Links I would send you if I were your lawyer #4
Legal nuggets for Fintech, Web3 and other tech founders and builders.
Hey founders et al. Here’s another fresh batch of news coming from the Fintech and Crypto legal worlds. At the top, I’ve put three interesting reads that might require your full attention :) Enjoy!
May 6, 2022
Something I am reading. Here’s a substack I just discovered by Matt Harvey. This episode offers some great insights on how to think about cap tables. I recommend reading through his other episodes too. Very insightful stuff!
The Fair Notice Defense. Really like this thread, originally posted by Twali Wrapped newsletter, re the “fair notice” defense that crypto projects could use if they choose not to register their digital assets as required by Section 5 of the Securities Act. This defense arises under the U.S. Constitution's Due Process Clause and requires that the language of any criminal statute be sufficiently clear to objectively give fair notice of what is prohibited.
Legal food for thought regarding crypto and “ownership”. Can you truly own anything in the metaverse? A law professor explains how blockchains and NFTs don’t protect virtual property. This is especially relevant following the latest BAYC Otherside mint!
Fintech
The CFPBs expanded reach. The Consumer Financial Protection Bureau recently announced that it is going to exercise authority described as “dormant” to supervise nonbanks that are not otherwise subject to the CFPB’s supervision authority. Since 2011, the CFPB has limited its supervisory activities to banks, so-called “larger participants” in specific industry sectors such as credit reporting, and mortgage and payday lenders. This expanded supervision authority suggests therefore that the CFPB is focused on gaining supervisory access to fintechs that are not involved in lending and that offer products or services to consumers.
Bank Regulators Propose Overhaul of Redlining Law. Regulators released a proposed set of overhauled regulations under the Community Reinvestment Act, the 1977 law intended as a countermeasure against discriminatory lending, also known as redlining. One of the most significant changes is the addition of a new method to evaluate banks’ CRA obligations that isn’t tied to branch networks. The rise of mobile and online banking has lessened the value of branches to traditional banks, while some newer banks are entirely online, with no physical presence.
More Student Borrowers Get Relief. The U.S. Department of Education has once again approved hundreds of millions of dollars in borrower defense to repayment discharges for student borrowers, signaling an ongoing crusade to relieve student loan debt with what appears to be a focus on the for-profit sector. The department announced it would deliver relief totaling $238 million to 28,000 student borrowers who attended Marinello Schools of Beauty, which closed in February 2016.
More “true lender” drama, now from CA’s DFPI’s. California Department of Financial Protection and Innovation (DFPI) filed a cross-complaint against a Chicago-based FinTech company alleging that as the “true lender” of consumer installment loans. The DFPI argues that the FinTech, and not the bank, is the true lender based on the substance of the transaction and in consideration of the totality of the circumstances where the primary determining factor is which entity has the predominant economic interest in the transaction. The complaint is part of a continuing trend whereby attacks on bank partnerships have argued that the nonbank partner is the “true lender”.
Crypto
Crypto anti-money laundering proposals from the EU Parliament received a lukewarm reception. In the Transfer of Funds Regulation, the European Parliament had proposed rules that are stricter for crypto than for regular banking transactions. For example, the draft wants transactions of a certain size originating from an unhosted wallet automatically to be reported to authorities. This is “very resource intensive” and may not be practical, according to an AML data specialist from the European Banking Authority. I love this thread from Patrick Hansen for purposes of explaining the big picture:
Beefed up Enforcement. U.S. Securities and Exchange Commission is increasing the headcount of its newly formed Crypto Assets and Cyber Unit to 50 positions from about 30. The unit is concentrating on enforcing securities laws in all aspects of crypto. from trading to lending to NFTs to custody. “The U.S. has the greatest capital markets because investors have faith in them,” Gensler, the SEC’s chairman, said in a statement released by the commission on May 3. “As more investors access the crypto markets, it is increasingly important to dedicate more resources to protecting them.” Not all of the Commissioners agree with this approach. Hester Peirce is upset that the focus is on enforcement rather than guidance fort the industry:
How effective is China’s crypto trading ban? It’s possible it’s not stopping Chinese investors from buying crypto, as these researchers suggest: “we provide strong evidence that the crackdown on Bitcoin trading has not been effective as Chinese investors continue to purchase Bitcoin using the stablecoin Tether instead of Chinese yuan.”
Too long didn’t read the Terms. Hong Kong law applies to the sale of the Otherside metaverse land. Would love to read a legal deep dive into the implications of this. Does anyone know of one? Here is a good thread as a starter pack:
That’s all for now. Thanks for reading. Stay lawyerly,
Brian