CFTC Announces Two Events Designed to Encourage FinTech Innovation
On June 27, 2019, the Commodity Futures Trading Commission (“CFTC”) announced two events designed to encourage fintech innovation. First, the agency announced the launch of LabCFTC Accelerator. According to the press release, “LabCFTC Accelerator is a component of the broader CFTC’s LabCFTC initiative, focused on deploying a variety of tools, including internal pilots and tests, market research, and innovation competitions in order to drive better understanding and potential adoption of emerging technologies.”
Second, the CFTC announced that it will hold its second annual FinTech Forward 2019 conference—dedicated to exploring the latest in fintech developments—on October 24, 2019. The agency hopes to bring together innovators, regulators, and the general public to examine the impact of developments in such areas as digital assets, commodities, exchange platforms, machine learning and AI, RegTech, and algorithmic trading. Registration for FinTech Forward 2019 will be open to the public early this fall.
LedgerX Permitted to Offer Physically Settled Bitcoin Futures Contracts
The CFTC announced that bitcoin derivatives provider LedgerX is now approved as a designated contract market and is permitted to offer futures contracts, including physically settled bitcoin futures contracts. Unlike most bitcoin futures, physically settled futures result in the buyer receiving the underlying commodity (in this case, bitcoin) at the expiration of the contract rather than its value equivalent. LedgerX is currently already registered as a swap execution facility and a derivatives clearing organization, and it offers physically settled bitcoin swaps and options.
LedgerX may be the first company to receive approval to offer physically settled bitcoin futures. Cboe Global Markets Inc. stopped offering bitcoin futures contracts last week after 18 months of trading. Should LedgerX receive clearinghouse approval, the company will be able to list and clear bitcoin futures contracts and offer its products to retail customers in addition to institutional traders. Several other firms, including Intercontinental Exchange’s Bakkt, Seed CX, and ErisX, have also expressed plans to enter this emerging market.
NYSE Arca Files Proposed Rule Change with SEC
On June 25, 2019, exchange NYSE Arca filed a proposed rule change with the United States Securities and Exchange Commission (“SEC”) for an application to list shares in an investment trust that would be backed by bitcoin and short-term U.S. Treasury securities with a maturity of less than one year (“T-Bills”). As we have previously blogged, the SEC continues to delay its decision regarding the company’s bitcoin exchange-traded fund application, filed several months prior.
According to the June 25, 2019 filing, the Trust’s objective is for the shares “to closely reflect the Bitcoin Treasury Index . . . less the Trust’s liabilities and expenses.” To help assist with volatility, the index would be calculated daily and used to balance the index’s monthly allocation between its bitcoin assets and T-Bill assets reliant on a math outcome, with the bitcoin aspect reliant on the CME BRR. CME BRR was designed to control for manipulation and currently accounts for a select 57% of trading.
NYSE Arca’s proposed Trust has obtained insurance for up to $200 million in coverage against theft from its wallets, which is provided “by a syndicate of industry-leading insurers that are highly rated by AM Best.” The SEC has 45 days to approve, reject, or delay NYSE Arca’s requested rule change and up to 90 days to make a final decision.
House Task Force Holds Hearing on Cryptocurrency Regulation
On June 25, 2019, the House Task Force on Financial Technology held its inaugural hearing, addressing, among other things, the need for additional guidance from the SEC pertaining to the regulation of cryptocurrency. During the proceedings, Rep. Warren Davidson, R-Ohio, questioned Valerie A. Szczepanik, Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation at the SEC, on whether she believed that the SEC’s lack of guidance was causing the United States to lose its place as a global leader in the industry and whether the SEC felt a sense of urgency to provide more clarity to industry participants. In response, Ms. Szczepanik denied any shortcomings on the part of the SEC and explained that the current regulatory system was purposefully lithe:
“I think it’s important to remember that distributed ledger technology is nascent and it’s fast evolving. Our laws that we have currently are flexible and principles based and very broad. And they’ve assisted us over the years in taking in all kinds of new technologies as they occur, this isn’t the first time we’ve had a new technology come to bear. We regulate around activity and conduct.”
Rep. Davidson has been a leader on cryptocurrency legislation, including introducing the Token Taxonomy Act of 2019, which would exclude digital tokens from the definition of “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934 and provide guidance on how the SEC may approach cryptocurrency regulation.
Salesforce Considers Blockchain to Advance Machine Learning
At the fifth annual Blockchain Summit, Adam Caplan, Senior Vice President of Emerging Technology at Salesforce, described how the company is seeking to use blockchain technology to track the origin of biased data and facilitate advancements in machine learning. Specifically, Caplan described how harnessing blockchain technology would permit artificial intelligence (“AI”) programs to access large and broad data sets while simultaneously protecting competing companies’ confidential algorithms. Further, despite the data being sufficiently pseudonymized, blockchain technology could help pinpoint the exact data set that causes a bias to be introduced and thus stop the bias before it permeates the program.
By way of background, innovators in the field of AI have been historically reluctant to share data with competitors—regardless of the potential gains. However, the more data that is available (and available from the most diverse possible sources), the less likely it is that the AI will internalize bias.
Almost Half of States Join Multistate Licensing Agreement for Financial Services Companies
As of June 24, 2019, 23 states have committed to a multistate agreement that aims to standardize several elements of the licensing process for money transmitters and other money services businesses (“MSBs”) and will include reciprocity of a participant’s findings. This multi-state contract, if successful, could streamline the MSB licensing process among the participants.
The participating states at this time are as follows:
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
Further Amendment to Cayman Islands Proceeds of Crime Law (2019 Revision)
On June 5, 2019, the Cayman Islands Proceeds of Crime (Amendment) Law, 2019 was signed into law. As we have previously blogged, this law amends the Proceeds of Crime Law (2019 Revision) by broadening the powers and duties of the country’s regulatory authorities, including the Financial Reporting Authority and the Anti-Money Laundering Steering Group, over financial due diligence and governance.
At the same time, a new bill has been introduced that requires a narrow subset of Cayman Islands companies—those that carry out “virtual asset services”—to comply with the Know Your Customer (“KYC”) and related obligations set forth in the Anti-Money Laundering Regulations (2018 Revision). The definition of “virtual asset services” appears to exclude security and utility token issuers. Under the bill, a “virtual asset” means “a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes.” Accordingly, those issuers may yet be able to retain the flexibility to adopt alternative vetting processes.