More Enforcement Action Taken by the SEC on Crypto Sales

On January 30, 2018, dissatisfied crypto token purchasers filed a class action lawsuit against Paragon Coin, Inc. (“Paragon”) and founders Jessica VerSteeg and Egor Lavrov, alleging that the Paragon initial coin offering (“ICO”) violated the federal securities laws.[1]  This lawsuit follows those filed by plaintiffs against Centra, Tezos, ATBCoin, BitConnect, and Xunlei in connection with their ICOs in recent months.  One of the more high profile class action defendants is BitConnect, which is defending two class action lawsuits alleging that it sold unregistered securities and operated a Ponzi scheme.[2]  BitConnect allegedly led purchasers to believe that they would receive a 3,000% return on their investment over the course of a year.

Read the full report on our sister site, The FinTech Update.

SEC Taking Action Against Companies Hyping Blockchain-Related Trading

The U.S. Securities and Exchange Commission (“SEC”) is continuing to increase its scrutiny of companies that might be taking advantage of investor excitement for blockchain and cryptocurrency (ICO) deals to inflate their share prices and raise funds.  On January 8, 2018, the SEC suspended trading in the securities of Hong Kong-based UBI Blockchain Internet, Ltd. (“UBI Blockchain”) through at least January 22, 2018.  This action follows the SEC’s suspension of trading in the securities of The Crypto Company announced in December 2017 and three other blockchain-related companies in the summer of 2017. Read the full report on our sister site The FinTech Update.

Senators Announce Bipartisan Deal to Ease Banking Regulations

On November 13, 2017, Senate Banking Committee Chairman Mike Crapo, along with several Democratic senators, announced an agreement on bipartisan financial reform legislation. The proposed legislation aims to lower the number of banks considered “systemically important” and thus subject to enhanced bank supervision rules.  The legislation also contains provisions aimed at easing the regulatory burdens of small, midsize, and community banks.

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Digital Assets Have Existing Laws Applied by SEC and CFTC

Nine years after Satoshi Nakamoto circulated his whitepaper and introduced the world to bitcoin, regulated bitcoin derivatives are about to be introduced in the United States. CME Group recently announced that it will begin to offer bitcoin futures based on the CME CF Bitcoin Reference Rate later this year[1] and the Chicago Board Options Exchange has announced it will begin listing bitcoin futures contracts in Q1 2018.[2]  Ahead of any futures contract launch, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo revealed that he does not feel that any new laws or regulations are necessary to accommodate the new bitcoin futures products or digital assets generally. Read the full report on our sister site the FinTech Update.

Financial Institutions’ IT Systems Receives New Regulatory Requirements from BaFin

On 3 November 2017, the German regulator for the financial sector, the Federal Financial Supervisory Authority (“BaFin”), published a new circular titled Rundschreiben 10/2017 (BA) vom 3. November 2017 – Bankaufsichtliche Anforderungen an die IT (in English: Circular 10/2017 – Regulatory Requirements for IT-Systems – “BAIT”). The BAIT is available in German language at the BaFin’s website. The final version of the BAIT incorporates a number of revisions that result from the submissions made by stakeholders in the course of a prior public consultation. Read the full report on our sister site, the Technology Law Dispatch.

NJ Governor-Elect Murphy Has Businesses Prepared for Change

Democrat Phil Murphy has been elected as the next Governor of the State of New Jersey. Murphy comes into the office with a double-digit victory over departing lieutenant governor Kim Guadagno (R), and the backing of a state legislature controlled by Democrats.  Governor-Elect Murphy, who has never served in elected office, promises to take the Garden State in a new direction. Read our full report on our sister site, the Technology Law Dispatch.

Digital Currency Company Receives SEC Complaint After Bitcoin Conversion Scheme

On October 30, 2017, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint in federal court against a day trader for allegedly committing fraud and market manipulation during which the trader utilized a digital currency exchange in a supposed attempt to cover his tracks. The SEC claims that defendant’s associate obtained unauthorized access to other people’s brokerage accounts and caused them to enter unauthorized trade orders at artificial prices.  Many of these orders then executed, directly or indirectly, against the defendant’s orders.  The defendant then allegedly transferred a share of the profits to his associate.  Notably, the defendant transferred the proceeds, which were denominated in U.S. dollars, to a digital currency company that converted the dollars to bitcoin and transmitted them to the defendant’s associate.

Read the full report on our sister site, the FinTech Update.

Prize-Linked Savings Laws Spread Across States

With Americans’ saving habits in the news as the federal government considers caps on retirement contributions, financial institutions should be aware that many states are passing laws making it easier to incentivize saving.

To date, 26 states have enacted legislation that liberalizes their approaches to games of chance in support of good consumer saving practices. Prize-linked savings (PLS) accounts allow consumers that invest in savings accounts or certificates of deposit to be entered into drawings that can augment their original deposits, with the prizes funded by the interest generated. By passing laws that permit PLS accounts, states are allowing financial institutions to run lotteries in ways not traditionally permitted in order to persuade more Americans to save for a rainy day.

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Banks, Fintechs and Consumer Data: The CFPB Weighs In

On October 18, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) entered  into the long simmering debate over consumer-authorized data sharing.  This debate pits mainstream financial institutions, which are typically reticent to share customer data with third parties, against data aggregators and other fintechs.  Those newer companies provide services directly to consumers—or to enhance the consumer experience—and rely on data from mainstream institutions in order to do so.  Both sides are grappling with complex issues surrounding consumer information, including who owns consumers’ financial data as well as how it can be used, shared, and kept secure.  The CFPB released a set of nine consumer protection principles  to address those and other issues and “help safeguard consumer interests as the consumer-authorized aggregation services market develops.”  Read the full report on our sister site, the Technology Law Dispatch.

Senate Nullifies Arbitration Rule in Huge Setback to CFPB

Late Tuesday evening the Senate voted to nullify the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) controversial Arbitration Agreements Rule (“Rule”).  All but two Senate Republicans supported a resolution to repeal the Rule pursuant to the Congressional Review Act.  While there were rumors that one or two Democrats might also lend their support, none ultimately did so.  The Vice President cast the tie breaking vote.

The House of Representatives voted to nullify the Rule in July days after the CFPB released the final Rule. The late night vote in the Senate garnered just enough support—a simple majority—to send the resolution to President Trump’s desk.  The President already indicated his support of the resolution.  Following a string of defeats on healthcare, and lukewarm support on tax policy, this action in Congress marks the first significant legislative win for the Trump administration.

As we noted recently, opposition to the Rule has been strong and several industry groups recently filed a federal lawsuit.  The Rule became effective September 18, 2017 and would have impacted agreements entered into after March 19, 2018.  In light of the fast-approaching deadline, many companies have struggled to determine how much effort to invest in preparing to come into compliance.  The nullification of this Rule will be a welcome relief.

The vote represents a full rebuke of the CFPB’s efforts concerning arbitration. The Rule followed years of information-gathering and analysis by the Bureau.  CFPB staff at all levels, including Director Cordray, staunchly defended the Rule, its legal and factual underpinnings, and its potential to protect consumers. Nullification of this Rule is a massive blow to an agency that has suffered a number of recent losses in federal court.  The CFPB will now be barred from promulgating another Rule concerning class action waivers in arbitration clauses.

Industry will likely be buoyed by this vote. As the CFPB increasingly comes under fire from the Trump administration, Congress, and through litigation defeats, more companies may be willing to openly challenge the Bureau—something that was virtually unheard of just a year ago.  With the head of Enforcement recently announcing his departure and rumors of Director Cordray leaving to run for governor in Ohio, the future of the CFPB seems much more tenuous following this vote.

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Maria Earley is a partner in Reed Smith’s Financial Industry Group in Washington, D.C. and a former enforcement attorney with the CFPB. Ashley Shively is counsel in the Financial Industry Group in San Francisco. Maria, Ashley, and several other Reed Smith attorneys have significant experience handling supervisory, enforcement, and litigation matters involving the CFPB.  If you have questions about this Rule, the CFPB, or consumer litigation, please do not hesitate to contact a member of the Reed Smith team.

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