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Treasury takes robust measures against ransomware
On September 21, the U.S. Treasury Department announced recent actions that are focused on confronting “criminal networks and virtual currency exchanges responsible for laundering ransoms, encouraging improved cyber security across the private sector, and increasing incident and ransomware payment reporting to U.S. government agencies, including both Treasury and law enforcement.” As part of its continuing actions to counter the increasing threat of ransomware, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against a virtual currency exchange, pursuant to Executive Order 13694, as amended, for its alleged role in providing material support to the threat posed by criminal ransomware actors. As a result of the sanctions, all transactions by U.S. persons or in the U.S. that involve any property or interests in property of designated or otherwise blocked persons are generally prohibited. Additionally, OFAC issued an updated advisory, which highlights “the sanctions risks associated with ransomware payments in connection with malicious cyber-enabled activities and the proactive steps companies can take to mitigate such risks, including actions that OFAC would consider to be ‘mitigating factors’ in any related enforcement action.” Treasury also noted that FinCEN has engaged with industry, law enforcement, and others regarding the ransomware threat through the FinCEN Exchange public-private partnership (covered by InfoBytes here).
New York enters judgment against crypto platform and CEO
On September 13, the New York attorney general announced a judgment against an unregistered virtual currency trading platform and its CEO (collectively, “defendants”) for allegedly defrauding thousands of investors across the country out of millions of dollars by converting investor funds without their consent. According to the AG, in June, the New York Supreme Court granted the AG’s motion for a preliminary injunction and the appointment of a temporary, court-appointed receiver with special powers to safeguard investments already made on the trading platform. The defendants failed to comply with the preliminary injunction by creating, offering, and selling a new virtual currency and failed to respond to the AG’s complaint. The judgment permanently appoints the court receiver to obtain, safeguard, and return all assets invested and traded through the trading platform and imposes a money judgment against the defendants of $3,061,511, both together and separately. In addition, the judgment requires the defendants to permanently cease their illegal and fraudulent operations and puts in place a permanent receiver to protect investors’ funds.
CSBS releases Uniform Money Transmission Modernization Act
On September 9, the Conference of State Bank Supervisors (CSBS) released the Uniform Money Transmission Modernization Act as part of states’ broader effort for modernizing the state financial regulatory system. The act, also referred to as the Money Transmitter Model Law, is intended to replace 50 sets of state-specific money transmitter laws and rules with a single set of nationwide standards and requirements designed by state and industry experts. According to CSBS, the law is a result of continuing discussion among state regulators and industry that began under CSBS’ “Vision 2020”, which convened a Fintech Industry Advisory Panel to determine pain points in the state system (previously covered by InfoBytes here). Among other things, the law: (i) “[p]rovides regulators with the tools needed to regulate money transmitters of all sizes, including those that operate globally or small businesses operating locally”; (ii) standardizes definitions, exemptions, the licensing process, the change in control process, and requirements regarding safety and soundness; (iii) enables multistate licensing and multi state supervision; and (iv) “[f]acilitates the development of technology and data analytics necessary to supervise at scale with local accountability.” CSBS also notes that the law will benefit customers of companies that offer digital wallets, prepaid cards, money orders and cash or virtual currency transmissions by establishing a common regulatory floor and standardized and risk-based requirements. In addition to the law, CSBS released Money Transmitter Model Law FAQs and Fintech Industry Advisory Panel Recommendations.
DFPI addresses MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:
- Agent of Payee – Fund Transfers in Connection with Real Estate Closing Transactions. The redacted opinion letter reviewed whether a company—licensed as a money transmitter in several states, including California, and registered with FinCEN as a money services business—is eligible for the agent-of-payee exemption under the MTA. The company proposes to “facilitate fund transfers in connection with real estate closing transactions” during which it “will be authorized to receive real estate closing funds on behalf of its customer (the seller of real estate).” The payment funds will first flow from the buyer of real estate to the company via the buyer’s lawyer or title company, and then from the company to the seller after the company converts the funds from U.S. dollars to another currency. By providing these services, the company, as the seller’s agent, will receive money from the buyer pursuant to a preexisting written contract between the company and the seller. DFPI concluded that “[t]o the extent these fund transfers take place in California or are with, to, or from persons located in California, [the company’s] services constitute “receiving money for transmission” because [the company] receives money from the buyer for transfer to the seller.” However, DFPI noted that a provision in the written contract, which appoints the company as the agent of the seller when the seller is located in California, allows the company’s services to satisfy the requirements of the agent-of-payee exemption in Financial Code section 2010, subdivision (l). The agent-of-payee exemption, DFPI stressed though, does not apply to sellers outside of California.
- Bitcoin ATM Kiosk. Two redacted opinion letters (see here and here) examined whether the sale and purchase of bitcoin through ATMs/kiosks described by the companies is subject to licensure under the MTA. In each instance, the transaction will only be between the consumer using the ATM/kiosk and the company, the transaction will be completed instantly without involving third parties, and any bitcoin sold will be provided from the company’s own inventory. Moreover, the letters state that the companies do not hold virtual currency on behalf of customers nor do they act in a fiduciary capacity. Because the companies’ activities are limited to selling bitcoin, DFPI determined that an MTA license is not required because the activities “do[] not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI reminded the companies that its determination is limited to the activities specified in the letters and does not relieve them from any FinCEN, federal, or state regulatory obligations.
NYDFS to start collecting and publishing board diversity data
On July 29, NYDFS announced in an industry letter that it will start collecting gender, racial, and ethnic board and management composition data as of December 31, 2019 and 2020 from state-regulated (i) banking institutions with over $100 million in assets; (ii) non-depository financial institutions with over $100 million in gross revenue; and (iii) entities authorized to engage in virtual currency business activities. Citing its authority under Banking Law 37(3) to “require any banking organization to make special reports to her at such times as she may prescribe,” the Superintendent stated NYDFS plans to collect data over late summer and will publicly publish findings on an aggregate basis in the first quarter of 2022. The results will be categorized by institution type and other relevant factors to “allow firms to assess where they stand relative to their peers” and hopefully “raise the bar for the entire industry.” In the future, the NYDFS would consider collecting and disclosing similar information, “including on a more granular basis.” The letter also set out the NYDFS’ expectation that institutions would (i) make the diversity of their leadership “a business priority and integrate it into their corporate governance”; (ii) “pay close attention to their talent pipeline of future diverse leaders, in addition to the diversity of its affiliates”; and (iii) “view diversity like other strategic priorities.”
Texas permits banks to provide virtual currency custody services
On June 10, the Texas Department of Banking issued Industry Notice 2021-03, which notifies supervised Texas state-charted banks that they “may provide customers with virtual currency custody services, as long as the bank has adequate protocols in place to effectively manage the risks and comply with applicable law.” The Department noted that Texas state-chartered banks have long provided customers with safekeeping and custody resources through secure storage of assets, which is a critical role in the banking business. “While custody and safekeeping of virtual currencies will necessarily differ from that associated with more traditional assets the [Department] believes that the authority to provide these services with respect to virtual currencies already exists pursuant to Texas Finance Code §32.001,” the notice provided. In addition, the type of virtual currency a bank chooses to utilize will depend on that bank’s expertise, risk appetite, and business model. The notice also pointed out that the Department determined that custody services may be offered by a Texas state-chartered bank in a capacity that is fiduciary or non-fiduciary. A non-fiduciary capacity will allow the bank to act “as a bailee, taking possession of the customer’s asset for safekeeping while legal title to that asset remains with the customer.” Alternatively, in its fiduciary capacity, the bank will have oversight to control virtual currency assets as it would any other type of asset held in such capacity. The notice warned, however, that if a bank is offering virtual currency services, bank management must conduct due diligence and carefully examine the risks involved in offering a new product or service through a methodical risk assessment process.
CFPB: 54 percent increase in consumer complaints from 2019
On March 24, the CFPB published its Consumer Response Annual Report for 2020, providing a review of the Bureau’s complaint process and a description of complaints received from consumers in all 50 states and the District of Columbia between January 1 and December 31, 2020. According to the report, the Bureau handled approximately 542,300 consumer complaints—an almost 54 percent increase from 2019. Of these complaints, the Bureau noted that roughly 32,100 complaints referenced the Covid-19 pandemic or related keywords, but emphasized that complaints that did not include Covid-19 as a keyword were not necessarily an indication that the complaint was not related to the financial impact of the pandemic. Additionally, roughly 84 percent of the complaints were submitted to companies for review and response, nine percent were referred to other regulatory agencies, and seven percent were determined to be incomplete. Report data showed that more than 3,300 companies responded to complaints received by the Bureau, with roughly 11,100 complaints receiving administrative responses. In addition, as of February 1, 2021, approximately 3,900 complaints were still being reviewed by companies, the report stated. The top products and services—representing approximately 92 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to: (i) money transfers and virtual currency; (ii) vehicle finance; (iii) prepaid cards; (iv) student, personal, and payday loans; (v) credit repair; and (vi) title loans. The CFPB also reported that 89 percent of consumers who submitted complaints indicated that they first tried to resolve their issues with the companies.
New York warns of “extreme risk” with cryptocurrency trading
On March 1, the New York attorney general issued two alerts warning investors about the “extreme risk” facing New Yorkers investing in virtual or “crypto” currency. The first investor alert directs investors to take caution when investing in virtual currencies because, among other reasons, virtual currency trading platforms provide limited protection from fraud as “[m]ost platforms are subject to little or no oversight.” The second industry alert is directed towards broker-dealers, salespersons, and investment advisors, and provides a reminder that “people and entities dealing in virtual or ‘crypto’ currencies that are commodities or securities in the state of New York, and who do not qualify for an exemption, must register with the Office of the Attorney General,” and that failing to do so will expose them to both civil and criminal liability. The alerts follow an agreement entered last month (covered by InfoBytes here) between the AG and the operators of a virtual currency trading platform and a “tether” virtual currency issuer, along with their affiliated entities, which resolved allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds.
New York reaches $18.5 million settlement with virtual currency operators
On February 23, the New York attorney general announced a $18.5 million settlement with the operators of a virtual currency trading platform and the “tether” virtual currency issuer, along with their affiliated entities, to resolve allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds. According to the AG, one of the companies operated an online trading platform for exchanging and trading virtual currency, which allowed users to store virtual or fiat currency, convert virtual currency into fiat currency, and withdraw funds, while the “tether” virtual currency issuer represented that the “stablecoin” it issued was backed one-to-one by U.S. dollars in reserve. However, an AG investigation found, among other things, that the companies made false statements about the backing of the stablecoin and moved hundreds of millions of dollars between the two companies in an attempt to conceal massive losses, and that the stablecoins were, in fact, no longer backed one-to-one by U.S. dollars in reserve, contrary to the company’s representations. The AG also noted that a national bank, which acted as the correspondent bank for the companies and was used to fill orders for U.S. dollars, elected to stop processing U.S. dollar wire transfers from the companies, forcing the companies to find alternative banking arrangements and ultimately leading to a liquidity crisis. Further, the AG stated that the companies failed to disclose these issues to the public. In 2019, a court order enjoined the companies from engaging in activities that may have defrauded investors trading in cryptocurrency (covered by InfoBytes here).
Under the terms of the settlement agreement, the companies and related entities must, among other things, (i) discontinue any further trading activity in the state; (ii) pay $18.5 million in monetary relief; and (iii) take steps to increase transparency, including maintaining internal controls and procedures designed to ensure that their products and services are not used by New York persons and entities, providing compliance reports to the AG, and providing a list of utilized payment processors.
DFPI addresses several MTA licensing exemptions
Recently, California’s Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency, agent of payee rules, and transactions in which recipients are paid before a company is reimbursed. Highlights from the redacted letters include:
- Agent of Payee Exemption – Online Gaming/Sports Betting. The redacted opinion letter reviewed whether a company’s payment processing services—which allow customers to use bank accounts to purchase stored value redeemable for goods and services, including “e-commerce, digital goods, financial services, travel, and online gaming/sports betting”—require licensure under the MTA. DFPI concluded that the company’s “pay-in” transactions qualify for the agent-of-payee exemption where the merchant is the payee, the customer is the payor, and the company is the agent of the payee, because the pay-in transactions are ultimately for goods and services since the customer is purchasing stored value redeemable in a closed loop of issuing merchant, and the company’s master agreement with the merchant states that payment to the company satisfies the customer’s obligation to pay the merchant. However, DFPI noted that the agent-of-payee exemption does not apply to transactions involving refunds and the pay-out of winnings. Pay-out transactions, DFPI explained, “constitute ‘receiving money for transmission’ because the [company] receives money from the [m]erchants for transfer to the [c]ustomers” and the customer does not provide goods or services to the merchant for which payment is owed.
- Agent of Payee Exemption – Payments to Daily Fantasy Sports Providers. The redacted opinion letter, which supersedes an interpretive opinion issued last August (covered by InfoBytes here), reviewed whether MTA licensure is required for a company that plans to offer U.S.-based merchant clients (primarily daily fantasy sports providers) an ACH payment platform to allow customers to use bank accounts to purchase credits for their accounts with the merchants. According to DFPI, pay-in transactions for stored monetary value “constitute ‘receiving money for transmission’”; however, DFPI noted that based on provided information, the pay-in activities qualify for the agent-of-payee exemption because the merchant is the payee, the customer is the payor, and the company is the agent of the merchant. Additionally, the company’s “receipt of funds from the [c]ustomer satisfies the [c]ustomer’s payment obligation to the [m]erchant for the goods or services.” Here, DFPI also explained that the pay-in transactions are closed loop since the customer’s stored value can only be redeemed for goods or services provided by the issuing merchant or its affiliate. DFPI further explained that “selling or issuing” closed loop stored value is excluded from the definition of money transmission. In both the first and second opinion letters, DFPI reiterated that MTA licenses cannot be issued to companies engaged in the transmission of money to facilitate unlawful activities, such as sports betting.
- Purchase and Sale of Cryptocurrency. The redacted opinion letter concluded that a company’s activities, which are limited to buying and selling virtual currency directly from and to consumers via ACH or wire transfer, do not trigger the licensing requirements of the MTA because the activities do “not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”
- Paying Recipients Before a Company is Reimbursed. The redacted opinion letter examined whether a company’s payment reimbursement model requires licensure under the MTA. The company offers transactions that result in beneficiaries being paid before the company receives money from the sender. The company “obtains a payment authorization on the customer’s debit card for the transaction,” and the debit card authorization then “puts a hold on the cardholder’s funds for the purchase and guarantees that [the company] will be paid.” Once the customer authorizes the transaction, the funds are instantly moved to the recipient’s wallet or bank account for immediate use. To be reimbursed, however, the company must initiate a second step, which actually processes the payment and converts the hold status to payment/post status. According to DFPI, the company’s payment reimbursement model does not involve transactions that constitute money transmission because the company “never ‘receives money for transmission. . ., does not actually or constructively receive, take possession of, or hold money or monetary value for transmission. . ., incurs no transmission liability,” or puts consumer funds at risk.