While some commentors predict that Blockchain will make payment companies obsolete, the law hasn’t quite caught up yet. Specifically, how money is transferred is usually governed by a uniform set of laws (called the Uniform Commercial Code or UCC). The UCC doesn’t cover digital transfers like Blockchain as it does for wire transfers.
Advisors often keep watch on the news for themselves as well as their clients. These days, client education often means client re-education in terms of undoing the misinformation that seems to have a tsunami quality at times. In the wash of all this information and misinformation, some information may get missed. Since we watch for trends in regulation regularly, we noted five topics of interest: 1) the SEC v. Coinbase case and defining securities to include digital assets; 2) the UCC and Blockchain; 3) open banking extensions; 4) AI for loan processing; and 5) AI for cybersecurity.
First, in the continuing cycle of news about cryptocurrencies and crypto-exchanges we picked up on a key issue. The ability of regulators, like the SEC, to monitor these digital exchanges, has been limited by legal definitions of securities. We’ve discussed a few items related to that issue in other articles and suffice it to say, the issue of what is and isn’t security is a bit detailed.[1] The lack of regulation of digital assets, and their exchanges, has been an aspect of their volatility.
The who, what and how of regulating crypto and crypto exchanges has been the third rail, potentially causing widespread shutdowns in other areas. Here’s why: to determine if an exchange involves securities, the item must have aspects of property. That may mean that identifying crypto-currency as a security may imbue other transient things with property-like aspects, creating new legal questions. Bloomberg News recently predicted that reticence to address this question may be waning. They think that the SEC case against Coinbase may rise to the US Supreme Court. There, the SEC charged Coinbase with selling unregistered securities and operating an unregistered exchange. Importantly, the SEC accused Coinbase of another vital breach: operating an exchange while acting as both broker and clearing agency, a violation based on failing to separate these functions.[2] It’s worth noting that several other cases are potentially pending for review on the extent of administrative agency.[3]
Another new change concerning digital asset transfer to watch involves Blockchain. While some commentors predict that Blockchain will make payment companies obsolete,[4] the law hasn’t quite caught up yet. Specifically, how money is transferred is usually governed by a uniform set of laws (called the Uniform Commercial Code or UCC). The UCC doesn’t cover digital transfers, like Blockchain, as it does for wire transfers.
The committee that makes changes to the UCC suggested amendments to those uniform laws in 2022. Those changes include “creating a concept of “Controllable Electronic Record” (“CER”) … and specifically addressing intangible digital assets (whether currently known or unknown) in several existing UCC provisions …. The 2022 Amendments recommend states adopt a uniform effective date of either January 1 or July 1, 2025….”[5] As the New York City Bar Association stated, “the Amendments focus on the rights acquired by transferees of interests in digital assets. They are not intended to, and do not, address regulatory or public interest issues outside the scope of the UCC. Thus, they do not concern the technology by which such assets are created, and, in fact, are intended to be neutral on that subject.”[6]These amendments are still being considered by various groups and have not had widespread adoption yet. By the summer of 2023, only a handful of states had adopted part of these changes. Those states include Nebraska, New Hampshire, North Dakota, Iowa, and Wyoming.[7] The lack of uniformity of adoption could limit predictability in regulation, slowing down the adoption of Blockchain for payment processing.
Other predicted trends and developments in FinTech products may not have so many thorny legal issues. They also may translate into significant changes to how investors plan and participate in the market. For example, as open banking continues to increase consumers may literally “see” their money in new ways.[8] Open banking involves major financial institutions that allow access to their encrypted information to app developers. It can help customers track their spending or their investments through API or widgets on their phones and computers, for example. In turn, that may help investors prioritize saving towards retirement.
Additionally, more lenders are turning away from conventional approaches to lender qualification and are looking to AI to assess loan candidates. This trend began with SoFI, who led the change with prioritizing future income calculations when making loans. This change may impact an investor’s planning process for acquiring assets; if interest rates and loan amounts are no longer limited by total debt or by traditional credit scores (impacted by student loans), investors may be able to change their planning for major life changes, such as acquiring houses, getting married, or even starting families. It’s notable that SOFI is acquiring Technisys in a deal valued more than $1 billion.[9] The acquisition gives SoFI Technisys’s banking platform, which includes tracking and mobile banking apps. With further roll out of open banking, the increased power of SoFI may have a big impact on investing and retirement planning for Millennials and other generations holding credit crushing amounts of student loan debt.
Other aspects of increased reliance on machine learning may impact companies rather than consumers. For example, as more companies lean on AI for fraud detection and trend tracking, companies may be able to respond more dynamically to risk, saving resources. Additionally, use of tech for the never-ending cybersecurity war may reduce the threat of cyberattack. It may also impact staffing choices as more employees will need to be well-versed in encryption and authentication processes.
[1] Hats off to Professor Bill Carney for his valiant effort at teaching this author. https://law.emory.edu/faculty/faculty-emeritus/carney-emeritus-profile.html
[3] https://www.bcgbenefits.com/blog/administrative-agency-authority
[4] https://www.fintechweekly.com/magazine/articles/top-5-fintech-trends-in-the-us
[8] https://www.fintechweekly.com/magazine/articles/top-5-fintech-trends-in-the-us
[9] https://fintech.global/2023/01/06/top-fintech-mergers-acquisitions-in-2022
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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