By Tracy L. Hooey, Daniel Fuke and Bradley Freelan
On August 24, 2017, the staff of the Canadian Securities Administrators other than Saskatchewan (CSA) published CSA Staff Notice 46-307 Cryptocurrency Offerings (the Staff Notice) in response to increased activity within the distributed ledger technology or “blockchain” industry. The Staff Notice provides guidance regarding the application of Canadian securities laws to businesses operating in that industry, in particular those undertaking initial “coin” or “token” offerings (ICOs), exchanges on which those coins, tokens and cryptocurrencies are traded and investment funds that invest in such assets.
The Staff Notice provides that in the CSA’s view many coins, tokens and cryptocurrencies fall within the definition of “securities” under Canadian securities laws. An offering of such tokens would therefore require a prospectus or exemption from prospectus requirements and businesses supporting and operating ancillary to such tokens could be subject to registration requirements. The Staff Notice also provides that such products may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities.
The Staff Notice confirms speculation among industry participants and advisors that Canadian regulators would take this approach, which is similar to the positions articulated by the United States Securities & Exchange Commission and securities regulators in Singapore.
With respect to ICOs, the Staff Notice provides that, from the CSA’s perspective, many of the ICOs completed to date involved the sale of securities and that securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or there are Canadian investors in the tokens.
The CSA are aware of businesses marketing their tokens as software products and taking the position that the tokens are not subject to securities laws. It appears to be the CSA’s view, however, that in many cases, when the totality of the offering or arrangement is considered, the tokens should properly be considered securities. In assessing whether or not securities laws apply, the Staff Notice states that the CSA will consider substance over form and apply a purposive interpretation to the law with the objective of investor protection in mind.
In determining whether or not a token is a security, the Staff Notice states that Canadian regulators will consider each ICO on a case-by-case basis and apply the test articulated in the Supreme Court of Canada case, Pacific Coast Coin Exchange v. Ontario Securities Commission. In applying such test, the Canadian regulators would consider whether the ICO involves: i an investment of money, ii in a common enterprise, iii with the expectation of profit, iv to come significantly from the efforts of others.
The Staff Notice provides two examples that would likely result in different conclusions by Canadian regulators with respect to an offering of tokens. In the CSA’s view, tokens purchased for the purpose of playing video games on a platform may not be considered to be securities. Conversely, tokens whose value is tied to the future profits or success of a business would likely be considered to be securities.
The Staff Notice gives no additional guidance with respect to the relevance of any additional factors in assessing whether a coin or token is a security, such as: i the utility of the token and whether or not the token can be used outside the platform or can be exchanged for, or used to create, other tokens or instruments that the Canadian regulators would consider a security, ii the consumptive nature of the token and what happens to the token when it is used or “burned up”, iii the marketing of the ICO, iv the representations provided in respect of, or the development post-ICO of, a secondary market for trading the tokens and any encoding on the protocol proposed to limit or preclude the development of a secondary market for trading the tokens, v the monetary policy underlying the tokens, vi the maturity of the technology, service or platform at the time of the ICO, vii the tax treatment of the proceeds of the ICO, and viii the voting or control rights in respect of the technology, service, platform or business. This lack of additional guidance is perhaps understandable given the relatively early stages of this industry.
The Staff Notice goes on to highlight the securities law requirements that apply in the event that the tokens are considered to be securities, namely prospectus and registration requirements.
With respect to cryptocurrency exchanges, the Staff Notice cautioned that a platform that facilitates trades in tokens that are securities may be an “exchange” or a “marketplace” under Canadian securities laws and accordingly would be subject to the robust regulations applicable to securities marketplaces. To date, no cryptocurrency exchange has been recognized in Canada.
As discussed above with respect to ICOs, whether a particular token is or is not a security becomes a gating consideration for the launch or operation of a cryptocurrency exchange seeking to list or facilitate trades in such a token. Presumably, if an exchange were to list and trade only cryptocurrencies and tokens that are not securities, it would avoid the application of securities laws in this area. Without being able to precisely determine what is or is not a security, however, determining which assets to list would be difficult for a cryptocurrency exchange.
With respect to funds that wish to invest in cryptocurrency as an asset class, a pool of assets invested in cryptocurrencies on behalf of investors may be considered an “investment fund” under Canadian securities laws regardless of whether the investments are securities or not. The Staff Notice provided several cautionary reminders about the Canadian securities laws applicable to investment funds, including that access to retail investors will be limited, due diligence will be required regarding the exchanges on which the assets trade and, considering the nascent nature of these exchanges, valuations may be difficult.
An entity that acts as manager of any such fund would be required to be registered as an investment fund manager and, depending on how the fund is marketed and sold, the involvement of a registered dealer may be required.
Whether a registered advisor would be required to be engaged is a more interesting question because the requirement for registration as an advisor is based on being in the business of providing advice in respect of securities. Similar to ICOs and exchanges, then, whether a coin or token is or is not a security is a gating issue on this point as well.
The Staff Notice also reminds readers that an investment fund’s assets are required to be held by a custodian that meets certain prescribed requirements. Given that cryptocurrencies and tokens are typically held in online “wallets”, it is unclear whether traditional fund custodians such as banks and trust companies are practically equipped to meet the custodial needs of such funds.
Because the question of whether a particular cryptocurrency or token is or is not a security is central to the application of securities laws to the blockchain industry, it is helpful for industry participants and advisors to know that Canadian regulators are considering the question. Further guidance on how the CSA might apply the test laid out in the Pacific Coast Coin Exchange to assess some of the common characteristics of a token would be a helpful next step. In the meantime, the Staff Notice encourages businesses operating in the industry to contact their local regulators in order to discuss the specifics of that business and how it can best comply with applicable securities laws.
FSS and India Post Payments Bank AePS Partnership Advances Financial Inclusion in India
New Delhi, January 12th,2020: FSS (Financial Software and Systems), a leading global payment processor and provider of integrated payment products, today announced partnering with India Post Payments Bank (IPPB) to promote financial inclusion among underserved and unbanked segments. As part of the collaboration, IPPB will use FSS’ Aadhaar Enabled Payment System (AePS) to deliver interoperable and affordable doorstep banking services to customers across India.
FSS’ AePS solution combines the low-cost structure of a branchless business model, digital distribution, and micro-targeting that lowers acquisition costs and improves reach. This strategic partnership offers significant opportunities to bring millions of unbanked customers into the financial mainstream. Currently, there are nearly 410 million Jan Dhan accounts in India. A primary reason for low usage of banking and payment services is the challenge of accessibility in rural areas and the cost of maintaining active accounts — including transaction and transport— outweigh the benefits. In rural and peri-urban areas, the average time to reach a banking access point potentially ranges between 1.5 and 5 hours, compared with the average of 30 minutes in urban areas.
Leveraging its vast network of over 136,000 post offices, and 300,000 postal workers, IPPB has been setup with the vision to build the most accessible, affordable, and trusted bank for the common man in India to deliver banking at the customer’s doorstep. With the launch of AePS services, IPPB now has the ability to serve all customer segments, including nearly 410 million Jan Dhan account holders, giving a fresh impetus to the inclusion of customers facing accessibility challenges in the traditional banking ecosystem.
Speaking on the tie-up, Mr.Krishnan Srinivasan, Global Chief Revenue Officer, FSS said, “We are proud to be IPPB’s technology partner in this monumental nation-building exercise. The collaboration is evidence of FSS’ deep payments technology expertise and commitment to bringing viable, market-leading innovations that promote financial deepening. FSS’ AePS solution combined with IPPB’s expansive last mile distribution reach empowers citizens of the country with a range of digital payment products and advance India’s vision towards less-cash economy.”
“Through the vast reach of Department of Posts network along with the advent of the interoperable payment systems to drive adoption, IPPB is uniquely positioned to offer a range of products and services to fulfil the financial needs of the unbanked and the underbanked at the last mile. Having launched AePS services, the Bank has become the single largest platform in the country for providing interoperable banking services to customers of any bank. The strategic partnership with FSS provides us with an opportunity to expand the portfolio of financial services and improve customer experience whilst maintaining operational efficiency, thus building a digitally inclusive society,” said Mr. J. Venkatramu, MD & CEO, India Post Payments Bank.
The infrastructure created by IPPB addresses the accessibility challenges faced by customers in the traditional banking ecosystem. It fulfils the Government’s objective of having an interoperable banking access point within 5 KM of any household and creating alternate accessibility for customers of any bank.
The operation of FSS’ AePS solution is based on agents performing transactions on behalf of customers using a tablet, micro-ATM or a POS device. The system is device agnostic and can accept transactions originating from any terminal. Customers of any bank can access their Aadhaar-linked bank account by simply using their fingerprint for cash withdrawal, balance enquiry and transfer of funds into an operating IPPB account, right at their doorstep. FSS’ AePS exposes APIs to third parties to develop an expansive services ecosystem and extend a broad suite of financial products and tools including micro-insurance, micro-savings, micro-finance, mutual fund investments, enabling the bank to further services adoption among low and moderate-income consumers.
FSS (Financial Software and Systems) is a leader in payments technology and transaction processing. FSS offers an integrated portfolio of software products, hosted payment services and software solutions built over 29+ years of experience. FSS, end-to-end payments products suite, powers retail delivery channels including ATM, POS, Internet and Mobile as well as critical back-end functions including cards management, reconciliation, settlement, merchant management and device monitoring. Headquartered in India, FSS services leading global banks, financial institutions, processors, central regulators and governments across North America, UK/Europe, Middle East, Africa and APAC. For more information visit www.fsstech.com.
About India Post Payments Bank
India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Hon’ble Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked & underbanked and reach the last mile leveraging a network comprising 155,000 post offices (135,000 in rural areas) and 300,000 postal employees.
IPPB’s reach and its operating model is built on the key pillars of India Stack – enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers’ doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages.
IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true – Every customer is important; every transaction is significant and every deposit is valuable.
Be Future-Ready: The Case for Payments as a Service (Paas)
By Barry Tarrant, Director, Product Solutions, Fiserv
Over the years, financial institutions have faced a myriad of changes in regulations, technology and customer expectations. Banks are now having to deal with the competing demands of maintenance and compliance on the one hand, and the need to innovate and deliver value-added services on the other. The balance of effort is increasingly consumed by the former with the share of investment in innovation and value generation being squeezed.
COVID-19 has changed customer behaviour, which will accelerate the need for more digital innovation, adding further to the demand on technology resources that are already stretched to the limit. While future investment plans may remain uncertain, banks need to consider several factors for their technology strategy, such as efficiency, where to invest and how to reduce capital expenditure.
It is apparent that the traditional approach to implementing and updating technology is no longer sustainable in the long-term.
The true cost of outdated technology
Maintaining technology has always been a challenge. What makes it more important now than ever is that innovation expectations have become far greater and exist on multiple simultaneous fronts. Today, there is more demand for product innovation, alongside the need to deliver consistently across multiple channels. On top of this, banks are facing structural changes, such as the convergence of payments.
Faced with this combination of imperatives, many banks are finding that continuing to maintain their payments technology in-house is no longer the most viable option.
Banks that persist with existing in-house infrastructures are in many cases spending large sums just to keep up, with little left for innovation. This can put them at a distinct disadvantage in today’s digital environment, where challenger banks and fintechs are fully embracing tools like the cloud to optimise operations while delivering truly transformational customer experiences.
Maintaining technology can be quite costly, and leveraging shared payment innovation can result in notable cost savings. Additionally, there are savings to be had in the areas of capital costs, opportunity costs, regulatory or payment scheme compliance costs, and the inevitable one-off costs from technology or infrastructure upgrades.
And as the options available for customers to initiate payments across card and non-card payment rails increase, this will drive a convergence of the technology that supports the processing of those payments, further increasing the demand for change.
In this environment, migrating to an alternative technology strategy, such as PaaS, can be a strategic and cost-effective decision.
One solution to mitigate the risks and costs associated with maintaining technology is to outsource payments activity to a PaaS provider. The most obvious advantage here is cost reduction. However, there are many other positive and significant financial benefits that can be realised in terms of reduced capital expenses and the associated effects on balance sheet and free cash flow. This is particularly important in the current environment as capital investment comes under even more scrutiny.
Running a robust platform is a PaaS provider’s primary business, whereas for a bank it is just one of the many areas in which it has to invest. A PaaS provider is compelled to continually reinvest to ensure their technology never stands still long enough to become outdated, while also recruiting high-calibre personnel to support and advance it.
Geographical scale can also add value and increase opportunities for innovation. A PaaS provider with clients around the world sees and delivers innovation globally, which can be redeployed elsewhere rapidly and at a lower cost than custom development. Also, a global processing network can serve as a worldwide payments intelligence network, detecting trends, such as new payment types, consumer payment behaviour and cyberthreats.
One further consideration is how payments have become increasingly commoditised in recent years. As traditional revenue streams from payments have declined, it makes even less financial sense to retain payment processing in-house. By adopting PaaS and benefiting from the associated cost savings, retained payment margins can be maximised, simultaneously freeing up resources that can be diverted to innovation and value-added activities, such as enhancing customer experience and building the franchise.
Debunking the myths
Despite the compelling business case for banks to adopt PaaS, some remain reluctant to do so because of various myths. One example is the belief that outsourcing data is inherently risky. The reality is, in fact, the opposite. PaaS providers have the scale, resources and procedures to address and invest in key priorities – for example, cybersecurity. Keeping things in-house can actually create greater data security risk if resource constraints are an issue.
Budgetary considerations aside, experience and specialist tools are also major points of difference here. A typical bank IT manager might experience two or three major transition projects in their entire career. In contrast, teams at a PaaS provider collectively will have experience successfully delivering many major transformation projects, and will have also developed a whole range of specialised implementation adapters and toolkits that are continually enhanced and expanded.
Be more agile and tactical
When technology becomes outdated it can easily go from an asset to a liability. While COVID-19 has emphasised this reality for some, truly appreciating it requires a comprehensive assessment of existing technology and its long-term impact on business. Outsourcing through PaaS has a wealth of benefits that can radically transform this situation. Financial institutions can become more agile and tactical so they can continue to innovate and provide services that customers demand while differentiating themselves from the competition.
Teaching Your Kids to Build Good Credit: The One Tool You Never Knew You Needed
Teaching your kids about money can be tricky. You want them to understand the value of a dollar without putting undue pressure or stress on them too early on. It’s essential to have productive conversations with your children around money so they can have the knowledge to guarantee their own financial well being when they become adults. One of the most important conversations to have with your kids is on the importance of building good credit, the steps they can take to do so, as well as techniques for avoiding the risks of poor credit. While you may have already thought to educate them on credit cards and loans, there is one tool you may have never considered that can help you underline this lesson. Read on to find out more.
Tradelines – What Are They?
A tradeline is defined as a record of activity for any type of credit that has been extended from a lender to a borrower and is also reported to a credit reporting agency. In short, a tradeline is a record-keeping mechanism that tracks all of the activity associated with that borrower’s account. For each credit account you have, you will have a tradeline. Generally, tradelines are one of the most widely used tools credit agencies use to calculate an individual’s credit score.
Tradelines typically include the following information:
- The name and address of the lender
- The type of account
- Partial view of the account number
- Current status of the account
- The date the account was opened
- The date the account was closed (if it has been closed)
- The date of last activity
- The current account balance
- The original loan amount or credit limit
- The monthly payment amount
- The recent balance (only applicable for credit cards)
- The payment history
The Type of Tradeline You Never Knew You Needed
When it comes to educating your child on the logistics of building good credit, there is a specific type of tradeline that can help achieve this goal: AU tradelines. In this case, AU stands for authorized user. In this type of tradeline arrangement, a parent can add their children to their tradelines as a means of aiding in building their credit. In other words, AU tradelines are the perfect tool to get your kid’s finances started on the right foot as they enter adulthood. By providing your child with this assistance early on, you will not only boost their credit, but you will teach them a valuable lesson on how to “futureproof” their credit management and use such tools to their benefit.
Ultimately, holding constructive conversations with your kids around responsible financial practices is an essential step in guaranteeing their future prosperity. Not only will you enhance your children’s understanding of valuable financial tools, but you will set them on the path to financial security and freedom. The more freedom and stability they have, the sooner they will be able to achieve their financial goals of buying a car, a home, or paying for their education. At the end of the day, you cannot put a price on that kind of peace of mind.
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