Digital Chamber of Commerce Comments on IOSCOs Consultation on Crypto Asset Trading Platforms: Balancing Regulation and Innovation

In May of 2019, the International Organization of Securities Commissions (IOSCO) kicked off a consultation on “crypto-asset trading platforms” or “CTPs.” The goal of the Consultation is to assist IOSCO members in evaluating the issues and risks relating to trading in digital assets and the exchanges that facilitate these markets. IOSCO represents 95% of the world’s securities markets in more than 115 jurisdictions which also includes the United States.

IOSCO states that fostering innovation should be balanced with “the appropriate level of regulatory oversight.” If a digital asset is a security then it simply falls under existing security law. But if the crypto-asset is not deemed to be a security then questions arise as to how to best regulate the novel asset.

Some jurisdictions have established bespoke rules for digital assets. Others are in the process of doing so and some are doing little at all. What is clear, is that there is a good degree of regulatory friction emerging around the world which makes cross border regulation, and issuance, a bigger challenge.

The consultation closed on July 29th with a report expected to follow later this year.

Squeaking just under the deadline to provide feedback is the US-based Digital Chamber of Commerce, a group that says it represents over 200 blockchain-based firms around the world.

In a blog post from yesterday, the Digital Chamber of Commerce outlined their recommendations as to how to master the balancing act of regulation and innovation in the emerging blockchain sector:

  • Recognize that a broad array of crypto-assets has emerged, and even more will emerge over time, not all of which are crypto-asset securities.
  • Regulatory guidelines regarding the appropriate categorization and regulatory treatment of these assets will provide needed clarity to enable implementations of blockchain technology to flourish.
  • Regulation should be technology-neutral. Crypto-asset securities have the same legal character as traditional securities.

The DCC states:

“… we believe that the IOSCO guidance in this area should be specific to crypto-asset securities and CTPs that trade crypto-asset securities and recognize that transactions in non-security crypto-assets should not be subject to securities laws, although there are other regulatory regimes that likely apply depending on the jurisdiction.”

The feedback continues to outline the Chamber’s perspective on how digital securities should be treated.

It is interesting to note that the UK Financial Conduct Authority (FCA), an IOSCO member, published its regulatory approach to crypto-assets last week. The FCA’s guidance created an opportunity for non-security token issuance and trading. The FCA added that it hoped a more globally harmonized approach will emerge:

The FCA stated:

“We will continue to work closely with other regulatory agencies; both bilaterally as well as multilaterally through bodies such as the Global Financial Innovation Network (GFIN), the International Organization of Securities Commissions (IOSCO), the European Commission (EC) and the European Supervisory Authorities (ESA) to encourage regulators to approach cryptoassets in a consistent way.”

The letter states that CTPs offering of crypto-asset securities should be engaged and part of the discussion regarding and forthcoming guidance.

The Digital Chamber of Commerce letter is embedded below.

[pdf-embedder url=””]

Here is the FCA Consultation Proposing the Ban of Cryptoasset Derivatives for Retail Investors

Earlier this month as previously reported, the UK Financial Conduct Authority (FCA) proposed a ban on the sale of both derivatives and exchange-traded notes (ETNs) based on “certain types of cryptoassets.” The announcement of the proposed ban kicked off a consultation, embedded below, for feedback from interested parties that is scheduled to close this coming October. A final policy statement and final Handbook rules is expected in early 2020.

The FCA states they are “seeking to reduce the harm to retail consumers caused by the sale of derivatives and ETNs referencing unregulated transferable cryptoassets.” The proposed ban is estimated to save consumers from a loss of between £75 million and £234.3 million.

It is interesting to note that the UK market for crypto is “remains small” in contrast to other jurisdictions, exhibiting “limited trading volumes.” This could be due to the fact that the UK has already fostered a robust online capital formation market and boasts the most effective crowdfunding market today.

The FCA is looking to create specific rules to:

“ban the sale, marketing and distribution of derivatives and ETNs that reference certain types of unregulated, transferable cryptoasset to all retail clients by firms in, or from, the UK.”

The FCA is in the midst of a broader digital asset consultation with results of the process expected to be released within the next couple of weeks.

The final Guidance by the FCA will seek to allow firms to understand whether certain cryptoassets are regulated. The guidance hopes to provide regulatory certainty protecting consumers.

[pdf-embedder url=”” title=”Prohibiting the sale to retail clients of investment products that reference cryptoassets cp19-22″]

Ban Hammer: UK Financial Conduct Authority Proposes Prohibition of Crypto Derivatives

The UK Financial Conduct Authority (FCA) has proposed a ban on the sale of both derivatives and exchange-traded notes (ETNs) based on “certain types of cryptoassets.”

This ban will impact retail investors.

As part of the decision-making process, the FCA has commenced a public consultation on a ban.

The FCA believes these types of crypto-derivatives may cause harm to retail consumers. The financial regulator said “these products are ill-suited to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets (crypto-derivatives).

The FCA stated this is due to:

  • Inherent nature of the underlying assets, which have no reliable basis for valuation
  • The prevalence of market abuse and financial crime in the secondary market for cryptoassets (eg cyber theft)
  • Extreme volatility in cryptoasset price movements, and
    inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them

The FCA’s consultation proposes a prohibition on the sale, marketing, and distribution to all retail consumers of all derivatives (ie contract for difference – CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The FCA said a ban will create a potential relief for retail consumers of between £75 million to £234.3 million a year.

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, stated:

‘As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.

Woolard added that most consumers cannot reliably value derivatives based on unregulated cryptoassets.

“Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses. It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

The FCA is currently in the midst of a broader consultation regarding digital assets. The document will be published later this summer.

Yesterday, in a speech delivered at Cambridge University, Woolard shared the FCA’s evolving approach to the issuance and utilization of “stablecoins.”

As the Lines of Financial Services Blur, the UK Financial Conduct Authority is Doing a Consultation on a “Cross Sector Sandbox”

While it is a fact we all need bank-like services it is also true we do not necessarily need a traditional bank. The digitization of finance has liberated the masses from paper driven, brick and mortar operations to the bank of the iPhone (or Android for that matter).

Financial services are quickly becoming ubiquitous.

Technology is at its best when it is simple to use, and available at the moment of need, but otherwise remains unobtrusive. The same holds true for Fintech.

Perhaps the best examples today of this phenomenon are full stack Fintechs such as Alibaba and Tencent. From payments to credit to wealth management – it’s all there. But these companies are not banks.

Facebook’s Libra is an effort to leapfrog the Chinese innovators by providing a decentralized financial service ecosystem creating a central bank of Facebook for retail customers. Borderless and integrated into your daily existence.

The UK Financial Conduct Authority (FCA) has recognized this fast emerging trend and launched a consultation on the possibility of creating a “cross-sector sandbox” to better understand this systemic change.

The FCA states:

The financial landscape is changing. Technologies such as Artificial Intelligence (AI) and Distributed Ledger Technology (DLT) are affecting the way consumers, firms and regulators interact. Access to, and usage of, data is fundamental, underpinning both products and services. These changes prompt us to think about how we respond as a regulator to ensure financial markets can benefit from such innovation, while advancing our statutory objectives of market integrity, consumer protection and competition.

The FCA recognizes the “increasing fluidity with which products and services are being offered.”

The regulator is curious, and concerned, as to how this will impact consumers, as well as to how their role will be altered in the future.

The FCA seeks to ensure innovation and competition can flourish while markets work as they should and consumers are protected. However, the shifting sands of innovation mean overlapping responsibilities amongst agencies with oversight of various sectors of industry.

Launched last month, this consultation is open until August 30, 2019.

This is an interesting pursuit and unique to the financial regulatory world. Credit, where credit is due – kudos to the FCA for tackling such a topic in public.

[pdf-embedder url=”” title=”FCA call-for-input-cross-sector-sandbox”]

Concept Release: The Securities and Exchange Commission Asks for Feedback on Ways to Harmonize Securities Exemptions

The Securities and Exchange Commission is seeking comments on the current securities exemption structure. In a release yesterday, the SEC asked the public to provide feedback on “ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.”

In the US, there is an alphabet soup of securities exemptions, or methods for companies to raise capital, while remaining compliant under the law. The rules have been created over decades with tweaks and additions that have added to what can only be described as a mish-mash of convoluted rules.

For ordinary people, the structure is Byzantine at best. The only true beneficiaries are lawyers steeped in the acronym-speak of securities law. Issuers pay dearly for this knowledge.

For online capital formation, this publication frequently references Reg D506c, Reg A+ and Reg CF, even while recognizing the fact that most people find this confusing as they simply want to raise capital while being compliant.

Part of the equation and SEC consultation is the definition of an “accredited investor.” Long in use, the current rule is wealth based demanding individuals that qualify to earn over $200,000 a year or have a net worth of more than $1 million. While simple to apply, this metric has failed in recognizing investor sophistication. While common sense dictates that wisdom is not measured by cash in the bank, the current regime has disenfranchised tens of millions of investors. As private markets have become a preferred route for capital formation, the net effect has been to block the masses from some of the most promising investment opportunities in history. Meanwhile, the rich get wealthier.

The SEC has long discussed their project to review securities exemption harmonization. The common-sense initiative was launched by SEC Chair Jay Clayton who commented on the request for public feedback:

“We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States. Input from startups, entrepreneurs, and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today.”

While it is not clear if there will be an actionable outcome, the project is long overdue.

[easy-tweet tweet=”We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike” template=”light”]

The concept release seeks input on whether changes should be made to improve the entire exemption ecosystem. The SEC is asking for feedback on the following topics:

  • The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
  • The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
  • The Commission should expand companies’ ability to raise capital through pooled investment funds
  • Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
  • The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings

Crowdfund Insider asked Doug Ellenoff, Managing Director of Ellenoff Grossman & Schole and longtime advocate of financial innovation for his thoughts on harmonization. Ellenoff credited the SEC staff for pursuing a more rational approach to private offerings exemptions:

“In the aftermath of the JOBS Act of 2012, the rules have only become more arcane and I believe more confusing for the public to navigate these regulatory financing options.  While I appreciate the need and history of each of the provisions, other than securities lawyers, what entrepreneur is able to properly process the range of currently available options (pros and cons; expenses etc.)–4(a)(2); 4(a)(6); Rule 504; Reg D– 506(b); 506(c); 3(a)(11), Rule 147 and Rule 147A; Reg A and Reg A+,” stated Ellenoff.

He said there is just no simple, common sense way to explain these provisions:

“I have spoken at hundreds of events to glazed over audiences trying to convey it in a digestible manner … and even seasoned securities lawyers are having trouble making sure their clients truly understand how to proceed legally and make the right judgment call,” Ellenoff stated. “So it’s timely in my judgment to clarify and meaningfully crowdsource responses to the SEC’s list of dozens of questions.  I encourage everyone’s participation.   This is a significant challenge but a magnificent chance to make a meaningful impact on capital formation for entrepreneurs to effect securities law policy.”

Maxwell Rich, a securities attorney and Chief Compliance Officer of leading crowdfunding platform Republic had this to say:

“Republic supports the Commission’s efforts in studying ways that the various registration exemptions used to raise capital in the United States can be simplified, harmonized and improved. While regulation crowdfunding is a nascent and emerging capital formation framework, its interactions with other exemptions such as Reg D and Reg A+ lack synergy and symmetry, which causes investor and issuer confusion.”

Rich said they hope this study will provide “common sense and actionable recommendations” for expanding investment and capital raising opportunities while maintaining appropriate investor protections.

Youngro Lee of NextSeed 3Youngro Lee, founder and CEO of NextSeed and Chair of the Association of Online Investment Platforms, added his voice of support for the SEC’s harmonization initiative.

“This is a very positive development for the future of small business capital formation laws.  The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations.  Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”

By requesting the public’s feedback on regulatory harmonization we can expect a diversity of opinion on the matter. But in the end, it is what the SEC does with the information. And whether they are willing to act, or alternatively, they feel a need to pass the buck over to Congress.

Regardless, it is painfully obvious action is needed.

The public comment period for the concept release will remain open for 90 days following publication of the release in the Federal Register.



The Commission issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising.  The concept release seeks comment on possible ways to simplify, harmonize, and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.


Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised.  As a result, the overall exempt offering framework has changed significantly.  Our capital markets would benefit from a comprehensive review of the design and scope of the Commission’s exempt offering framework.


The concept release requests comment on:
The Exempt Offering Framework Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework.
The Capital Raising Exemptions within the Framework Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding.
Potential Gaps in the Framework Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
Investor Limitations Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition.
Integration Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
Pooled Investment Funds Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
Secondary Trading Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.

What’s Next?

The Commission welcomes all feedback and encourages interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release.

The concept release will be published on the Commission’s website and in the Federal Register.  The comment period will remain open for 90 days from publication in the Federal Register.

[pdf-embedder url=”” title=”SEC Concept Release Harmonization June 2019 33-10649″]

IOSCO Looks for Feedback on Consultation Regarding Cryptocurrency Trading Platforms

The International Organization of Securities Commissions (IOSCO) has launched a consultation on “crypto asset trading platforms” or “CTPs.” Crypto exchanges have launched around the world to varying degrees of regulatory compliance – depending on the jurisdiction.

IOSCO is the leading international policy forum for securities regulators and is a global standard setter for securities regulation. The organization’s membership regulates more than 95% of the world’s securities markets in more than 115 jurisdictions

The consultation, entitled “Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms,” presents a series of issues and risks affiliated with digital assets and the trading of these assets on cryptocurrency exchanges.

According to IOSCO, the key considerations related to:

  • Access to CTPs;
  • Safeguarding participant assets;
  • Conflicts of interest;
  • Operations of CTPs;
  • Market integrity;
  • Price discovery; and
  • Technology.

The consultation seels to assist regulatory authorities in evaluating CTPs within the context of their regulatory frameworks. The document does not include an analysis of the criteria that is used by regulatory authorities to determine whether a crypto-asset falls within its remit, IE if the asset is a security.

IOSCO states that:

“fostering innovation should be balanced with the appropriate level of regulatory oversight. Accordingly, while aspects of the underlying technology and operation of CTPs may be novel, if a CTP trades a crypto-asset that is a security and it falls within a regulatory authority’s jurisdiction, the basic principles or objectives of securities regulation (investor protection, ensuring fair, efficient and transparent markets and investor confidence in markets) should apply.”

The IOSCO consultation is a good exercise as its members represent both extremes of crypto regulation with some jurisdictions banning crypto while other jurisdictions are “considering new or tailored requirements to account for the novel and unique characteristics of CTPs.”

In preparing the consultation, IOSCO conducted a survey of the regulatory approaches to CTPs that are currently applied or are being considered in member jurisdictions.

Comments may be submitted on or before 29 July 2019.

FinTechRat: Germany Publishes Statement on Blockchain Strategy

A document recently published by the Fintech Council of the German Federal Government has outlined the country’s potential approach to blockchain technology. The document is a consultation entitled “Stellungnahme des FinTechRat zur Blockchain-Strategie der Bundesregierung im Rahmen der öffentlichen Konsultation.” The “FinTechRat” is an advisory council formed two years ago to address Fintech innovation. Its 29 members are authorities in the digitization of financial services. The group met for the first time in March when the group selected “digital expert” Chris Bartz as its new chairman.

The FinTechRat advises the German Ministry of Finance and the Federal Government on a voluntary basis on current topics such as artificial intelligence, cloud computing, blockchain, and data protection. The group is expected to meet at least twice a year in the Federal Ministry of Finance.

The FinTechRat seeks to better understand technological developments and their potential, opportunities, and risks and thereby contributes to strengthening Germany as a financial center.

The document, translated from German, is embedded below.

A translation of the preamble states:

“Blockchain strategy of the Federal Government.
The federal government is planning a blockchain strategy and As part of this, a public consultation will be carried out, inter alia, by means of a detailed questionnaire. With this document FinTechRat would like to comment on the questionnaire of the Federal Government regarding the planned blockchain strategy. In addition, the TechRat on the key issues paper of the Federal Ministry of Finance (BMF) and the Federal Ministry of Justice and Consumer Protection (BMJV) on the regulatory treatment of electronic securities and crypto-tokens. In any case, the FinTechRat highly appreciates the Fact that the federal government is planning a blockchain strategy.”

Apparently, the German government wants to develop a comprehensive strategy for blockchain. The government seeks to encourage innovation in the area.

Addressing specifically the benefits of tokenization, the document bullets out the following (translation):

  • Traceability of the transfer of value from owner to owner;
  • Simplifying the transferability of values ​​and possibly reducing the associated costs
    overhead costs;
  • Increasing the liquidity of tradable assets through easier divisibility, eg it would be through
    the almost arbitrary divisibility of tokens eg. easier to create smaller shares of real estate too
  • The ability to merge currently physically separate markets and thereby
    opening up increased transparency but also the possibility of creating new products

To conclude, the document says there exists enormous potential with blockchain technology but there are risks (translation).

“The entire technical ecosystem around DLT and Blockchain features high modularity and flexibility in terms of tokenization. Therefore, it is difficult to estimate all possible effects based on today’s knowledge. However, an efficient and future-oriented, necessarily international, legislation [should] lead to a significant strengthening of innovation.”

[pdf-embedder url=”” title=”Statement by the FinTech Council on the Federal Government’s blockchain strategy in the context of public consultation”]

Switzerland Wants to Create the Best Possible Framework for Fintech and Distributed Ledger Technology

The government of Switzerland wants create the very best environment for Fintech, and more importantly distributed ledger technology (DLT) to thrive.

The Swiss Federal Council kicked off a consultation last month on the adoption of DLT/Blockchain seeking to “increase legal certainty, remove hurdles for DLT-based applications and limit risks of misuse.”

Switzerland is well known for its blockchain sector. Many initial coin offerings have been based in Switzerland, specifically Zug – which is known as Crypto Valley.

The consultation at hand will conclude at the end of June.

The review incorporates multiple sectors of crypto assets including the following:

  • In the Swiss Code of Obligations, the possibility of an electronic registration of rights that can guarantee the functions of negotiable securities is to be created. This is intended to increase legal certainty in the transfer of DLT-based assets.
  • In the Federal Law on Debt Collection and Bankruptcy, the segregation of crypto assets in the event of bankruptcy is to be expressly regulated, also to increase legal certainty.
  • In financial market infrastructure law, a new authorisation category for so-called “DLT trading facilities” is to be created. These are intended to be able to offer regulated financial market players and private customers services in the areas of trading, clearing, settlement, and custody with DLT-based assets.
  • It should also be possible in the future to obtain a license to operate an organized trading facility as a securities firm. This requires an adaptation of the future Financial Institutions Act.

The Federal Council is sensitive to AML requirements and money laundering will be integrated within any outcome. Simultaneously, the Council notes its preference not to regulate donations and rewards based platforms as it would be “disproportionate” as it is so small.

Perhaps, the most important aspect of the consultation is the trading of digital assets and the proposed law.

In a blog post, PwC notes that Switzerland is introducing “DLT uncertified securities”  and DLT trading venues. To quote: “The requirements for establishing a DLT exchange are similar to those for stock exchanges, but there is no listing takes place and multilateral trading is limited to DLT securities and tokens that are not securities, such as payment and utility tokens.”

It will be interesting to see what the Swiss produce following the consultation.

Consultation: Malaysia Seeks Feedback on Proposed ICO Framework

The Securities Commission Malaysia (SC) has published a consultation on a framework for Initial Coin Offerings (ICOs). The SC is one of many financial regulators that are seeking to better understand digital assets while investigating potential regulatory environments to create an effective ecosystem.

The SC consultation paper discusses the proposed framework for, among others, the eligibility of issuers, the need for transparent and adequate disclosures as well as utilisation of proceeds of COs.

The SC states that blockchain and digital assets may be able to enhance efficiencies in the capital market including lowering post-trade latency and counterparty risks. Additionally, digital assets may be able to enable “seamless regulatory reporting and compliance.”

The regulator recognizes that digital assets can act as an alternative asset class for investors and as part of their remit is to promote the development of capital markets they are pursuing a regulatory framework that attempts balance innovation and investor protection.

The public may submit their comments to until 29 March 2019.

Initial Coin Offering Consultation by the Australian Government Closes Today

The Treasury of the Australian Government launched a public consultation on the initial coin offering (ICO) marketplace in January and the process closes today (February 28th).

The consultation is part of a broader policy initiative to foster innovation in the financial services industry. Like much of the rest of the world, Fintech is emerging as strategically important.

The Treasury notes that ICOs have some similarity to IPOs, venture capital, and crowdfunding but there are some distinct differences too. ICOs have tended to be borderless, if less so now that regulators have taken a greater interest in the new process of online capital formation. The consultation is aware that a number of jurisdictions are “actively competing to attract ICO activity and establish themselves as a hub for innovative technology companies that favour ICO fundraising.”

The consultation, while recognizing the innovation, seeks to highlight both the risks and opportunities to these digital asset offerings.

“An ICO is essentially a means of crowdfunding a project that relies on DLT.”

Some of the key questions asked by the Australian consultation include:

  • What is the best way to define an ICO and are there different categories of tokens?
  • What is the importance of secondary trading in the ICO market?
  • Can ICOs contribute to innovation?
  • And how important are ICOs to Fintech and other economic opportunities?
  • What are the risks for policymakers, regulators and investors?
  • When does an ICO fall under existing financial services law and when does it (or should it) not?
  • And what about the tax treatment of crypto?

The consultation asks many good questions which are similar in nature to what many policymakers have been asking themselves around the globe.

This will be a good consultation to watch.

See the ICO document embedded below.

[pdf-embedder url=”” title=”ICOs Issue Paper Australia The Treasury”]

UK Financial Conduct Authority Issues Consultation on “Cryptoassets” Seeking to Provide Clarity on Regulatory Approach

The UK Financial Conduct Authority (FCA) issued a consultation today on the emerging “cryptoasset” sector of finance.  The UK is well known for its thoughtful regulatory approach when it comes to innovative new financial services and the final outcome will be watched with interest around the globe.

The cryptoasset consultation is also part of the UK Cryptoasset Taskforce’s recommendation that the FCA provides additional guidance on the regulatory perimeter. The Taskforce published a report last October.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented on the consultation:

‘This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should.”

In a release, the FCA said the numbers regarding crypto remain relatively small but more consumers are investing in these digital assets.

Today, within the UK there are less than 15 cryptocurrency exchanges in operation out of a global total of about 231. Out of these exchanges in the UK, only 4 produce daily trading volume in excess of $30 million with aggregate daily trading volume of just $200 million for the group.

There are currently over 2,000 exchange and utility tokens in the market reports the agency. The FCA notes that in 2018 initial coin offerings (ICOs) saw a significant reduction in capital raised in compared to 2017. Global ICO funding was $65 million in November 2018, compared to over $823 million in November 2017.

The FCA estimates that there are 56 projects in the UK that have used ICOs, accounting for less than 5% of projects globally.

The FCA has previously issued warnings regarding the risk to consumers affiliated with investing in cryptoassets. About 78% of ICOs in 2017 were labeled scams. Yet the agency continues to pursue an important policy of ensuring competition in financial services – IE challenges to traditional finance – while providing sufficient investor protection.

The FCA states that publishing guidance should “reduce legal uncertainty and assist firms to develop legitimate cryptoasset activities and business models.” The intent is to “improve participation in the cryptoasset market and competition in the interest of consumers.”

Overall, the UK’s regulatory approach has been lauded around the world for fostering a robust Fintech ecosystem. Digital assets may be the most challenging project associated with the regulator’s portfolio of regulatory objectives.

Drawing the Line.

Most every crypto industry participant recognizes the need for bright-line rules to engender a successful sector of finance. Clear guidance has been missing in much of the world with some jurisdictions choosing to regulate via enforcement actions. Once guidance is finalised expectations are that it will be clear what is regulated by the FCA – and what is not.

Cryptoassets are a cryptographically secured digital representation of value or contractual rights that is powered by forms of DLT and can be stored, transferred or traded electronically. Examples of cryptoassets include Bitcoin and Litecoin (which we categorise as exchange tokens), as well as other types of tokens issued through the Initial Coin Offerings (ICOs) process (which will vary in type).

The Consultation states:

“The final Guidance will enable firms to understand whether certain cryptoassets fall within the regulatory perimeter. This should allow firms to have increased certainty around their activities while meeting our own regulatory objectives of consumer protection, enhancing market integrity and promoting effective competition in the interest of consumers. We encourage firms to seek expert advice if you are unsure whether the products you offer fall within the regulatory perimeter.”

The FCA has defined three different types of cryptoassets:

  • Exchange tokens: these are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They are, usually, a decentralised tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the [FCA] perimeter.
  • Security tokens: these are tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument as set out in the RAO, and are within the [FCA] perimeter.
  • Utility tokens: these tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by Specified Investments. Although utility tokens are not Specified Investments, they might meet the definition of e-money in certain circumstances (as could other tokens), in which case activities in relation to them may be within the [FCA] perimeter.

Exchange tokens, such as Bitcoin, are not considered to be money by either the FCA nor the Bank of England as these assets are simply too volatile to be considered a store of value, and, at least currently, are not widely accepted as a medium of exchange. Stablecoins are also considered to be exchange tokens yet the FCA adds that Stablecoins can be securities as well.

So where does the FCA seek to draw the line for security tokens?

Within the consultation, the FCA indicates that whether the token is transferable and tradeable on cryptoasset exchanges or any other type of exchange or market, this may be indicative that a token is a “Specified Investment” – thus a security. Simultaneously, the consultation states:

“Much like exchange tokens, utility tokens can usually be traded on the secondary markets and be used for speculative investment purposes. This does not mean these tokens constitute Specified Investments.”

The consultation includes several examples of what is, and what is not, a utility token.

This question may garner considerable interest from industry participants. The FCA says “the more decentralised the network the less likely it is that the token will confer enforceable rights against any particular entity, meaning it may not confer the same or equivalent rights as Specified Investments.”

In Europe, several jurisdictions have pursued, or are pursuing regulations that are viewed as supportive of crypto. France expects to enact law in early 2019 that defines their regulatory approach to crypto. The FCA has most certainly reviewed the proposed French regulation.

The Cryptoasset Consultation is open to feedback until Friday 5 April 2019. Stakeholders may submit responses via email to

Final Guidance on the existing regulatory perimeter in relation to cryptoassets will be published “no later than summer 2019.”

Download FCA Guidance on Cryptoassets here.

South African Authorities Urge Regulation of Crypto Sector, Aim to Do So By End of Q1 2019

Authorities responsible for regulating finance, banking and taxation in South Africa have issued a consultation paper stating that regulation of the cryptocurrency/digital token sector should be enacted forthwith and adjusted to accommodate innovation later:

“The IFWG and Crypto Assets Regulatory Working Group is of the view that regulatory action should not be delayed until the most appropriate regulatory approach has become clear, but to rather act and amend as innovation evolves. The IFWG is further of the view that, for innovation to thrive, it does not necessarily mean that lax or even no regulation should be implemented.”

The paper is issued as a follow up to statements made by these authorities in 2014 warning the public that, “no legal protection or recourse was offered to users of, or investors in, crypto assets.”

In response to a nonetheless growing interest among the public in cryptocurrency/digital tokens, South Africa’s Intergovernmental Fintech Working Group (IFWG) –comprised of representatives from the Financial Intelligence Centre (FIC), Financial Sector Conduct Authority (FSCA), National Treasury (NT), South African Revenue Service (SARS) and the South African Reserve Bank (SARB)– formed a working group to develop a more comprehensive approach to the phenomenon in early 2018:

“The aim of the IFWG is to develop a common understanding among regulators and policymakers of Fintech developments, as well as policy and regulatory implications for the financial sector and economy.”

“Balanced consideration” was sought:

“The approach to reviewing fintech innovation is a balanced one, considering both its benefits as well as taking cognisance of associated risks.”

Two crypto use cases are briefly analyzed in the consultation paper: crypto trading and the use of cryptocurrencies for payments.

The paper explains that digital tokens/cryptocurrencies can be traded three ways: peer-to-peer (ex. LocalBitcoins), on exchanges or at ATMs.

The paper notes that Bitcoin was originally created as a payment network (and not for speculation) although, “The associated value of crypto assets is still largely tied to fiat currency exchange rates, which attests to the fact that crypto assets have not yet been adopted as a unit of account.”

The consultants point out that using crypto for payments still falls outside a “regulatory framework” in South Africa, meaning payments are made at the “discretion of consumers and willing merchants.”

This is an interesting point. The documentary, “Bitcoin: Beyond the Bubble” advances a case for Bitcoin in regions of Africa where banking and credit availability are light.

Unlike credit card transactions, Bitcoin payments cannot be reversed without the consent of the recipient, a feature that one of the commentators in that film says could help regions overcome low availability of capital due to high local instances of credit card fraud and resulting reticence among creditors to serve certain regions.

But in the absence of regulation, a “discretionary” payment network is “fragmentary” and implies a lack of recourse/consumer protection if and when that system is abused.

The South African consultants believe the risk posed by crypto networks to established currency networks is also significant:

“The risk with potentially the widest-ranging implications is the threat to central banks’ historical exclusive right to issue money and control the money supply…(an) ability that has the benefit of ensuring an efficient monetary policy transmission mechanism. The risk posed by crypto assets to the monetary policy transmission mechanism is: should demand for crypto assets increase significantly, demand for fiat currency would decrease. In essence, this would lead to the creation of a parallel – and ultimately fragmented – monetary system.”

The consultants also see a possible risk to financial stability if the market cap of crypto passes the “psyschological” mark of $1 trillion.

Crypto networks could also end up competing with “national payment networks” the consultants say but without the same level of regulation.

Money laundering and criminal use are implied.

Finally, the consultation paper, “presents recommendations for dealing with crypto assets from a South African perspective.”

Possible regulatory responses include regulating and restricting new products and “outright banning”:

“Under this approach, innovators are obliged to adapt to the prevailing regulatory environment.”

The second possible approach is to “let things happen,” described by the American Commodity Futures Trading Commission’s (CFTC’s) Giancarlo as the ‘do-not-harm’ approach:

“The do-not-harm approach is highly cognisant of not letting overregulation stifle innovation, and supports finding the optimal balance between innovation, the concomitant risks and the wider safety of the financial system.”

The consultants suggest using the Lansky scoring system of 0-to-5 (zero for “ignoring” and 5 for full or partial ban/integration) for considering how to implement rules governing the sector.

The regulators say they will, “…specify the way forward through a policy instrument such as a guidance note or position paper aimed for [the] first quarter of 2019.”

Stakeholders and members of the public are invited to submit comments by February 15th, 2019, to

“Input received will feed into a crypto assets policy paper that will set out the manner in which crypto assets will be managed within the regulatory perimeter in South Africa.”

[pdf-embedder url=”” title=”South Africa CAR WG Consultation paper on crypto assets_final”]

Central Bank of Israel Requesting Submissions from the Public on How to Regulate “Digital Asset” Sector and DLT for Finance

The Central Bank of Israel is soliciting position papers from the general public regarding how the country should support and regulate domestic cryptocurrency/security token ventures and distributed ledger technology (DLT) for finance in the country.

The bank has assembled a team (“The Interministerial Team for Regulatory Coordination of Virtual Assets”) and has tasked it with:

“…(G)ather(ing) data and information for the purpose of creating a knowledge base on the issue(s) for regulators and the public, and in order to formulate recommendations regarding the desired regulatory policy.”

The team is comprised of representatives from the Israeli Capital Market Authority, the Israel Securities Authority, the Ministry of Finance, the National Economic Council, the Israel Tax Authority, the Ministry of Justice, the Israel Money Laundering and Terror Financing Prohibition Authority, the National Cyber Bureau, and the Bank of Israel.

According to an associated release from the bank, “…(R)egulators of the Israeli financial system believe that there is room to renew and strengthen cooperation and coordination among all regulators and the public,” with regards to the two sectors (“digital asset” investing and DLT).

The team also wishes to, “…monitor developments in this area in Israel and abroad…” and believes that the sectors and the tech undergirding them have, “…implications for economic activity, the financial markets, and financial stability.”

The team would like interested members of the public to address the following questions:

  1. What are the main barriers, regulatory or otherwise, with which Israeli parties at interest dealing with virtual assets must deal if they wish to operate in Israel and offer their product to the domestic consumer?  If the company has previous experience operating in Israel, we would like to know what specific barriers it has encountered.
  2. What are the main barriers, regulatory or otherwise, with which Israeli parties at interest operating in the context of investing and fundraising in the area of virtual assets must deal if they wish to operate in Israel?  If the company has previous experience raising funds in Israel, we would like to know what specific barriers it has encountered.
  3. What are the main barriers, regulatory or otherwise, with which the consumers of virtual-asset-based applications in Israel must deal?
  4. What are the risks inherent in the use of virtual assets and in activity using virtual assets?
  5. What is the relevant information that regulators must gather in order to monitor developments in the industry?
  6. What are the opportunities inherent in this technology for the financial sector?
  7. How can this technology help in dealing with AML/CFT (Anti Money Laundering and Combatting the Financing of Terrorism) challenges?

Summary documents of no more than 10 pages can be emailed to until December 31, 2018.

The committee says it can and will respond to some of the submissions but cannot respond to all.

It will also use the content and data provided in the submissions to form final recommendations and for publishing, “…unless the response includes an explicit written request to limit the disclosure or use of the information contained.”

Israel has acted as something of a powerhouse in the Middle East with its support for the crypto sector, which the country has generally supported as part of broader initiatives to transform Israel into a world-class technology hub.

The country has also had its fair share of crypto-related controversies, however, including incidents of tax evasion, alleged cryptocurrency-project frauds, kidnappings, and extortion.

Dubai Financial Services Authority Launches Consultation on Property Crowdfunding

The Dubai Financial Services Authority (DFSA) has initiated a consultation on property crowdfunding.

Released last week, the consultation addresses a proposal to add a new subcategory for property investment crowdfunding platforms.

The DFSA notes that like many financial services, crowdfunding has evolved. Originally designed to improve access to capital for SMEs and startups, crowdfunding is being used for other assets classes such as real estate.

The DFSA states that property crowdfunding “presents some different risks that are not addressed by their current “Investment Crowdfunding framework.”

The regulator has outlined what they see as hurdles:

  • Investor understanding  – Most PICPs [Property Investment Crowdfunding Platforms] are aimed at investors (often retail) who are not property experts and may lack the knowledge to make appropriate decisions when investing in property (especially commercial property). Conversely, some investors may display ‘overconfidence’ in their knowledge of the property market and overestimate their ability to assess risk. Some investors may not understand what they are getting when they invest (for example, they are receiving an interest in an SPV (as shareholders), which owns a property).
  • Illiquidity  – Property itself is a relatively illiquid investment. Additionally, the investment in the SPV may also be illiquid. There is no publicly traded market and there may not be any other investor willing to buy the investor’s interest in this private arrangement (if the investors wishes to exit the investment).
  • Loss of capital – Some may seek to use a PICP as a last resort to sell unwanted properties. Additionally, there could be a chance that a property is empty (for good reason) and it will be challenging for the property manager to find a tenant, resulting in an investor receiving a reduced income.
  • Conflicts of interest – Incentives could be paid to the Platform Operator to appoint a certain property manager or valuer that could lead to investor detriment. There is a risk that the Crowdfunding Platform could be used to offload properties by the platform operator’s friends and family that they have been unable to sell.
  • Due Diligence – There is a risk that a Platform Operator will rely on market commentary, and other subjective public information, which could be biased, unbalanced, and not verified by relevant professionals with competency in this area. There is a risk that a seller selling his property via a crowdfunding platform does not have valid legal title to the property.
  • Operator expertise  – There is a risk that a Crowdfunding Operator will not fully understand the property market and/or have enough expertise in this field to make the right decisions about what properties to on-board.
  • Managing a Collective Investment Fund (CIF)  – The business model of a PICP can, in some circumstances, be similar in substance to a CIF, but without being subject to the same regulatory requirements or offering the same consumer protections. This presents risks of regulatory arbitrage.

The authority requests feedback on their set of proposals for property crowdfunding. The deadling for submissions is January 13, 2019.

Swiss Government Seeks to Improve Framework for Blockchain / Distributed Ledger Technology for Financial Services

Last week, the Swiss Federal Council announced a report on the legal framework for Blockchain and Distributed Ledger Technology (DLT) for the financial services industry. According to the Council, the Swiss legal framework “is well suited to deal with new technologies including blockchain.”

Even while noting the benefits of DLT, Council believes there is “an occasional need for adjustment,” including the monitoring and review of the potential for money laundering (AML) and terror financing risk pertaining to the usage of digital assets.

Switzerland has become a hotbed for innovation in the blockchain sector. Zug, Switzerland has become known as Crypto Valley due to the numerous crypto firms that populate the region. The Swiss government has embraced this innovation viewing blockchain tech as having great potential for one of their most important industries.

The Federal Council seeks to create the best possible framework conditions so that Switzerland can establish itself as a leading, innovative, and sustainable location for Fintech and blockchain companies.

Produced by the Blockchain/ICO working group created by the Federal Department of Finance (FDF), the report provides an interpretation of relevant framework conditions, clarifies the need for action and proposes concrete measures. In brief, the report states there are no “fundamental adjustments to the Swiss legal framework, but there is still a need for specific adjustments.”

The Federal Council has determined that the FDF and the Federal Department of Justice and Police (FDJP) should prepare a consultation draft in the first quarter of 2019, with the goal to:

  • Increase legal certainty in the transmission of rights by means of digital registers in civil law,
    in insolvency law to further clarify the segregation in the bankruptcy of crypto-based assets as well as to check a disposition of non-financial data;
  • Draft a new and flexible approval tool for blockchain-based financial market infrastructures in financial market law;
  • In banking law, to reconcile bank bankruptcy law provisions with adjustments in general insolvency law, and
    In money laundering legislation, the current practice of placing decentralized trading platforms under the Money Laundering Act should be more explicitly anchored.

On December 7, 2018, the Federal Council also took note of a report by the Interdepartmental Coordination Group on Combating Money Laundering and Terrorist Financing (KGGT) on “Money Laundering and Terrorist Financing Risks of Crypto Assets and Crowdfunding”.

Their analysis indicated that crypto assets pose a threat to money laundering and terrorist financing. However, due to the low number of cases, the real risk in Switzerland cannot be conclusively estimated. The Federal Council did mandate the FDF to examine whether money laundering legislation should be adjusted in relation to certain forms of crowdfunding.

[pdf-embedder url=”ür-Distributed-Ledger-Technologie-und-Blockchain-in-der-Schweiz-December-2018.pdf” title=”Rechtliche Grundlagen für Distributed Ledger-Technologie und Blockchain in der Schweiz December 2018″]

[pdf-embedder url=”” title=”Legal framework for distributed ledger technology and blockchain in Switzerland Swiss Federal Council December 2018″]

Financial Conduct Authority Issues Consultation on Patient Capital

The UK Financial Conduct Authority (FCA) has issued a consultation paper, alongside a discussion paper, on patient capital. The consultation is in response to a policy push by HM Treasury to increase investment into long-term assets including venture capital plus private equity, real estate and more. The proposed changes are designed to allow retail investors greater access to these types of asset classes.

The proposed measures seek to reduce existing barriers for smaller investors while maintaining an appropriate level of protection.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented on the consultation explaining they want to allow “retail investors greater access to long-term investment opportunities.”

“We are also seeking views to help us identify any unnecessary barriers to investment in patient capital through authorised funds. We will ensure that any changes continue to provide an appropriate level of protection for consumers.”

Of course, online capital formation is part of this exercise.

Many investments need longer-term capital as the business or asset requires a longer runway to accomplish the stated investment objectives. These types of investments, such as early-stage firms, are frequently illiquid, although technology may provide a solution to general illiquidity.

The FCA outlined what their goals should accomplish:

  • Benefit consumers by allowing funds to choose investment opportunities that match the investment needs of consumers more effectively.
  • Enable a broader range of long-term investment through unit-linked funds, particularly in defined contribution pension funds where members invest via unit-linked funds.
  • Increase confidence and participation in the market by providing an appropriate degree of protection for investors seeking to invest in illiquid or higher risk patient capital assets within unit-linked funds.
  • Reduce potential harm from a lack of consumer understanding of the type of assets that they hold and reduce risks that consumers may invest in products that do not fully reflect their investment needs. This would be achieved by making investment and liquidity risks more transparent and requirements on authorised firms to take responsibility for ensuring that higher risk or more illiquid investments are only offered or taken up where it is suitable and appropriate for consumers and the purposes for which their investments are held.

Responses to the consultation are due by February 28, 2019. Both the consultation and the discussion paper are embedded below.

[pdf-embedder url=”” title=”FCA Consultation on proposed amendment of COBS 21.3 permitted links rules December 2018 cp18-40″]

[pdf-embedder url=”” title=”FCA Patient Capital and Authorised Funds December 2018 dp18-10″]

CFTC Requests Feedback for Consultation on Crypto Mechanics Including Underlying Tech for Ethereum

The Commodity Futures Trading Commission (CFTC) has launched a public consultation today seeking feedback on “crypto-asset mechanics” including Ethereum (Ether) and Bitcoin. The CFTC said the consultation will better inform the Commission’s understanding of the markets for virtual currencies.

In a Request for Information (RFI) the CFTC is asking for public comment on a range of questions related to the “underlying technology, opportunities, risks, mechanics, use cases, and markets, related to Ether and the Ethereum Network.”

Once the RFI is published in the Federal Register, the consultation will be open for 60 days.

The RFI also seeks to understand the similarities and differences between Ether and Bitcoin. Ethereum is the platform that launched the initial coin offering rave due to the ability to issue bespoke tokens and smart contracts.

The CFTC said the comments received will benefit LabCFTC, the CFTC’s Fintech initiative, and help to inform the Commission’s understanding of these emerging technologies.

[pdf-embedder url=”” title=”CFTC RFI on Crypto Assets federalregister121118″]

BaFin Consultation on Virtual Currencies Scheduled to End this Month

Last month, BaFin, Germany’s security regulator, launched a public consultation on the subject of virtual currencies (or crypto). The regulator has published a draft circular regarding sector due diligence.

The BaFin circular seeks a reasonable and risk-oriented approach to virtual currency. The proposed circular addresses credit, financial services, payments and e-money institutions.

Among other things, the draft circular recommends that the origin of the crypto amounts or the financial means used for their purchase be determined and transparent. BaFin recommends additional identification requirements and asks the institutions to check whether a suspicious transaction report pursuant to section 43 (1) Money Laundering Act ( AMLA ) should be considered.

It is the responsibility of the money laundering institutions to assess the risks associated with virtual currency transactions and to take appropriate and appropriate measures to do so.

The consultation is ongoing with final responses expected by November 19th.

The draft circular is available here in German.

Switzerland: FINMA Opens Consultation on New Fintech License Designed to Promote Financial Innovation

The Swiss Financial Market Supervisory Authority (FINMA) has launched a consultation pertaining to Fintech. Switzerland has pursued innovations in finance as beneficial to their banking centric economy. The alpine nation has become prominent in the crypto or initial coin offering sector as many early stage blockchain based firms have incorporated in the country.

This past June, the Swiss parliament created a new licensing category labeled the “Fintech license”. The goal of this new license is to promote competition and innovation in the financial services sector. Accordingly, the new category fell under the auspices of the Swiss Banking Act (BA) and is said to apply to institutions that accept public deposits of up to CHF 100 million but do not invest nor pay interest on these funds. These same institutions will be subject to the Swiss Anti Money Laundering Act (AMLA) and required diligence mandates. FINMA states that it is now necessary to revise the Anti-Money Laundering Ordinance (AMLO-FINMA).

FINMA states that the due diligence requirements under AMLA must now be defined in detail for institutions which will fall within this new category. FINMA has now opened a consultation on this topic.

FINMA explains that, as a rule, all financial institutions are subject to similar due diligence requirements relating to combating money laundering. However, as most Fintech license applicants are likely to be smaller institutions, FINMA proposes to introduce some regulatory “relaxations” for such institutions.

These principles will now be set out in the Banking Ordinance. One specific relaxation in line with the principle of proportionality will see small institutions, unlike banks, being exempt from the requirement to establish an independent anti-money laundering unit with monitoring duties. According to FINMA, for the purposes of the draft ordinance “small” institutions are firms with gross revenues of less than CHF 1.5 million.

The AMLO-FINMA consultation will last until October 26, 2018. The Swiss Federal Council expects to implement updated rules by January 1, 2019.

Respondents may address comments to:

Swiss Financial Market Supervisory Authority FINMA
Attn: Matthias Obrecht Laupenstrasse 27

CH-3003 Bern

Key Points to the Consultation:

  1. The partial revision of AMLO-FINMA sets out the duties of due diligence for future FinTech licence holders (entities under Art. 1b Banking Act).
  2. Since entities under Article 1b of the Banking Act are expected to be small institutions, less stringent organisational requirements than those applicable to banks are proposed below certain thresholds. This applies in particular to the requirement that banks set up an independent competence center for money-laundering issues entrusted with control tasks (Art. 25 AMLO-FINMA).
  3. In principle, the same duties of due diligence under anti-money laundering legislation as for directly subordinated financial intermediaries (DSFIs) will apply in view of their similar size. In contrast to DSFIs, however, entities under Article 1b of the Banking Act accept deposits from the public and thus engage in higher-risk business, so not all of the relief granted to DSFIs will be applicable to them.

FINRA Issues Special Notice on Fintech and the Broker Dealer Industry


FINRA (Financial Industry Regulatory Authority) has issued a consultation on Financial Technology or Fintech and the Broker Dealer industry. The Special Notice was published at the end of July and is seeking comments until October 12, 2018.

FINRA currently has over 3700 member firms in the financial services industry that it regulates.

According to the posting;

“New financial technology innovations, commonly known as “Fintech,” can offer benefits for investors and the financial services industry, but can also present investor protection concerns where the safeguards of the securities laws are not respected. FINRA’s discussions with representatives of the fintech industry and our member firms through our Innovation Outreach Initiative have enabled us to better understand market participants’ interest in efforts among regulators to create an environment supportive of fintech innovations that benefit investors and the capital markets. Moreover, we have received several requests to solicit feedback from the broader public regarding how FINRA may support fintech innovation consistent with our mission of investor protection and market integrity. In response to these requests, we are seeking comments on how FINRA can support fintech development consistent with this mission.”

FINRA is asking for feedback on areas where their rules or processes could be improved to better support Fintech innovation. Of course, any benefits of Fintech must be consistent with their mission of safe guarding market integrity and investor protection.

FINRA has been urged by some of their stakeholders to modify their rules so members can test Fintech based models. This includes the emerging digital asset market – IE cryptocurrency or blockchain (DLT) based securities.

Along with general comments, FINRA is seeking insight on three specific topics:

  • Provision of data aggregation services through compiling information from different financial accounts into a single place for investors;
  • Supervisory processes concerning the use of artificial intelligence
  • Development of a taxonomy-based machine-readable rulebook.

In recent years, FINRA has been criticized as a monolithic self regulatory entity that had become tone deaf to their members. This changed to a degree when Robert Cook took over as CEO and initiated new programs to address cultural inertia including projects such as FINRA 360 , an Innovation Outreach initiative, and a Fintech Industry committee. More recently, FINRA has made a concerted effort to better understand and address the issues and opportunities of distributed ledger technology, ICOs and the digital asset market.

Questions regarding the Special Notice on Fintech may contact:

Questions regarding this Notice should be directed to:

  • Haimera Workie, Senior Director, Office of Emerging Regulatory Issues (ERI), at (202) 728-8097;
  • Kavita Jain, Director, ERI, at (202) 728-8128; or
  • Alex Khachaturian, Director, ERI, at (202) 728-8275.

[pdf-embedder url=”” title=”FINRA on Fintech Special-Notice-073018″]