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Proposed "Operating Vision" released for the U.S. Faster Payment Council
On April 24, the Governance Framework Formation Team (GFFT), through the Federal Reserve Board’s Faster Payments Task Force, announced a proposed "Operating Vision" for a new organization known as the U.S. Faster Payments Council (FPC). According to the Operating Vision, “[t]he goal is a ubiquitous, world-class payment system in 2020 where Americans can safely and securely pay anyone, anywhere, at any time and with immediate funds availability.” To achieve this goal, the FPC will focus on (i) facilitating interoperability to enable payments and information to move seamlessly, and (ii) broad adoption of faster payment solutions. The FCP’s core functions will be consensus-driven problem solving, forums for dialogue, and education and advocacy.
Membership of the FPC will be open to all stakeholders. The GFFT is requesting comments on the proposal by June 22.
11th Circuit denies motion to compel arbitration; rules claims relate to BSA violations and not to terms of user agreement
On April 23, the U.S. Court of Appeals for the 11th Circuit upheld a district court’s decision to deny a global money services business’s motion to compel arbitration under the doctrine of equitable estoppel. According to the unpublished opinion, the plaintiff-appellee—a customer of a now defunct cryptocurrency exchange (defunct exchange)—filed a proposed class action against the money services business and the CEO of the defunct exchange, alleging that when the money services business liquidated bitcoin into cash for two accounts that the CEO opened, it aided and abetted the defunct exchange’s breach of fiduciary duty and the CEO’s theft of customer assets. The customer claimed that the money services business had a duty under the Bank Secrecy Act (BSA) to monitor or investigate the CEO’s actions, detect the CEO’s theft of customer assets, and report the CEO’s suspicious activity to appropriate authorities. However, the business argued that when the CEO opened his accounts, he agreed to be bound by an arbitration clause in the user agreement, and that therefore, under the doctrine of equitable estoppel, the customer was bound by the arbitration clause because the customer’s claims were based on the user agreement. The district court rejected the business’s argument and found that the customer was not asserting any rights or benefits that arose out of the user agreement but rather on duties created under the BSA. The 11th Circuit affirmed the district court’s decision, stating that the customer’s claims were predicated on duties the defendant-appellant owed under federal statutes and regulations as well as state common law and not on enforcing the terms of the user agreement, and, therefore, the customer could not be compelled to arbitrate the claim.
New York Attorney General launches cryptocurrency integrity initiative
On April 18, the New York Attorney General’s office announced the launch of an initiative designed to protect virtual currency investors and increase transparency and accountability within the cryptocurrency industry. Attorney General Eric T. Schneiderman sent questionnaires to 13 virtual currency trading platforms, requesting information on their operations, policies, and internal controls as part of a “fact-finding inquiry.” “[T]oo often, consumers don't have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” the Attorney General stated. The Virtual Markets Integrity Initiative asks the trading platforms to disclose several categories of information, including ownership and control information, operation and fees, trading policies and procedures, internal controls, and privacy and money laundering risks and safeguards. Responses will be analyzed, compared across platforms, and presented to the public. Questionnaires are due May 1.
Conference of State Bank Supervisors releases nationwide list of fintech innovation contacts
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.)
Electronic contracting tools provide evidence and records necessary to undermine opposing affidavits
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.
Court upholds clickwrap agreement, reiterating that general principles of contract apply
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.
GAO encourages increased collaboration in fintech regulation
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.
Arizona creates first state regulatory sandbox for fintech innovation
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.
Financial Stability Board issues letter to G20 Finance Ministers and Central Bank Governors
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.
FTC challenges virtual currency “chain referral schemes”—creates new working group
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.