Payments

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In two recent articles, Latham & Watkins lawyers examine the SEC’s guidance on the application of securities regulations to digital assets and the questions that remain unanswered.

By Stephen P. Wink, Witold Balaban, John J. Sikora, Miles P. Jennings, Emanuel V. Francone, Cameron R. Kates, and Shaun Musuka

Digital Asset Regulation: Howey Evolves

In this article, the authors provide a comprehensive look at the SEC’s evolving guidance that aims to clarify when sales of digital assets (also known as tokens) are securities transactions. The authors discuss the Commission’s early application of the Howey test to digital assets, its pronouncements and enforcement actions, and the response of commentators. They then turn to the SEC’s Framework, issued in 2019, and other current SEC actions. They close by addressing steps the SEC should take to provide market participants with greater clarity on the application of the securities laws to digital assets.

Call for input: Industry needs to engage as the FCA moves forward on its transformative vision for open finance.

By Stuart Davis and Brett Carr

Imagine a world in which you could access your bank accounts, credit cards, mortgage, pensions, savings accounts and ISAs, brokerage account, home and car insurance, life insurance, and other financial products on one user interface or app, even if each of those products is held with a different provider. Then, imagine that the app could provide innovative financial management services across all of those products, such as automated switching to the best products, holistic investment advice and budgeting, and sweeping of excess cash into products yielding a better return than today’s current accounts. This world may be closer than you think, and it will likely have profound impacts for incumbent and new financial services business.

Global monetary authorities and financial regulators have responded forcefully to the advent of privately developed global stablecoins.

By Todd Beauchamp, David L. Concannon, Stephen P. Wink, Simon Hawkins, Stuart Davis, and Deric Behar

A new report highlights the risks of global stablecoins and enumerates the legal, regulatory, and oversight hurdles a global stablecoin must clear before launching. The Group of Seven Working Group on Stablecoins released the report, titled Investigating the Impact of Global Stablecoins (G7 Report), at the October 2019 International Monetary Fund annual meeting. The G7 Report was published in tandem with a report by the Financial Stability Board (FSB) on the Regulatory Issues of Stablecoins (FSB Report). Taken together, the two reports provide insight into how some of the world’s most advanced economies (the US, the UK, Canada, France, Germany, Italy, and Japan) view digital assets and stablecoins, particularly those with the potential to launch and quickly scale on an established private-sector global network.

The BoE is seeking feedback on the Introductory Phase of the ISO 20022 migration, that will create a common language for payments data globally.

By Christian F. McDermott, Grace E. Erskine, and Amy Smyth

In 2018, the Bank of England (BoE) consulted on the adoption of ISO 20022 — a global standard for payments messaging — for the payments industry in the UK. In response to consultation feedback and market developments such as SWIFT and the European Central Bank’s requirement that ISO 20022 messaging begin in November 2021, the BoE is now seeking further feedback from interested parties. The BoE’s latest consultation focuses on the Introductory Phase of the CHAPS ISO 20022 migration, specifically the early adoption of “enhanced” data. Feedback must be submitted by 16 October 2019. The BoE has set out two options for the implementation of the Introductory Phase:

European Commission confirms SCA measures should apply to EU consumers purchasing from UK websites in the event of a no-deal Brexit.

By Christian F. McDermott, Jagveen S. Tyndall, and Amy Smyth

Complex payment processing chains comprise multiple entities operating behind the scenes to support everyday transactions.

The strong customer authentication (SCA) requirements introduced by the revised EU Payment Services Directive (PSD2) aim to reduce fraud and make online payments more secure (as described in previous posts of June and August 2019). SCA requires that a customer provide two forms of identification that meet the following criteria:

US lawmakers urge FSOC to designate cloud-based storage systems used by major banks as systemically important financial market utilities.

By Alan W. Avery, Victoria McGrath, and Pia Naib

In an August 22, 2019, letter addressed to Treasury Secretary Steven Mnuchin, in his capacity as chair of the Financial Stability Oversight Council (FSOC), Congresswoman Katie Porter and Congresswoman Nydia Velazquez urged Secretary Mnuchin to designate the three leading cloud-based storage systems used by major banks — Amazon Web Services, Microsoft Azure, and Google Cloud — as systemically important financial market utilities (SIFMUs). This designation would subject such cloud-based storage systems to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Citing Title VIII of the Dodd-Frank Act, which was enacted to promote stability in the financial system, the Congresswomen highlighted the dependence on cloud services by banks and financial institutions for their data needs and the subsequent risks such services pose to the safety and stability of the financial system.

While the payments industry scrambles to meet new standards for APIs, the FCA grants an extension for SCA compliance.

By Christian F. McDermott, Jagveen Tyndall, and Amy Smyth

In an effort to evaluate the readiness of banks to comply with the revised EU Payment Services Directive (PSD2), Tink, a banking platform and data provider, has reported that it tested 84 application programme interfaces (APIs) spanning 2,500 banks and 12 European markets. According to Tink the results showed that none of these APIs were sufficiently robust to meet the new regulatory standards. Separately, the UK’s Financial Conduct Authority (FCA) has delayed the implementation of the strong customer authentication (SCA) requirements introduced by PSD2 to enhance the security of all electronic payment services.

The Federal Reserve is finally stepping into the real-time payments arena.

By Todd Beauchamp, Loyal T. Horsley, and Deric Behar

On August 5, 2019, the Board of Governors of the US Federal Reserve System (the Fed) announced that it plans to roll out a real-time payment and settlement service by 2023 or 2024. The service, named FedNow, is being developed with the stated goal of modernizing the national payment system. Facing political and societal pressure to upgrade the national payment system, the Fed sought comment on the development of a faster payment service in late 2018. After receiving more than 350 comments, the Fed is now moving forward and seeking additional comment on the best way to design the system so that it maximizes inclusivity and utility for all stakeholders. The Fed envisions that FedNow will capitalize on its nationwide infrastructure to provide consumers, businesses, and banks the ability to safely make and receive immediate and fully settled payments 24 hours a day, seven days a week.

Several states and municipalities are requiring brick-and-mortar retail locations to accept cash from customers.

By Todd Beauchamp, Loyal T. Horsley, and Charles Weinstein

On May 7, the San Francisco Board of Supervisors voted unanimously to require all brick-and-mortar stores in the city to accept cash from customers. The Board reasoned that the trending practice of retail establishments and fast-casual restaurants going cashless discriminates against low-income individuals, predominantly minorities, who may not have access to credit or bank accounts. Specifically, the Board found that “[f]or many [San Francisco] residents (for example, those who are denied access to credit, or who are unable to obtain bank accounts), the ability to purchase goods and services depends on the ability to pay for those goods and services in cash. This is especially true of the very poor.” San Francisco follows Philadelphia and New Jersey in passing laws banning cashless brick-and-mortar retailers.

Stripe-commissioned report projects that Europe’s online economy risks losing €57 billion when SCA goes into effect on 14 September.

By Christian F. McDermott

A recent report released by 451 Research and commissioned by Stripe, the online payment processing business, has found poor levels of readiness for the requirements of Strong Customer Authentication (SCA). The report projects that European businesses stand to lose €57 billion in economic activity in the first 12 months after SCA takes effect on 14 September 2019.

Background

The revised Payment Services Directive (EU) 2015/2366 (PSD2) introduced SCA as a means to help achieve the overall aim of “ensuring that all payment services offered electronically are carried out in a secure manner, [by] adopting technologies able to guarantee the safe authentication of the user and … reduc[ing], to the maximum extent possible, the risk of fraud.”[1]