Spotlight Article: Work Continues on the Model Regulation of Virtual Currencies Act

Dana-Syracuse-with-captionOn April 2-3, 2016, the third meeting of the Uniform Law Commission (ULC) Drafting Committee on the Regulation of Virtual Currencies (the “Committee”) was held in Chicago, Illinois. Dana Syracuse was in attendance as an official Observer along with Committee members, industry stakeholders, thought leaders, and government representatives. The Committee’s work in Chicago reflects comments received in response to drafts generated in previous meetings in Washington, D.C. last fall and Palo Alto in February. The Committee’s primary goal is to establish a common set of standards regulating certain types of virtual currency companies, including transmitters, custodians, and exchangers of virtual currency.

Subsequent to that meeting the Committee released an updated Draft Model Act reflecting all comments received to date. The current version of the Draft Model Act is divided into eight articles, as summarized below.

Article 1 (General Provisions): This Article includes definitions, which are important for laying out the scope of the Draft Model Act. Of significance is the revised definition of “control,” which states that “control means possession of sufficient virtual currency credentials or authority on a virtual currency network to execute unilaterally or prevent indefinitely virtual currency transactions, but does not control possessing, for a reasonably time-limited period, virtual currency credentials sufficient to prevent virtual currency transactions to provide a service such as an escrow function or transaction management.” This definition is significant because it arguably takes some of the more interesting features of the blockchain, such as escrow functions and some multi signature implementations, outside of licensure. Other significant definitions include custody, storage, transfer, virtual currency, and virtual currency business activity. This Article also contains exemptions for certain categories of institutions including government agencies, banks charted under state law or the jurisdiction of the United States, certain payment systems, those dealing in foreign exchange, those engaged in personal use of virtual currency, miners, and those who fail to meet a minimum threshold of monetary activity. Read more…

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Digital Insights & Trends: Potential Regulatory Pitfalls of the Mobile Payments Revolution

Dana-Syracuse-with-captionThe mobile payments revolution has provided consumers with unprecedented options at the checkout counter. In addition to cash, consumers have myriad payment options, including prepaid cards, debit cards, credit cards, virtual currency, gift cards, mobile phone billing, and person to person payment systems. While these different payment systems allow consumers convenient access to their money, there are numerous potential pitfalls, both for individuals and the industry, by way of regulatory gaps and inconsistencies. These issues are magnified by the fact that these different payment methods may be loaded onto and initiated by mobile devices, which can compound the regulatory, cybersecurity, data privacy, and consumer protection concerns.

  • Regulatory Concerns:  Depending on the payment method effectuated by the mobile device, consumers may find themselves with little or no right to redress and financial institutions may find themselves answerable to the FTC, CFPB, various state level regulators, or even the FCC.  As regulators become increasingly aware of these new forms of value transfer, new regulations will develop and existing regulatory gaps will close.  It is imperative that the financial institutions offering these services and products remain aware of all regulatory developments and adjust their compliance programs accordingly.
  • Cybersecurity Concerns:  Each transaction method has its own cybersecurity strengths and vulnerabilities which may expose sensitive consumer data and leave both the financial institution and consumer exposed.  The financial and reputational risks are great and must be met with robust cybersecurity protocols which, though they may not be required by law, will leave everyone more secure.
  • Data Privacy Concerns:  Mobile payment platforms may expose consumer data to both merchants and mobile payment providers.  Because this data is tied to a single individual, it is quite valuable and may be aggregated into databases and then sold.  As regulators become more attune to the risks presented, they are likely to step up efforts to implement privacy protection around mobile devices.
  • Consumer Protection Concerns: Though mobile payment platforms potentially offer lower fees and are therefore attractive to the young, underbanked, and unbanked, the multiple entities involved in these transactions may drive up fees and negatively impact the consumer.  The necessary fee disclosures may differ depending on  payment method and increased regulation in this area is likely.

The market for mobile payment platforms is growing and is on pace to supplant more traditional payment methods, especially as financial institutions shift away from brick and mortar and into an increasingly digital environment. Regulators are certain to monitor these developments and will focus on closing existing regulatory gaps and drafting new regulations where necessary. Equally, as industry adopts new products and technology, it must analyze whether their existing compliance functions are sufficient or must also be modernized.

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