Below is a summary of some of the significant legal, regulatory and industry actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
CFPB Declines to Make Definitive Statement on Virtual Currencies in Final Prepaid Account Rule
On October 5th, after more than four years of anticipation by the financial services community, the Consumer Financial Protection Bureau (CFPB) issued its final rule concerning prepaid accounts, declining to make any definitive statement as to whether Bitcoin and other virtual currencies fall within the scope of Regulation E. Regulation E implements the Electronic Fund Transfer Act and provides certain consumer protections by law, such as those relating to lost or stolen cards and restricting liability for unauthorized transactions. For the time being, this is welcome news for digital currency advocates who feared the negative impact of regulating “virtual currencies” as a prepaid financial account. Nonetheless, fiat prepaid accounts and digital wallets are in scope, and such platforms are advised to confer with counsel as to its applicability to their particular business. The final rule will take effect on October 1, 2017.
SEC Delays Decision on Bitcoin ETF
The SEC has further delayed a decision on approving the SolidX bitcoin exchange-traded fund (ETF). The proposed fund, if approved, would be the first exchange-traded product available on U.S. markets to hold a digital asset such as bitcoins. Instead, the SEC has implemented another three-week comment period to seek additional feedback on: the stability, resilience, fairness and efficiency of bitcoin markets; the potential for losses via computer hacking and manipulation; the product’s valuation method; and whether bitcoin’s “novel and unique properties” make it “an appropriate underlying asset for a product that will be traded on a national securities exchange.” The new deadline for the SolidX bitcoin ETF decision is October 31, 2017. We encourage participation on the proposal, and thus far the SEC has only received six letters for and against bitcoin ETF.
Credit Unions Turn to Blockchain
Faced with increasing competition and declining numbers across the credit union industry, Credit union service organizations (CUSOs) are joining more than 60 credit unions in the CU Ledger blockchain initiative, in an attempt to develop applications for distributed ledger technology (DLT) in the industry. The initiative is primarily focused on utilizing smart contracts and developing a user-centric digital identity that could enable faster authentication while minimizing fraud, and is funded by participant fees with a minimum investment of $10,000 required to participate. CU Ledger has the support of the system’s largest CUSOs and is working with Salt Lake City-based start-up Evernym in the hopes of having a prototype up and running by early next year.
Central Banks Look to Blockchain
Central banks are paying increasing attention to distributed ledger technology (DLT) and its potential to make the financial system faster and more efficient, transparent and secure. In a speech on October 7th, Federal Reserve governor Lael Brainard acknowledged the technology’s potential to transform the financial system, saying, “We are paying close attention to [DLT], recognizing this may represent the most significant development in many years in payments, clearing and settlement.” Her speech came just three days after the Fed announced the launch of a major new study on digital payment technologies, bitcoin, and fintech more broadly, to be led by the Fed’s Faster Payments Task Force. The study will focus primarily on the security and implementation of faster payments technology in order to encourage widespread adoption by businesses and consumers when the technology becomes available. The Fed’s effort is also designed to catch up to other countries who are further along in bringing their payments systems into an increasingly digital landscape — notably, the Bank of England, the People’s Bank of China, the Monetary Authority of Singapore and the Reserve Bank of Australia. The Bank of Russia also recently announced that it was testing Masterchain, an Ethereum-based blockchain prototype.
Virtual Currency Regulation Takes Effect in “Bitcoin Isle”
Light touch regulation of virtual currency exchanges have come into effect on the autonomous island of Jersey in the UK. The new laws make virtual currency exchange a supervised business and require exchange businesses with an annual turnover threshold of £150,000 or more to register with the Jersey Financial Services Commission (JFSC). Digital currency service providers will be sanctioned if they fail to register within three months of crossing that threshold. The new laws are designed to encourage experimentation, innovation and testing of new virtual currency products, services, business models and delivery mechanisms, while balancing the need for regulation. They also build on prior Jersey governmental efforts to attract companies involved in Bitcoin and other fintech services. In 2014, for instance, the island became home to the first ever regulated Bitcoin fund, Global Advisors Bitcoin Investment Fund (GABI), which was certified by the JFSC and allows traditional investments such as pensions to be invested in Bitcoin and secured by the same security features in commonly used financial products. And today, according to a local Bitcoin advocacy group, sixteen establishments on the tiny island accept Bitcoin as a method of payment.
Dubai Aims to Have All Documents on a Blockchain by 2020
On October 5th, the Crown Prince of Dubai announced a strategic plan to have all government documents secured on a blockchain by 2020, as part of a larger initiative known as the Dubai Future Agenda, whereby Dubai aims to set the standard for “smart cities” of the future. The plan, known as the Dubai Blockchain Strategy, has three main pillars: government efficiency, industry creation, and global leadership, and is a joint project between the Dubai Future Foundation and Dubai Smart City Office. The Dubai government estimates its blockchain strategy has the potential to generate 25.1 million hours of economic productivity each year in savings, while reducing CO2 emissions. If successful, individuals would only need to enter their personal data or business credentials once, after which the information would be updated and verified in a timely manner through the blockchain network across all government and private entities, including banks and insurance companies. The Crown Prince also announced plans to open the platform to other cities and nations in the hopes of international collaboration in the future.
For a comprehensive list of developments please see our Virtual Currencies: International Actions and Regulations.