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UK financial regulators issue new authority on securities sandbox
On April 3, the U.K.’s Financial Conduct Authority and the Bank of England released a consultation paper seeking comments on their proposal to implement the Digital Securities Sandbox (DSS), a new regime for financial firms to work on a testing ground for new technologies regarding digital assets. The goal of this testing ground would allow these firms to better issue, trade, and settle digital securities. The U.K. regulators believed that using securities on distributed ledgers (i.e., digital securities) has the potential to consolidate trade functions and reduce settlement times, reducing risk and streamlining processes. The DSS would oversee developing financial technologies, such as distributed ledger technology (DLT), during security trading. The three aims of the DSS would include promoting a safe and efficient financial system by removing potential barriers, protecting financial stability using DLT, and promoting market integrity. The securities regulated by the DSS include equities, bonds, money market instruments, and emissions allowances; however, unbacked cryptocurrencies (e.g., bitcoin) would remain outside the scope. The first sandbox entrants are expected after fall 2024.
South Dakota enacts new money transmission law, aligning the law to the Money Transmission Modernization Act
Recently, the Governor of South Dakota, Kristi Noem, signed into law SB 58, which amended and repealed many parts of the state’s money transmission law enacted in 2023 to bring the law more into alignment with a model Money Transmitter Model Law. South Dakota was one of several states that have enacted the model law since 2022 (covered by InfoBytes here, here, here, and here), to harmonize the licensing and regulation of money transmitters between states.
Among many other new provisions, the Act defined “money” to mean a “medium of exchange that is authorized or adopted by the United States or a foreign government” but excluded any central bank digital currency. Additionally, the Act provided for several exemptions, such as the “agent of a payee” exemption, which exempted an agent who collects and processes payment from a payor to a payee for goods and services other than money transmission itself from the Act’s coverage, under certain specified circumstances.
The Act also imposed a licensing regime on persons engaged in the business of money transmission and authorizes and encourages the South Dakota Director of the Division of Banking (Director) to coordinate the licensing provisions with other states and utilize the Nationwide Multistate Licensing System for the license applications, maintenance, and renewals. SB 58 amended the required surety bond amount from $100,000 to $500,000, to the greater of $100,000 or an amount equal to the licensee’s average daily money transmission liability in South Dakota for the most recent three-month period, up to a maximum of $500,000, or if the licensee’s tangible net worth exceeds 10% of total assets, $100,000.
Once a license application is completed, the Director will have 120 days to approve or deny the application. In addition to the license application process, the Act also outlined the criteria for renewing, maintaining, and changing control of the license, as well as the licensee’s responsibility to keep records and maintain permissible investments. Notably, if a licensee is transmitting virtual currencies, then the licensee must “hold like-kind virtual currencies of the same volume as that held by the licensee but that is obligated to consumers” instead of the permissible investments otherwise listed under the Act. The Act will go into effect on July 1.
Wyoming SF 96 amends regulations for banks offering custodial or fiduciary services for digital assets
On March 15, the Governor of Wyoming signed SF 96 (the “Act”), which amended regulations for banks offering custodial or fiduciary services for digital assets, made conforming adjustments, and set an effective date. The Act clarified the commissioner’s ability to petition for discharge of receivership duties at the commencement of a bankruptcy proceeding. With respect to digital asset custodial services, the Act included two new provisions which detailed how (i) a bank will be permitted to offer custody services for stablecoin reserves as long as these services align with the guidelines of the Act and adhere to the commissioner's rules and regulations; and (ii) a supervised trust company chartered within Wyoming will be authorized to offer custodial services for digital assets, provided that it would meet the requirements of the Act and follow the commissioner's rules and regulations. The Act will go into effect on July 1.
FDIC Vice Chair delivers remarks on tokenization
On March 11, FDIC Vice Chairman Travis Hill delivered prepared remarks on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues.” The speech addressed the evolution of money and payment systems, focusing on the recent innovation of tokenizing commercial bank deposits and other assets and liabilities. Hill distinguished tokenization from assets like Bitcoin and Ether: “tokenization involves a representation of ‘real-world assets’ on a distributed ledger, including… commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Hill highlighted the potential benefits of tokenization, such as improved efficiency in payments and settlements, 24/7/365 operations, programmability, atomic settlement (the settlement, or the act of transferring ownership of an asset from seller to buyer, combining instant and simultaneous settlements) and the creation of an immutable audit trail. He also mentioned that these innovations could streamline complex processes like cross-border transactions and bond issuances, offering notable advantages over traditional banking systems.
The speech also acknowledged challenges and risks associated with tokenization, including technical, operational, and legal uncertainties. Questions remain about the structure of the future financial system, interoperability between different blockchains, and the legal implications of transferring ownership via tokens, Hill added.
Regarding the regulatory approach to digital assets and tokenization, Hill expressed the need for as much clarity as possible, even in areas whether the technology is evolving quickly. For example, Hill noted that “it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should… explain how and why.”
Department of Energy discontinues crypto mining survey following a settlement agreement
On March 1, a cryptocurrency company (plaintiff) and the U.S. Department of Energy submitted a settlement agreement to the U.S. District Court for the Western District of Texas to discontinue an emergency crypto mining survey once approved by the Office of Management and Budget.
According to the settlement agreement, the Department of Energy initiated an emergency three-year collection of a Cryptocurrency Mining Facilities Survey in January, which the plaintiff claimed did not comply with various statutory and regulatory requirements for the emergency collection of information. Following the court’s approval of the plaintiff’s temporary restraining order, which protected plaintiffs from completing the survey issued by the Department of Energy and protected any information they may have already submitted, the Department of Energy discontinued its emergency collection, and said it will proceed through notice-and-comment procedures for approval of any collection of information covering such data. As a result of the discontinuation of the emergency collection request, no entity or person is required to respond to the survey.
As part of the settlement agreement, the Department of Energy will destroy any information it had already received from survey responses. In addition to a $2,199.45 payment for the plaintiffs’ litigation expenses, the Department of Energy also agreed to publish a new Federal Register notice of a proposed collection of information and withdraw its original notice.
SEC, DFPI charge unregistered crypto platform
On February 7, the SEC and DFPI announced charges against a Florida-based crypto platform, for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets into an account in exchange for promised interest payments.
The SEC found that crypto asset accounts with the “interest feature” were offered and sold by the company as securities in the form of investment contracts but failed to register its offer and sale as required by law. Despite voluntarily halting the offering of the interest feature in 2022, the company agreed to pay a $1.5 million penalty to settle the SEC's charges. The SEC also noted that the company announced its intention to terminate all crypto-related products and services in the U.S. on February 22.
In addition, DFPI also entered a consent order with the platform to settle an investigation into the platform’s interest-earning program. The resolution is part of a multistate settlement facilitated by a task force led by California and Washington, comprising of eight state securities regulators. The investigation found that from 2020 through 2022, the platform engaged in the unregistered offer and sale of securities through its crypto interest-earning program. The platform offered the program to investors, allowing them to passively earn interest on crypto assets loaned to the platform. The platform maintained “total discretion” over revenue-generating activities to generate returns for investors, DFPI added. As part of the settlement with DFPI, the company agreed to pay a $1.5 million penalty to the DFPI on behalf of 51 U.S. jurisdictions, mirroring a similar settlement with the SEC for the same amount.
OCC Acting Deputy Comptroller Murphy testifies on OCC’s Office of Financial Technology
On December 5, the Acting Deputy Comptroller of the OCC’s Office of Financial Technology, Donna Murphy, testified before the U.S. House Subcommittee on Digital Assets, Financial Technology and Inclusion. Her testimony focused on the OCC’s supervision and regulation of new and emerging fintech products.
Created in October 2022, the Office of Financial Technology regulates and supervises all aspects of fintech innovation in the federal banking system, including bank-fintech partnerships, artificial intelligence, and digital assets. Murphy testified that a strong risk management plan against third parties is essential. She referenced the joint guidance issued earlier this year by the OCC, Federal Reserve, and FDIC (previously covered by InfoBytes, here).
Murphy also discussed the use of artificial intelligence and algorithms in banking, highlighting the many ways they can strengthen safety and soundness, enhance consumer protection, improve compliance, address financial crime, and increase fairness and access to the banking system. However, Murphy highlighted the need for banks to focus on software design, testing, security, and data management when implementing artificial intelligence. Lastly, Murphy iterated the OCC’s commitment to reducing inequality in banking and increasing access to financial services for all.
DFPI opens comment period for the Digital Financial Assets Law
On November 20, DFPI announced it is seeking public comment before it begins its formal rulemaking process on its Digital Financial Assets Law (DFAL), which was enacted on October 13. As previously covered by InfoBytes, DFAL created a licensing requirement for businesses engaging in digital financial asset business activity and is effective on July 1, 2025.
For comments that recommend rules, DFPI encourages comments that “propose specific rule language and provide an estimate, with justification, of the potential economic impact on business and individuals that would be affected by the language.” Additionally, DFPI requests metrics, applicable information about economic impacts, or quantitative analysis to support comments. Among other topics, DFPI especially asks for comments related to (i) application fees and potential fee adjustments based on application complexity; (ii) surety bond or trust account factors; (iii) if capital minimums should vary by the type of activity requiring licensure; and (iv) its stablecoin approval process.
Comments must be received by January 12, 2024. On January 8, 2024, DFPI will host a Virtual Informal Listening Session with stakeholders to discuss feedback on this informal invitation for comments.
DFPI shares trends in consumer crypto complaints
DFPI recently published a report on consumer crypto-related complaints collected through its new online complaint portal. According to the third-quarter 2023 CSO report, some of the most common complaints include (i) consumers being scammed into transferring digital assets from a legitimate crypto account to a fraudulent platform; (ii) consumers losing access to funds after transferring to an unknown wallet; (iii) consumers who invest in sham crypto investments by sending US dollars to a scammer’s platform, wallet, or bank; (iv) consumers making additional investments to scammers after receiving the first and only return; (v) consumers with concerns regarding their account activity on legitimate crypto platforms; and (vi) consumers approached by scammers via text message and social media. DFPI shared tips on how consumers can protect themselves against scams as well, noting that “[i]f it seems too good to be true, it probably is.”
SEC charges crypto firm for failing to register and mitigate risk factors
On November 20, the SEC filed a complaint in the U.S. District Court of the Northern District of California against a crypto trading platform, which allows customers to buy and sell crypto assets through an online market, for allegedly acting as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC is also claimed defendant’s business practices, internal controls, and recordkeeping were inadequate and presented additional risks to consumers, that would also be prohibited had defendant been properly registered with the commission. For instance, the SEC cited practices including commingling billions of dollars of consumers’ cash and crypto assets with defendant’s own crypto assets and cash, which defendant’s 2022 independent auditor identified as “a significant risk of loss."
Director of the SEC’s Division of Enforcement, Gurbir S. Grewal said, “[Defendant’s] choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding [defendant] accountable for its misconduct and sending a message to others to come into compliance.”
The SEC seeks to (i) permanently enjoin defendant from violating Section 5 and section 17A of the Exchange Act; (ii) permanently enjoin defendant from offering or selling securities through crypto asset staking programs; (iii) disgorge defendant’s allegedly illegal gains and pay prejudgment interest; and (iv) impose a civil money penalty.