FCA Board Focuses on AI

By Latham & Watkins on September 13, 2023 Posted in Data Privacy, Cybersecurity, and AI, Fintech Regulation

A new publication from the UK’s financial regulator signals to firms that they should take steps to manage risks in the use of AI.

By Stuart Davis, Fiona M. Maclean, Gabriel Lakeman, and Imaan Nazir

The UK’s Financial Conduct Authority (FCA) has published its latest board minutes highlighting its increasing focus on artificial intelligence (AI), in which it “raised the question of how one could ‘foresee harm’ (under the new Consumer Duty), and also give customers appropriate disclosure, in the context of the operation of AI”. This publication indicates that AI continues to be a key area of attention within the FCA. It also demonstrates that the FCA believes its existing powers and rules already impose substantive requirements on regulated firms considering deploying AI in their services.

DeFi Crypto Platform Not Liable for Scam Tokens

By Latham & Watkins on September 6, 2023 Posted in Blockchain, Cryptoassets

A federal court’s dismissal of claims against a decentralized cryptocurrency platform and its investors for the actions of scam token issuers is a case of first impression with wider significance.

By Jenny Cieplak, Benjamin A. Naftalis, Stephen P. Wink, Douglas K. Yatter, Gregory Mortenson, and Deric Behar

On August 29, 2023, the US District Court for the Southern District of New York dismissed a proposed class action lawsuit against Uniswap Labs and its CEO, foundation, and three venture capital backers^[1] (the Defendants) brought by plaintiffs who sought damages from alleged exposure to scam tokens that originated with anonymous third-party token issuers on the company’s decentralized cryptocurrency trading protocol.

SEC Targets NFTs as Securities for the First Time

By Latham & Watkins on August 30, 2023 Posted in Blockchain, Cryptoassets, Non-Fungible Tokens

In its first enforcement action involving NFTs, the SEC focused on issuer marketing that promised outsized returns on investment and platform building.

By Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, Douglas K. Yatter, Adam Zuckerman, and Deric Behar

On August 28, 2023, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against a Los Angeles media and entertainment company (the Company) for an unregistered securities offering relating to its sale of $29.9 million worth of non-fungible tokens (NFTs)[1]. The company agreed to a settlement that includes disgorging $5 million, paying another $1 million in fees and penalties, and ceasing and desisting from violating the Securities Act of 1933. Notably, the settlement does not include fraud charges.

CFPB Set to Limit Credit Card Late Fees

By Latham & Watkins on August 25, 2023 Posted in Fintech Regulation, Payments

The move becomes effective on October 1, 2023, with the Supreme Court soon to decide on the agency’s rule-writing authority.

By Barrie VanBrackle, Marifiel Gonzalez, and Deric Behar

On February 1, 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule (the Proposal) to amend Regulation Z, which implements the Truth in Lending Act (the Act) to limit credit card late fees. The CFPB received comments before its May 3, 2023 deadline, and it announced that the proposed rule will go into effect on October 1, 2023.

Absent further challenges as described below, credit card issuers should be ready to implement controls to comply with the Proposal.

Singapore Finalises New Stablecoin Regulatory Framework

By Latham & Watkins on August 23, 2023 Posted in Cryptoassets, Fintech Regulation

The Monetary Authority of Singapore announced a new framework that seeks to ensure value stability for stablecoins regulated in Singapore.

By Simon Hawkins, Farhana Sharmeen, Tan Gen Huong, and Adrian Fong

On 15 August 2023, the Monetary Authority of Singapore (MAS), Singapore’s primary regulator for banks and payment services, announced its new stablecoin regulatory framework. The new framework introduces licensing and other requirements for stablecoin issuers with operations in Singapore.

This framework follows a consultation paper in October 2022, on the MAS’ proposed approach to the regulation of stablecoin issuers and intermediaries, and a consultation paper on the scope of e-money and digital payment tokens in December 2019, in which the MAS considered the need to review its regulatory approach to accommodate stablecoins with the potential to become more widely used as payment instruments. These publications, together with the Hong Kong Monetary Authority’s discussion paper on its proposed approach to the regulation of stablecoins, (see Latham’s blog post), indicate that Asian regulators continue to consider appropriate guardrails for cryptocurrencies in light of significant consumer interest.

Money Transmission Modernization Act Adopted in Several States

By Latham & Watkins on August 23, 2023 Posted in Fintech Regulation, Payments

The Act aims to modernize and streamline state regulation of money transmitters while promoting innovation and consumer protection.

By Parag Patel, Mik Bushinski, and Deric Behar

More than a dozen US states have enacted the Money Transmission Modernization Act (MTMA) in whole or in part, while several others have introduced bills to implement some or all of the model legislation that seeks to establish a uniform set of regulatory standards applicable to money transmitters at the state level.

The Conference of State Bank Supervisors (CSBS), a trade association of state financial services regulators that regulate money transmitters (among other providers of financial services), finalized the MTMA in August 2021 after receiving feedback from industry stakeholders.

The MTMA aims to reduce regulatory burden for money transmitters that operate in many states, streamline regulatory efforts and coordination among state regulators of money transmitters, encourage innovation by money transmitters, and protect small businesses and consumers that rely on money transmitters. The potential impact from more uniform and streamlined licensing across states is significant: in 2021, money transmitters handled $4.9 trillion, of which 99.8% was transmitted by companies licensed in multiple states, according to the CSBS.

States Enact Laws Regulating Earned Wage Access Services

By Latham & Watkins on August 21, 2023 Posted in Fintech Regulation, Payments

New laws implement regulatory standards and licensing requirements for fintechs seeking to improve employee access to wages.

By Parag Patel, Mik Bushinski, and Deric Behar

On June 13, 2023, Nevada enacted a law that regulates earned wage access (EWA) services provided to state residents. Missouri followed by enacting an EWA law on July 7, 2023 that shares many similarities with Nevada’s. The new EWA laws make Nevada and Missouri the first two states in the US to establish statutory frameworks designed to regulate EWA services.

EWA services enable a consumer to receive earned employment income prior to a scheduled payday. They ideally provide an alternative to high-cost forms of credit, such as payday loans, although some consumer advocacy groups have warned of fees and other problematic aspects with certain EWA services.

To date, the principal providers of EWA services are fintechs, some of which are new entrants and some of which have been in the EWA business for several years.

Importantly, the EWA laws in both states exempt EWA services from their respective state laws that regulate loans and money transmission. EWA service providers in Nevada or Missouri would therefore not be regulated as a lender or money transmitter in connection with the EWA services they provide to residents of those states.

FRB Clarifies Supervision of Digital Assets and Bank-Fintech Partnerships

By Latham & Watkins on August 16, 2023 Posted in Cryptoassets, Fintech Regulation

A new program addresses innovative banking activities such as bank-fintech partnerships and digital assets while reinforcing guardrails around stablecoin activity.

By Arthur S. Long, Parag Patel, Pia Naib, Ja Hyeon Park, and Deric Behar

On August 8, 2023, the Board of Governors of the Federal Reserve System (FRB) issued guidance to the banking organizations that it oversees regarding its supervision of novel activities. The guidance also provides information on the process that state banks can follow to engage in certain stablecoin activities.

SEC v. Ripple: A Tale of Two Token Transaction Types

By Latham & Watkins on July 25, 2023 Posted in Cryptoassets

A bifurcated decision in a highly anticipated digital assets enforcement action may not provide the clarity that market participants want or need.

By Jack Barber, Jenny Cieplak, Benjamin Naftalis, John Sikora, Stephen P. Wink, Douglas K. Yatter, Luca Marquard, Adam Zuckerman, and Deric Behar

On July 13, 2023, Judge Analisa Torres of the US District Court for the Southern District of New York issued an order on motions for summary judgment in the civil enforcement action brought by the Securities and Exchange Commission (SEC) on December 22, 2020, against Ripple Labs Inc. (Ripple), its former CEO (Christian Larsen), and its former COO and current CEO (Brad Garlinghouse). The SEC’s claims include the unlawful offer and sale of securities in violation of Section 5 of the Securities Act of 1933 (the Securities Act), as well as aiding and abetting the allegedly unlawful offer and sale of securities by the individual defendants (see this Latham blog post for more information).

The issue before the Court was whether, at the time of the various offerings, the defendants sold XRP as an investment contract. The Court determined at the outset that “XRP, as a digital token, is not in and of itself a ‘contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract. Rather, the Court examines the totality of the circumstances surrounding the defendants’ different transactions and schemes involving the sale and distribution of XRP.”

Federal Reserve Launches FedNow Real-Time Payment Service

By Latham & Watkins on July 24, 2023 Posted in Payments

Consumers and businesses stand to benefit from rapid access to funds at any time when routed through participating financial institutions.

By Parag Patel, Barrie VanBrackle, Mik Bushinski, and Deric Behar

On July 20, 2023, the Federal Reserve announced the long-awaited launch of its real-time payment service, FedNow. The new service enables consumers and businesses to send and receive payments instantly on a 24/7/365 basis via participating financial institutions. It is available to financial institutions eligible to hold accounts at Federal Reserve Banks, and participating depository institutions may appoint a service provider or agent to submit FedNow payment instructions on their behalf. FedNow will initially only support domestic payments between US depository institutions.

FedNow can benefit consumers, businesses, and financial institutions with the promise of more flexibility and transparency of payments, improved cash flow and money management, and new customer service solutions.