charter for non-bank financial service firms operating in this area? (ii) can the OCC take steps to coordinate with AML/CTF authorities, and state regulators, to develop flexible approaches that would allow U.S. digital currency firms to be competitive in light of various foreign regulatory frameworks? and (iii) how can the OCC help to facilitate relationships between digital currency firms and national banks?

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  • FSOC Publishes 2016 Annual Report, Highlights Marketplace Lending as Emerging Risk

    Privacy, Cyber Risk & Data Security

    On June 21, the Financial Stability Oversight Council (FSOC) released its 2016 annual report. The report reviews financial market and regulatory developments, identifies emerging risks, and offers recommendations to enhance the U.S. financial markets, promote market discipline, and maintain investor confidence. Among other things, the report focuses on threats and vulnerabilities related to cybersecuritry, marketplace lending, and distributed ledger systems/blockchain technology. Addressing the need for heightened cybersecurity, the report advises financial institutions to work together with government agencies to better understand risks associated with destructive malware attacks and to “improve cybersecurity, engage in information sharing efforts, and prepare to respond to, and recover from, a major incident.” Regarding marketplace lending, the report stresses that, as the industry continues to grow, “financial regulators will need to be attentive to signs of erosion in lending standards.” Finally, according to the report, distributed ledger systems pose operational vulnerabilities that “may not become apparent until they are deployed at scale,” and cautions that a “considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems.”

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  • CFTC Commissioner Urges Regulators to "Do No Harm" as Blockchain Technology Develops


    On March 29, CFTC Commissioner J. Christopher Giancarlo delivered remarks before the Depository Trust and Clearing Corporation 2016 Blockchain Symposium. According to Giancarlo, blockchain technology — also known as distributed ledger technology — has the ability to “revolutionize the world of finance” by potentially linking networks of legal recordkeeping in a similar fashion to how the “Internet connects data and information.” Giancarlo spent much of his remarks heralding the technology’s potential, opining that blockchain technology may (i) “be able to provide regulators with visibility into the trading portfolios of swaps counterparties that they lacked during the financial crisis and that Dodd-Frank mandated”; (ii) “make possible new ‘smart’ securities and derivatives that can value themselves in real time”; and (iii) “help market participants manage the enormous operational, transactional and capital complexity brought about by the legion of disparate mandates, regulations and capital requirements promulgated globally in the wake of the 2008 financial crisis.” In light of the potential benefits of blockchain technology, the speed at which it is developing, and the vast interest it has garnered within the financial industry, Giancarlo advocated that regulators take a uniformed, encouraging, and principle-based approach toward their regulation of the industry, likening it to the “do no harm” framework implemented during the comparatively relaxed regulatory framework at the onset of the Internet. This approach will foster innovation, according to Giancarlo : “[o]nce again, the private sector must lead and regulators must avoid impeding innovation and investment and provide a predictable, consistent and straightforward legal environment. Protracted regulatory uncertainty or an uncoordinated regulatory approach must be avoided, as should rigid application of existing rules designed for a bygone technological era.”

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  • Digital Insights & Trends: Clearing and Settlement Platforms to Watch in 2016


    Andrew-Grant-caption2015 was the year that blockchain technology, initially used as the public ledger for tracking bitcoin, began to mature and expand beyond payments. While regulators focused on the risks associated with virtual currency, technology companies and financial institutions forged ahead with developing alternate uses for the blockchain.

    Using blockchain technology offers many upsides, with one of the most notable being faster clearing and settlement functionality. Companies that can clear and settle transactions faster and at a reduced cost will have a competitive advantage.  Thus far, however, no dominant player has emerged.

    There are a number of companies that are working on creating blockchain platforms for financial institutions to use to clear and settle trades. Below are just a few of note:

    • Digital Asset Holdings. Blythe Master and team are developing a blockchain platform for financial institutions to use to settle digital currency trades as well as digitized versions of financial assets. Digital Asset Holdings recently purchased Hyperledger, which developed a distributed ledger to allow banks and other financial institutions to clear and settle transactions in real time, and Blockstack, which offers private blockchain services.
    • Ethereum. Launched in mid-2015, it offers its own decentralized blockchain platform that allows each blockchain to be customized to fit the specific security that is subject to clearance and settlement.
    • Bankchain. Developed by ItBit, it is a ledger system seeking to leverage the blockchain for clearing, settlement, and custody.
    • Clearmatics is working with  UBS to help develop a digital coin based on blockchain technology to settle trades and make cross-border payments.
    • R3CEV has developed a consortium of 42 banks dedicated to developing blockchain technology for settlements and payments, among other things.
    • Citigroup is developing various blockchain technologies (at least three) and has created a test virtual currency, “Citicoin,” which it uses to test the blockchain technologies.

    In addition, companies are using blockchain technology to issue and trade equities. At the end of 2015, Nasdaq issued shares in using Nasdaq Linq, its blockchain ledger technology.  Additionally, the SEC approved’s plan to issue company stock via blockchain through its subsidiary, t0.

    As the above demonstrates, both technology companies and financial institutions will be focused on developing numerous use cases for blockchain technology beyond payments in 2016. Regulators are also beginning to focus on the blockchain technology itself as opposed to solely virtual currency. For example, the CFTC is holding a hearing on January 26, 2016 to discuss the use of blockchain technology in derivatives markets.  Taken together, 2016 seems to be the year that blockchain technology separates itself from payments and begins to stand on its own.  Judging by the CFTC’s interest in blockchain technology, it appears that regulators may be thinking the same thing.

    For another retrospective on the blockchain in 2015, see our Coindesk article "The Stories That Shaped the Blockchain Narrative in 2015."

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  • Digital Insights & Trends: It's All About the Blockchain


    Just returning from a blockchain workshop in London, where I worked with a number of incredible people to consider solutions to some of the pressing regulatory issues impacting the blockchain technology.  While considering these issues I wondered if Bitcoin had gained popularity solely as a protocol and not as a currency, would it have evolved faster and more readily. The almost instantaneous (compared to current standards) transfer of value across the globe would be just one component of the potential possibilities for the technology as recognized by the mainstream public.  A secure ledger of property ownership, notarization, recordation of wills and trusts, claims for corporate names and intellectual property – all would be pursued at a much faster, or perhaps more public, pace.  Currently, progressive financial institutions have announced their active experiments with the technology, while others quietly research the potential use cases.

    The opportunities for developing a cryptographic, distributed, public ledger are endless, rendering predictions for the future, even 5 years from now, difficult.  What is clear is that the way we conduct financial transactions will be forever altered – for the better.  Payments and payment systems will be more efficient, secure, faster, and less expensive for all in the ecosystem and will also lead to financial inclusion.  Government regulation – while antithetical to the original thesis of the Bitcoin protocol – is a necessary component of the “algorithm” as the protection of the public from acts of terrorism and other crimes is in everyone’s interest.  So let’s work with it, think creatively about it, and help prepare the protocol, governments and the public for the next 5 years.

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