Category Archives: Legal Issues and Regulation

Global Risk Institute Report: Discussing Open Banking Regulation for Canada

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Global Risk Institute | Markos Zachariadis, University of Manchester | Sep 24, 2020

Data sharing frameworks and APIs - Global Risk Institute Report:  Discussing Open Banking Regulation for Canada

Executive Summary:  Data-sharing frameworks in financial services:  Discussing open banking regulation for Canada 

Data-sharing frameworks in financial services are becoming increasingly prevalent with the potential to shape drastically the future of banking and finance. As data assets are of strategic importance to financial institutions and central to their ‘datafication’ and digital transformation processes, sharing and accessing new data can alter the dynamics of competition and lead to the emergence of new players as well as nascent markets.

Innovative technologies such as application programming interfaces (APIs) can help simplify data communication between systems and thus standardize the exchange of information between organizations allowing them to experiment with new, more open, business models. APIs also give the ability to effectively control openness and orchestrate ecosystems of third-parties that can add value to organizations’ supply chain and end users. Having said that, the deployment of open APIs in financial services raises numerous questions regarding the appropriate regulatory (or not) framework and infrastructure for opening up data in the banking sector.

See: 

Open Banking – North American Style

Explore Fintechs in Canada

Sign-up for NCFA's Weekly & Insights Newsletter

 

The current paper examines the potential for an open banking framework in the Canadian market and makes an effort to identify the regulatory, economic, technological, sociological, and political debates in the industry concerning data openness. During the course of the study there was consensus from participants that discussing the “merits of open banking” or opportunities that it will bring is an outdated topic and instead the discussions should focus on the real issues and ‘pain-points’ around open banking implementation in Canada.

Following a good number of interviews with FinTechs, challenger and incumbent banks, regulators, legal experts, consultants, and financial services professionals (in various part of the business as well as IT) in the Canadian market, the paper outlines a number of themes and frictions that the industry as well as policy-makers in Canada should consider when implementing an open banking framework.

We believe that the findings can be generalized and be useful for practitioners and regulators around the world when exploring similar frameworks.

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NCFA Jan 2018 resize - Global Risk Institute Report:  Discussing Open Banking Regulation for Canada The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Ontario’s Capital Markets Modernization Task force report draws criticism

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Investment Executive | James Langton | Sep 21, 2020

Ontario government building 1 - Ontario's Capital Markets Modernization Task force report draws criticismSweeping recommendations to reform Ontario’s securities laws are facing a barrage of criticism from certain corners of Bay Street.

The Ontario Capital Markets Modernization Taskforce, which began its review of the province’s securities laws in February, published its draft recommendations in July. The task force aims to deliver its final recommendations to the government by the end of the year, despite conducting most of its consultations amid a global pandemic.

The task force’s work has been remarkable for both its speed and its ambition, but critics say the group’s recommendations are ill-conceived, threaten investor protection and could undermine the province’s efforts for more vibrant capital markets.

The task force’s July report proposes a series of reforms largely designed to stoke growth in the capital markets. In addition to the Ontario Securities Commission’s (OSC) traditional priorities of investor protection and ensuring fair and efficient markets, the task force proposes expanding the regulator’s mandate to include an obligation to foster capital formation and competition.

The task force also recommends overhauling Ontario’s existing regulatory structure, easing a variety of constraints on raising capital, remodelling proxy voting and corporate governance, and revisiting enforcement and investor restitution mechanisms.

See: 

CSA Provide Comments on the Ontario Capital Markets Modernization Taskforce Consultation Report

NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

Ontario capital markets task force proposes big changes

 

Many proposals set off alarm bells and, given the speed of the consultation process and the number of bold ideas in the report, perhaps that isn’t surprising.

First of all, revising the OSC’s marching orders to include a mandate to foster market growth is sparking concern. The submission from the OSC’s independent Investor Advisory Panel (IAP) warns that expanding the OSC’s mandate could undermine the regulator’s raison d’être, leaving the OSC “in the awkward and unenviable position of being seen as a cheerleader for Ontario’s capital markets when the OSC should more appropriately be positioned as a fair and objective regulator of those markets.”

Even if the government’s top priority is driving market growth, strong investor protection is a prerequisite for attracting capital, the Canadian Coalition for Good Governance (CCGG) cautions in its submission to the task force:

“Reforms that risk eroding investor protection or increasing regulatory burden for investors, risk losing the patient global capital that fuels capital formation over the long term.”

The CCGG, which represents institutional investors that collectively manage $4.5 trillion in assets, states in its submission that a number of the task force’s recommendations — including measures to regulate proxy advisory firms, to give issuers more information on shareholders and to involve the OSC in the handling of shareholder proposals — are “antithetical” to the OSC’s investor protection mandate.

Various submissions propose that several of the task force’s recommendations threaten to diminish investor protection.

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NCFA Jan 2018 resize - Ontario's Capital Markets Modernization Task force report draws criticism The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Federally Chartered Banks and Thrifts May Engage in Certain Stablecoin Activities

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Office of the Comptroller of the Currency, Press Release |  Sep 21, 2020

Stablecoins   - Federally Chartered Banks and Thrifts May Engage in Certain Stablecoin ActivitiesWASHINGTON—The Office of the Comptroller of the Currency (OCC) today published a letter clarifying national banks' and federal savings associations' authority to hold "reserves" on behalf of customers who issue certain stablecoins.

Stablecoins refer to cryptocurrency backed by an asset such as a fiat currency, including U.S. dollars or other foreign currency.

"National banks and federal savings associations currently engage in stablecoin-related activities involving billions of dollars each day," Acting Comptroller of the Currency Brian P. Brooks said. "This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner."

See: 

Stablecoins: Experience the Stability

Visa’s digital dollar concept opens a door to central bank currencies

FFCON20 Video: Future of CBDCs, Digital Assets and Trading

Virtual Panel via Toronto Centre (Apr 17): Using Stable Coins to Facilitate Financial Stability and Inclusion Under Unprecedented Times

The letter responds to questions regarding the application of stablecoin-related bank activities. It concludes national banks and federal savings associations may hold "reserves" on behalf of customers who issue stablecoins, in situations where the coins are held in hosted wallets. The letter addresses the use of stablecoins backed by a single fiat currency on a one-to-one basis where the bank verifies at least daily that reserve account balances meet or exceed the number of the issuer's outstanding stablecoins.

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NEW REPORT: Small Business SOS – It’s Time to Supercharge Local Crowdfunding to Unlock Needed Capital

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SBE Council | Sep 16, 2020

Fund small business recovery - NEW REPORT: Small Business SOS – It’s Time to Supercharge Local Crowdfunding to Unlock Needed Capital

New Report Highlights Investment Crowdfunding’s Success, and COVID-19 Policy Opportunities for Recovery

Today, Crowdfund Capital Advisors (CCA) and the Small Business & Entrepreneurship Council (SBE Council) released a new report detailing the growing power and prevalence of investment crowdfunding and the need for a “Main Street Recovery Co-Investment Fund.”

“We need to act quickly to stop the bleeding on Main Street,” says Sherwood Neiss, Principal at Crowdfund Capital Advisors.

“Short term band aids might slow the trauma, but we need a program that can quickly get capital to local businesses in a way that is supported by local investors. This will create a long-term win that will rebuild and sustain local economies, provide dividends to investors and achieve what Congress is trying to accomplish at the local level,” adds Neiss.

In the report, Regulation Crowdfunding by Congressional District: A Report Card, CCA and SBE Council review the progress of investment crowdfunding since 2016.  The Jumpstart Our Businesses Startup Act (JOBS Act) of 2012 enacted changes that ushered in investment crowdfunding, which officially launched following the finalization of Securities and Exchange Commission (SEC) rules in 2016.

Currently, the SEC is in the process of advancing regulatory proposals that would enable issuers to raise more capital than what is allowed by current caps, and provide for other changes to make Regulation Crowdfunding more accessible and effective for small businesses and startups. In addition, in response to COVID-19, the SEC recently extended temporary rules intended to expedite the offering process for small businesses by providing conditional relief from certain requirements of Regulation Crowdfunding.

See: 

NCFA Response to CSA on NI 45-110 Harmonized Securities Crowdfunding Rules

NCFA Open Letter: Government should collaborate with Fintechs

NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

FFCON20 Video:  State of Equity Crowdfunding in 2020

 

As noted in the report, there have been no cases of fraud with investment crowdfunding.

SBE Council president & CEO Karen Kerrigan asserts that innovative solutions like a “Main Street Recovery Co-Investment Fund” are desperately needed to help the nation’s economy dig out of its deep hole, and allow local communities to survive by supporting their businesses and new startups.

A comprehensive approach needs to include a co-investment fund to help local economies recover, rebuild and reinvent themselves. This includes urban and rural areas alike, along with enabling new business creation given the massive volume of business closures that will profoundly affect local communities.

The good news is that this type of fund has been successful in the UK through its Future Fund, which means our government will not be testing a new concept. The co-investment fund injects federal dollars into businesses that have been validated by local investors on regulated platforms, and accountable under an existing federal framework. There has been no fraud since inception,” said Kerrigan.

Under the co-investment funding model, the federal government would match 100% of funds raised from communities via a securities-based crowdfunding platform (not to exceed $250,000 per business). The federal money that is received by small businesses would be paid back. CCA and SBE Council are recommending that $20 billion be allocated to the fund.

U.S. JOBS Act Equity and Debt Crowdfunding Results Since 2016:

● 3,100 stock offerings have been listed by 2600-plus companies.

●  These offerings occurred in 90% of U.S. Congressional Districts (393 districts):

-95% of women-led districts had JOBS Act stock offerings

-93% of minority-led districts had JOBS Act stock offerings

-77% of districts had multiple offerings

-Nearly 50% of districts had campaigns that raised from $250,000 to $5 million

● $500,000,000 has been committed to these offerings.

● 700,000 retail investors participated in diverse offerings across the United States.

● Capital has been delivered to companies in 450-plus industries and across 850 cities.

● This capital has supported over 100,000 JOBS.

● Average amount raised per offering:  $342,000.

● Since inception, the SEC and Crowdfund Capital Advisors have each concluded that there has been NO SECURITIES FRAUD in these offerings.

● Pre-Covid-19: The monthly volume of capital raised in February 2020 was $9 million. During the Covid-19 crisis, the monthly amount raised has increased dramatically.

-In August 2020, the amount of capital raised was $25 million, which represents an INCREASE of 2.8x in just 6 months. Community-focused investing is delivering significant capital to local businesses.

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NCFA Jan 2018 resize - NEW REPORT: Small Business SOS – It’s Time to Supercharge Local Crowdfunding to Unlock Needed Capital The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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The future relationship between AI and IP

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The Law Society UK | Giles Parsons | Sep 16, 2020

Copyright - The future relationship between AI and IPEverything a computer does includes copying; data is processed, written to memory, retrieved, and transmitted.

Copyright is infringed when the 'expression of the intellectual creation of the author of the work' is copied.  So in order to allow the internet to function, the EU passed an exception in copyright law that allows temporary copying when that copying forms part of a transmission of a copyright work in a network.

This isn’t an issue for people – we don’t 'copy' documents in the same way to read them. Perhaps use by AI would fall within exhaustion of rights – once a book has been sold, it can be read by both man and machine.

But behind this is a bigger question: what use by AI of a copyright work should be allowed? Copyright does not protect ideas; it protects the expression of ideas. But drawing a neat line between the two has always been difficult.

See:  How do intellectual property rights apply to AI?

Machine learning software, using artificial neural networks, can learn from information it receives and reach decisions on its own volition, with limited or no human intervention. AIs have been trained to paint like Rembrandt and compose like Bach. When a machine, which is trained only on one author’s works, goes on to make similar work, is it not copying something protected by copyright?

When alternate products are sold from the results of an image search, all the retailer needs is something that looks like the product being searched for to increase the prospects of sale of their own products.

AI will make it easier to create lookalikes and will automate and make it easier for consumers to find lookalikes.

AI creating copyright works

This also leads us back to the problem of whether copyright should subsist in AI generated works. EU jurisprudence says that copyright protects intellectual creations and that ‘an intellectual creation is an author’s own if it reflects the author’s personality’. The Advocate General in Painer C-145/10 has explicitly said that only human creations are protected.

The UK’s Copyright, Designs and Patents Act 1988 provides for computer generated works to be protected by copyright. So, EU case law and UK statute are incompatible, perhaps because neither is designed with AI generated works in mind.

UK law expressly excludes computer generated works from holding moral rights. Perhaps the paternity right for computer generated works would be a good thing to keep people honest, even if the computers don’t care.

See:  Podcast Strictly Legal: Who Owns Blockchain?

News organisations are using machines to interpret data, detect trends and generate articles – including Bloomberg’s Cyborg, Forbes’ Bertie and the Washington Post’s Heliograf.

Retail and trade marks

AI is changing our shopping habits. Smart assistants can order goods; smart fridges can keep us stocked with fresh milk; AI fashion assistants can tell us what to wear. However, when I ask Alexa for an iPhone charger or a Nintendo Switch charger, it tells me that it has put a compatible charger in my basket. If I ask Siri for the BBC weather forecast, it shows me results from the iPhone’s weather app.

These issues are an extension of the ones consumers already encountered when shopping online. We know that if we enter 'Canon camera' into Google, we may be shown results for Nikons.

Using a trade mark in an advertisement is not trade mark infringement if the advert enables 'normally informed and reasonably attentive internet users' to ascertain whether the goods or services referred to in the ad originate from or are connected with the proprietor of the mark.

To avoid trade mark issues, AI platforms will have to inform consumers about the products they are being offered. Brand owners will have to ensure consumers still care about what brand they are purchasing.

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NCFA Jan 2018 resize - The future relationship between AI and IP The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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KYC and KYP led banks to push in-house products more, exec says

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Investment Executive | Rudy Mezzetta | Sep 2, 2020

bay street toronto - KYC and KYP led banks to push in-house products more, exec saysIncreasing compliance requirements — such as enhanced know-your-product rules — provided cover for Canada’s banks to focus ever more exclusively on selling their in-house investment products, shutting out independent products and limiting client choice, says Sheila Murray, a corporate director and former president of CI Financial. 

“Under the guise of compliance and risk aversion, and doing the right thing for their clients, [banks] moved in favour of their own products to the detriment of having a balanced product shelf,” Murray said, speaking on a panel presented by NEO Exchange on Wednesday. The topic: Ontario’s Capital Markets Modernization Taskforce consultation paper, released in July.

Murray made the comments in support of proposal in the paper that banks be directed to offer independent providers greater access to their distribution channels. The task force set a deadline for Sept. 7 for comments, and intends to provide a final report with recommendations to the Ontario Minister of Finance before the year’s end. 

See:  NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

It’s really difficult [issue], but I think [the task force] is going in the right direction of encouraging more open shelf and transparency on the shelf,” Murray said. 

In its paper, the task force proposed that closed product shelves/proprietary-only shelves be banned in the bank-owned distribution channel. The task force noted that an estimated 80 per cent of product distribution currently goes through bank distribution channels, and that such concentration encourages the sale of proprietary product. 

The task force also proposed that bank-owned dealers be required to include products on their shelves if requested by an independent provider — unless the bank has determined “on a reasonable basis that a particular product isn’t suitable. Bank-owned dealers would have to document “a detailed rationale” for excluding a product and provide that documentation to the requesting producer. 

Finally, bank-owned dealers would report on the percentage of proprietary versus independent products on the shelf or sold on a quarterly basis to the Ontario Securities Commission.

Murray says independent providers, such as her former firm, were already having a difficult time gaining access to bank channel distribution, and “that only became more difficult with enhanced know-your-client and know-your-product rules, [and other] enhanced compliance obligations.

Banks “understandably” decided to concentrate on selling their own products rather than expend effort on assessing the risk profile of competitor products, she said. 

See:  C.D. Howe Institute Report: Open Banking Holds Promise, Risks for Consumers

In reply to Murray’s comments, panellist Cindy Tripp, a task force committee member, and founding partner and former co-head of trading at GMP Securities LP, said,

“I think we all agree that there were unintended consequences from know-your-client and know-your-product [rules].” 

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NCFA Jan 2018 resize - KYC and KYP led banks to push in-house products more, exec says The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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The new urgency of global tech governance

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Brookings | Landry Signé, Mark Esposito, and Sanjeev Khagram | Sep 10, 2020

Global tech governance - The new urgency of global tech governancePandemic lockdowns, digitalization, and the acceleration of the Fourth Industrial Revolution (4IR) are all driving a shift in global governance. Since the world’s technological leaders will also be geopolitical leaders, the competition for dominance in cutting-edge sectors like artificial intelligence is intensifying. The 4IR technology race will be the primary factor influencing global economic and political arrangements in the post-pandemic future.

Although the United States remains the top AI power, it is closely followed by China, and then by other players such as Russia. For its part, China has already invested an estimated $300 billion in the field (including chips and electric cars), adopted a national innovation strategy (“Made in China 2025”), and enabled the rise of pioneering tech giants like Baidu, Alibaba, and Tencent. But while China has massive potential for AI development, it also has a lot of work to do before it surpasses the U.S. Studies show that China still lags on three key fronts: hardware, research, and the commercial sector.

See:  Global Survey on Impact of Covid-19 and Recession Risk: Fintech and Financial Institutions

Beyond the U.S. and China, European and Asian countries are also pursuing 4IR innovation. The United Kingdom, for example, is in the top quartile of countries in terms of AI readiness, owing to its top-tier research universities and generous public research funding. Similarly, many Asian countries have demonstrated an obvious advantage in terms of technological diffusion and robot density. With 774 robots per 10,000 workers, South Korea is far ahead of most other countries; and Japan, with its already-dominant automobile industry, has begun to establish itself as a leader in autonomous vehicles.

Against this backdrop, the COVID-19 pandemic has accelerated trends toward digitalization, with an array of 4IR technologies being adopted to track, trace, forecast, diagnose, and contain the virus, in addition to enabling remote work, e-commerce, and other behavioral shifts. In fact, it was an AI platform that first spotted the signs of a viral outbreak more than a week before the World Health Organization’s official announcement. And since then, AI and machine learning have been used to track and anticipate the evolution of the pandemic, identify high-risk patients, and optimize resource usage.

Moreover, scholars are using AI to detect new COVID-19 outbreaks and to drive the research for effective treatments or a vaccine. But this work points to the need for more regulatory clarity at the global level. To avoid zero-sum “vaccine nationalism,” we need better processes for the cross-border sharing of data and technological solutions, so that no one is left behind.

The recent dynamism in health care is emblematic of 4IR geopolitics more broadly. Plenty of attention has been devoted to the escalating Sino-American rivalry since the start of the COVID-19 crisis. Less noticed is the opportunity for developing countries to use the crisis as an impetus to expand their own adoption of 4IR technologies.

In Africa, for example, an AI-powered SMS platform has been deployed to deliver educational content to out-of-school children who lack internet access, smartphones, or even textbooks. Such innovations will become even more important the longer schools remain closed. Similarly, retailers and consumers are increasingly relying on e-commerce and mobile money to maintain social distancing and preserve supply chains. And in agriculture, more farmers are using information from big-data platforms, augmented by the Internet of Things, to guide their decisionmaking.

See:  What to expect from Biden-Harris on tech policy, platform regulation, and China

But fully capitalizing on these opportunities will require more coordination between the public and private sectors and with multilateral institutions. By its very nature, the 4IR competition tempts countries to use their economic power to shape international standards. In a data-driven age, how leading governments define their approaches to regulation, including key issues such as individual privacy, will affect the entire global economic order in the years ahead.

This dynamic is already evident in how different countries have managed the use of AI-driven facial-recognition and digital contact-tracing tools during the pandemic. In South Korea and China, these technologies were widely adopted early on, and have (so far) proven effective in limiting the spread of the virus, but indisputably at the expense of individual privacy.

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NCFA Jan 2018 resize - The new urgency of global tech governance The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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