Week of October 15-19, 2018
SEC Launches FinHub to Facilitate Public Engagement on FinTech Issues
On October 18, the SEC launched FinHub, a new “Strategic Hub for Innovation and Financial Technology.” The SEC envisions that the hub will provide the public with a singular resource for engaging with the SEC on emerging FinTech issues. The FinHub website consolidates the SEC’s speeches, publications, and regulatory actions on four key emerging technologies and issues: blockchain technology, digital marketplace financing, automated investment advice, and artificial intelligence/machine learning. Additionally, FinHub provides a portal through which the public can request assistance from SEC staff on securities issues raised by emerging financial technologies.
CFTC Commissioner Opines That Developers Could Face Enforcement Actions for Coding Foreseeably Unlawful Smart Contracts
On October 16, at the GITEX Technology Week Conference in Dubai, CFTC Commissioner Brian Quintenz addressed blockchain enforcement. Speaking for himself, and not for the CFTC, Commissioner Quintenz asked who should be held responsible for smart contracts within the CFTC’s jurisdiction that don’t comply with CFTC regulations. As an example, Commissioner Quintenz posed a hypothetical involving an event contract—a type of binary option heavily regulated by the CFTC—executed through a smart contract. Among other things, he suggested developers of such event contracts could be prosecuted for aiding and abetting violations of CFTC regulations if the developers “could reasonably foresee, at the time they created the code, that [the smart contracts] would be used by U.S. persons in a manner violative of CFTC regulations.”
The text of Commissioner Quintenz’s speech is available here.
Bitcoin Ponzi Scheme Operators Ordered to Pay More Than $2.5 Million
This month a New York federal court entered final judgment against Nicholas Gelfman and Gelfman Blueprint, Inc. (individually, “GBI,” and collectively, “Defendants”), ordering that they pay more than $2.5 million in civil penalties and restitution for operating a fraudulent Ponzi scheme involving Bitcoin.
In September 2017, in its first anti-fraud enforcement action relating to virtual currency, the CFTC brought claims against Defendants for fraud and misappropriation in connection with solicited investments in Bitcoin. Specifically, CFTC alleged that Defendants solicited participation in a pooled commodity fund, falsely claiming that they had a successful high-frequency Bitcoin trading bot that was generating substantial returns for investors. In fact, Defendants were running a Ponzi scheme—any “profits” Defendants paid out were misappropriated funds from other investors. And to conceal their misappropriation and losses, the CFTC alleged that Defendants staged a “hack” on its computer systems.
Through two orders—an Order for Final Judgment by Default against GBI and a Consent Order for Final Judgment against Gelfman—the court ordered GBI and Gelfman, respectively, to pay restitution of $554,734.48 and $492,064.53 and civil penalties of $1,854,000 and $177,501. In addition, the court permanently banned GBI and Gelfman from performing certain activities, including trading Bitcoin for third-parties.
Singapore Issues Guidelines for Digital Advisory Services
The Monetary Authority of Singapore recently released licensing guidelines for individuals providing “digital advisory services,” which the guidelines define as the providing advice on investment products using client-facing “automated, algorithm-based tools” with “limited or no human adviser interaction in the advisory process.” The guidelines reflect an attempt by the Monetary Authority of Singapore to make it easier for financial institutions to offer digital advisory services. For instance, some licensed financial advisors providing digital advisory services will not be required to obtain a separate capital markets license to re-balance client portfolios. Moreover, the guidelines make it easier for individuals providing digital advisory services to obtain a capital markets license. Provided that certain safeguards are met, these “digital advisers” are eligible for a capital markets license even if they do not meet corporate track record or minimum assets under management requirements. Finally, the guidelines require that digital advisers ensure that adequate controls are in place to ensure the security and integrity of the algorithms powering their digital advisory services.