Recent News in Fintech & Crypto: Ethoca Acquired, Law Firms Accepting Crypto Payments, & More

A businessman considers the potential of Fintech

Toronto-based Ethoca to be acquired by Mastercard

Mastercard has announced it will be acquiring Toronto-based fintech company Ethoca. Ethoca is a global provider of technology solutions which aids merchants and card issuers in identifying and dealing with fraud in digital commerce.

Ethoca provides technology which identifies when a fraudulent transaction has occurred. When detected, information is sent to merchants which enables them to confirm the transaction, halt delivery or reverse it to avoid a chargeback, which is the return of funds to the customer. Ethoca has stated they connect roughly 5000 merchants with 4000 financial situations.

While Mastercard did not discuss the terms of the agreement, the deal is expected to close in the second quarter of 2019. In recent years Mastercard has made other cyber-security focused acquisitions, including a 2017 deal to acquire Vancouver-based fintech company NuData Security.

The story continues: Quadriga’s cold wallets found empty

QuadrigaCX, formerly Canada’s largest cryptocurrency exchange, became embroiled in controversy when, after the unexpected death of its CEO and founder in December of last year, it came to light that the CAD $190 million owed to customers was missing or otherwise inaccessible. Allegedly, the company’s founder, Gerald Cotten, was the only individual in possession of the passwords necessary to access the funds.

In a recent development, the company’s “cold wallets” – offline digital storage mechanisms for cryptocurrencies – have been found to be empty. The new report by court-appointed monitor Ernst and Young states that there have been no deposits into five of wallets since April 2018. This has raised suspicions, as no identifiable reason for cessation of their usage at that time has been identified.

Suspicions of misconduct have also been raised through the finding of fourteen QuadrigaCX user accounts created “outside the normal processes” and under a number of aliases. These accounts were created internally but were not associated with a corresponding customer. Transaction data indicates that they were used to trade on the Quadriga platform and to make withdrawals of cryptocurrencies to wallets not associated with Quadriga.

Ernst and Young plan to seek help from the Nova Scotia Supreme Court of Justice for the continued recovery of funds. So far, the firm has managed to recover $24.7 million in cash, with another $5.8 million in bank drafts to be available shortly.

IBM finds itself in the crypto custody market with a hardware security model

IBM is the latest player coming to the crypto custody space. Shuttle Holdings, a New York Investment firm, is expected to launch a beta version of a custody solution for digital assets built in IBM’s private cloud and encryption technologies. While both companies will not be storing cryptocurrencies and tokens themselves, their technology will be offering tools for others to do so.

Brad Chun, Shuttle’s chief investment officer stated that potential users of the custody solution include banks, brokers, custodians, funds, family offices and high net worth investors who want to do self-custody, and exchanges. He noted that clients have already been selected to take part in the beta, and there is a wait list to get in.

Recently IBM has been delving further into the digital asset space, after having been involved with crypto during its work with the Stellar Foundation, and developing the Hyperledger Fabric private blockchain.

The system designed by Shuttle differs from traditional cold storage solutions utilized by the majority of crypto custodians as it is built on a hardware security module (HSM). An HSM is like a lockbox which protects and manages digital keys in a tamper-free environment. Opinions differ as to HSM’s versus the more traditional cold storage. The former relies on a completely electronic process, which makes it much faster than cold storage access, which can take anywhere from an hour to 48 hours given the need for a person to physically be involved. Other high-profile HSM initiatives are occurring worldwide and the debate over HSM and Cold Storage is sure to continue.

Law firms accepting client crypto payments poses unique risks and ethical dilemmas

The role of cryptocurrencies as payments for legal services rendered was a key topic at the Legal Practice and Risk Management Conference in Chicago. Law firms are capable of accepting cryptocurrency as payment or to help their clients with initial coin offerings. Despite the inherent risk and volatility associated with crypto markets, many law firms seem intent on adopting crypto as an appropriate form of payment.

Matthew K. Roskoski, one of the panelists and a deputy general counsel for Latham & Watkins, stated that lawyers may accept crypto as payment to demonstrate “we’re hip and cool and on top of stuff.” Roskoski said that despite the risks associated with crypto, lawyers may decide to offer it as a payment option if clients request it, given that the legal industry is a customer service business.

Panelists stated that in addition to financial risks, there are ethical risk considerations as well. Roskoski identified as one of these considerations the appreciation of cryptocurrency value over time, which is unlike cash. Consequently, lawyers who accept crypto from clients may decide not to spend or liquidate it. This is not an issue if the lawyer or law firm accepts crypto as a payment for a bill, but if crypto is accepted as a retainer to be held in trust, the situation becomes murky. Roskoski concluded that crypto does not fit with the general model for trust funds, and that lawyers should not accept crypto as trust money.

Roskoski suggested that dealing with initial coin offerings creates another difficulty for legal professionals: “Working in ICO space [sic] is subject to risk and a liability scheme we have no track record in,” but also added that there is real money to be made, which means lawyers do not want to completely neglect the idea.

FIS to merge with Worldpay in $43 billion deal

Fidelity National Information Services Inc. (FIS), a financial technology company which provides payment processing and banking software, has announced it is merging with Worldpay, a payment processing company which makes technology for credit card and other transactions for e-commerce merchants, in a deal that values Worldpay at $43 billion.

This represents the largest deal ever in the international payments sector. As part of the deal, FIS will assume Worldpay’s debt. Current shareholders of FIS will own 53 percent of the combined company, and Worldpay investors will hold 47 percent. Analyst Darrin Peller at Wolfe Research suggests the two companies are combining in order to create a one-stop-shop for capitalizing on the e-commerce payments industry. The fast-consolidating payments sector is under significant pressure to cut costs, develop new products, and add customers. The field of global payments is set to reach approximately $3 trillion over the next five years according to McKinsey.