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Financial Services Law Insights and Observations


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  • CFTC Commissioner Romero discusses crypto regulation


    On June 14, CFTC Commissioner Christy Goldsmith Romero discussed cryptocurrency regulation in an interview. According to sources, Romero rejected suggestions that the agency would be laissez-faire on cryptocurrency regulation, saying that the CFTC is positioned to protect consumers if provided with more authority. Throughout the interview, Romero noted some similarities between the present market and the 2008 market, stating that there is a “pretty sizeable market that’s largely unregulated.” Noting that a “regulatory gap” exists because the CFTC does not have any regulatory authority over the cash spot market, Romero said that Congress should close that gap. She mentioned her support for a bill similar to the Responsible Financial Innovation Act that she expects will give the CFTC more authority and will be introduced by Senators Stabenow and Bozeman. When asked about the possibility of regulation slowing the crypto market, Romero responded that “companies can’t scale up the way they need to without a lot of the financial institutions investments,” and that “regulation is needed.” She further noted that “bringing credibility [and] bring[ing] customer protections [] are going to be really important for scaling up.” She also referred to the case-by-case philosophy of CFTC enforcement actions, explaining that the agency looks at “where the evidence lies" and that part of this approach is "send[ing] a message to deter future violations of the law.” She further expanded on that point by saying that “since the CFTC doesn’t have regulatory authority, it has to rely on victims and whistleblowers," among other things.

    Romero also mentioned that a difference between now and 2008 is that there are not a lot of financial institutions invested in cryptocurrency, as many are “waiting for a regulatory framework" and more regulation. As more financial institutions become invested in cryptocurrency, she said that she expects there to be “more interconnections” and more customer protections. She also noted that her biggest concern is that “if regulation fails to keep pace with technology, the most vulnerable people are going to be hurt.” In terms of areas needing more customer protections, Romero identified the need for segregation of accounts, settlement, custody, and reducing cybersecurity risk. She also expressed her support for customer education, calling it “very important.”

    Fintech Federal Issues Digital Assets CFTC Cryptocurrency

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  • DFPI requests comments on oversight of crypto asset-related financial products and services

    State Issues

    On June 1, the California Department of Financial Protection and Innovation (DFPI) issued a request for public comments from stakeholders on developing guidance related to the oversight of crypto asset-related financial products and services. DFPI will proceed with rulemaking under the authority of the California Consumer Financial Protection Law (CCFPL). The request is in accordance with an executive order issued by the California governor last month, which called on the state to create a transparent and consistent framework for companies operating in blockchain, cryptocurrency, and related financial technologies. (Covered by InfoBytes here.) DFPI’s request outlines various topics and questions concerning regulatory priorities, CCFPL regulation and supervision, and marketing monitoring functions, but notes that stakeholders “may comment on any potential area for rulemaking relating to crypto asset-related financial products and services,” including under other statutes administered or enforced by DFPI such as the Corporate Securities Law, Escrow Law, California Financing Law, or Money Transmission Act. The deadline to submit comments is August 5.

    State Issues State Regulators DFPI California Digital Assets Cryptocurrency CCFPL Fintech

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  • Brainard discusses central bank digital currency at House hearing

    Federal Issues

    On May 25, Fed Governor Lael Brainard spoke before the U.S. House Financial Services Committee in a virtual hearing titled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” According to the Committee’s memorandum regarding the hearing, the Fed defines a central bank digital currency (CBDC) as a “digital liability of a central bank that is widely available to the general public,” and though definitions vary, “understanding what distinguishes cryptocurrency from fiat government-issued currency is fundamental.” The memorandum also discussed the Fed’s publication of a discussion paper in January, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. CBDC (covered by InfoBytes here). In Brainard’s prepared statement, she noted that the “rapid ongoing evolution” of digital assets “should lead us to frame the question not as to whether there is a need for a central bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.” Brainard also stated that “there are risks of not acting, just as there are risks of acting.” While there has not been a decision on creating a U.S. CBDC, Brainard stated that “it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.” Additionally, Brainard pointed to recent pressure on two widely used stablecoins and resulting market turmoil that “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.” Brainard further stated that a U.S. CBDC could be a potential “way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.”

    Federal Issues House Financial Services Committee Privacy/Cyber Risk & Data Security Digital Assets Cryptocurrency Federal Reserve Bank Regulatory CBDC Fintech

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  • Upcoming Treasury reports will highlight CBDC issues

    Federal Issues

    On March 22, Treasury Under Secretary for Domestic Finance Nellie Liang spoke before the National Association for Business Economics on topics related to stablecoins and a possible central bank digital currency (CBDC). As instructed by President Biden’s Executive Order on digital assets (covered by InfoBytes here), Liang announced that Treasury will partner with other agencies in the coming months to produce a series of reports and recommendations focusing on (i) the future of money and payment systems, with a discussion of CBDCs; (ii) financial stability risks and regulatory gaps posed by digital assets; (iii) the use of digital assets for illicit finance and associated national security risks; and (iv) international engagement supporting global principles and standards for digital assets and CBDCs. “Regulatory policy for new financial products may need to evolve, but should follow ‘same risk, same regulation,’ in the sense that regulations should be based on risks of the activity rather than the technology itself,” Liang stressed, adding that Treasury’s work will “complement” other agency efforts such as the Federal Reserve Board’s recent discussion paper which emphasized that any CBDC should ensure users’ privacy, have an intermediated model, be transferable, and prevent illicit finance (covered by InfoBytes here).

    Federal Issues Digital Assets Fintech Stablecoins Department of Treasury CBDC

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  • Senate holds hearing on the role of digital assets in illicit finance

    Federal Issues

    On March 17, the Senate Banking, Housing, and Urban Affairs Committee held a hearing titled “Understanding the Role of Digital Assets in Illicit Finance” to consider the risks crypto technology and digital assets pose for consumers and the financial system. The Committee heard from several witnesses, including FinCEN’s Former Acting Director, Deputy Director/Digital Innovation Officer Michael Mosier, who stressed that policymakers should focus on finding a balance that does not only “chase bad actors but also prevents exploitation of the vulnerable from the start.” Chairman Sherrod Brown (D-OH) opened the hearing by explaining that the “dollar has safeguards to protect against crime and illicit activity” because companies dealing in real money “are required to know their customers, and report suspicious transactions.” In contrast, digital assets “make it easier for money launderers to use webs of transactions across the globe to cover their tracks” and hinders law enforcement agencies’ ability to trace illicit funds. Brown cautioned that “lax rules and little oversight” are providing bad actors more opportunities to “hide and move money in the dark” using cryptocurrency. He stressed, however, that President Biden’s recent executive order, which outlined a coordinated approach to digital asset innovation (covered by InfoBytes here), will “drive progress on this issue” and “jumpstart a coordinated strategy from law enforcement and regulators to fight bad actors who want to use crypto.” Ranking Member Pat Toomey (R-PA) took a different view, noting that the “traceable nature of many cryptocurrencies” can also support the detection and prevention of illicit crime, which is “a factor making [cryptocurrency] terribly risky to utilize for criminal purposes.” He also expressed concerns that the lack of regulatory clarity surrounding digital assets has driven innovation abroad.

    Witnesses provided various recommendations designed to, among other things, reduce the risk of sanctions evasion through digital assets, as well as improve detection, disruption, and deterrence of the illicit use of digital assets. While one witness stated that “transparency of blockchains enhances the ability of policymakers and law enforcement to detect, disrupt, and ultimately, deter illicit activity,” another witness cautioned that “[e]ven with the latest blockchain analytics, investigations can take years to complete,” particularly because “prosecutors must demonstrate that an identifiable person is behind the criminal activity.”

    Federal Issues Digital Assets Fintech Senate Banking Committee Financial Crimes Blockchain

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  • Biden calls for coordinated approach to digital asset innovation

    Federal Issues

    On March 9, President Biden issued an Executive Order (E.O.) on digital assets outlining the first “whole-of-government” strategy to coordinate a comprehensive approach for ensuring responsible innovation in digital assets policy. (See also White House fact sheet here.) The White House highlighted that “non-state issued digital assets reached a combined market capitalization of $3 trillion” last November (up from $14 billion five years ago) and noted that many countries are currently exploring, or in certain cases introducing, central bank digital currencies (CBDC). The Executive Order on Ensuring Responsible Development of Digital Assets stressed that “we must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections,” and mitigate “illicit finance and national security risks posed by misuse of digital assets,” including money laundering, cybercrime and ransomware, terrorism and proliferation financing, and sanctions evasion. The E.O. cautioned that future digital assets systems must also promote high standards for transparency, privacy, and security.

    The E.O. outlined several principal policy objectives, including that:

    • Federal agencies are directed to coordinate policy recommendations to address the growth in the digital asset sector.
    • Federal agencies are directed to explore the need for a potential U.S. CBDC. Treasury, along with heads of other relevant agencies, are ordered to submit “a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.” The Federal Reserve Board is also encouraged to continue researching, developing, and assessing efforts for a CBDC, including developing a broad government action plan for a potential launch. The E.O. also directed an assessment of whether legislative changes would be necessary in order to issue a CBDC.
    • The Secretary of the Treasury will work with relevant agencies to produce a report on the future of money and payment systems, which will include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence these areas. The approach to digital asset innovation must also address the risk of disparate impact, the E.O. stressed, adding that any approach should ensure equitable access to safe and affordable financial services.
    • The Attorney General, FTC, and CFPB are “encouraged to consider what, if any, effects the growth of digital assets could have on competition policy.” The agencies are also “encouraged to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.” Additional federal agencies are also encouraged to consider the need for investor and market protections.
    • The Financial Stability Oversight Council and Treasury are directed to identify and mitigate systemic financial risks posed by digital assets and develop policy recommendations to fill any regulatory gaps.
    • Federal agencies are directed to work with allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks posed by the illicit use of digital assets. Agencies should also explore “the extent to which technological innovation may impact such activities,” and explore “opportunities to mitigate these risks through regulation, supervision, public‑private engagement, oversight, and law enforcement.”
    • Federal agencies are directed to establish a framework for interagency international engagement with foreign counterparts to adopt global principles and standards for how digital assets are used and transacted, and to promote digital asset and CBDC technology development.

    CFPB Director Rohit Chopra and Treasury Secretary Janet Yellen issued statements following Biden’s announcement. “Today’s Executive Order recognizes that the dramatic growth in digital asset markets has created profound implications for financial stability, consumer protection, national security, and energy demand,” Chopra said. “The [CFPB] is committed to working to promote competition and innovation, while also reducing the risks that digital assets could pose to our safety and security. We must make sure Americans in all financial markets are protected against errors, theft, or fraud.” Yellen stated that in addition to partnering with interagency colleagues to produce a report on the future of money and payment systems, Treasury will also work with international partners to promote robust cross-border standards and a level playing field. “As we take on this important work, we’ll be guided by consumer and investor protection groups, market participants, and other leading experts. Treasury will work to promote a fairer, more inclusive, and more efficient financial system, while building on our ongoing work to counter illicit finance, and prevent risks to financial stability and national security,” she said.

    Treasury also recently announced that the Financial Literacy and Education Commission (led by Yellen and Chopra and comprised of the heads of 21 federal agencies and entities, including the OCC, Fed, FDIC, SEC, FTC, and HUD, among others) is forming a new subgroup on digital asset financial education to analyze the impact of digital assets on consumer and investor protections. “History has shown that, without adequate safeguards, forms of private money have the potential to pose risks to consumers and the financial system,” U.S. Under Secretary of the Treasury for Domestic Finance Nellie Liang said.

    Federal Issues Digital Assets Privacy/Cyber Risk & Data Security Biden Department of Treasury Federal Reserve Bank Regulatory Consumer Protection Central Bank Digital Currency Of Interest to Non-US Persons FSOC Anti-Money Laundering Financial Crimes Fintech

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  • McWilliams discusses her tenure at FDIC

    On February 3, outgoing-FDIC Chairman Jelena McWilliams spoke at the Bipartisan Policy Center on both her tenure and technology’s role in facilitating a more inclusive financial system. In reflecting upon her time as Chairman, McWilliams opined that the “story of how financial regulators, central banks, and the global financial system responded to the pandemic is one of great success. Only three banks failed since the start of the pandemic, and none due to the pandemic itself.” She also pointed out that during the Covid-19 pandemic, the FDIC prioritized “improving supervision and resolution planning” and “the importance of strong capital levels,” particularly for large banks. McWilliams listed some of her accomplishments as Chairman, including “implement[ing] a recordkeeping rule,” “simplify[ng] the deposit insurance rules for trust accounts,” and “enhancing the FDIC’s readiness if it is ever called upon to resolve non-bank firms, such as central counterparties.” Central counterparties, McWilliams explained, play a critical role in the financial system as their clearing services are central to U.S. financial markets. McWilliams discussed the ways in which the FDIC enhanced competition, fostered innovation, and “supported third-party partnerships,” extolling these virtues as “the guiding principles of my chairmanship that helped forge the most vibrant financial market in the world.”

    McWilliams also stated that a “key aspect of our pro-competition agenda” was to “moderniz[e] a broad range of our rules while maintaining our core safety and soundness focus.” In connection with “crypto assets,” McWilliams opined that her personal “view is that generally bank-issued stablecoins closely resemble digital representations of deposits.” She urged the FDIC to “to build off the work we have done and provide clarity to the public as soon as practicable, which could include promulgating amendments to the deposit insurance rules.” McWilliams said that she hopes regulators will be more welcoming of the “endless possibilities” that digital assets and blockchain technology have in enhancing the efficiency of payments.

    Bank Regulatory Federal Issues Digital Assets Fintech FDIC Covid-19 Cryptocurrency

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  • FDIC and FinCEN launch Tech Sprint to help digital identity proofing


    On January 11, the FDIC’s technology lab, FDiTech, and FinCEN announced the launch of a Tech Sprint challenging participants “to develop solutions for financial institutions and regulators to help measure the effectiveness of digital identity proofing—the process used to collect, validate, and verify information about a person.” According to the Tech Sprint program, Measuring the Effectiveness of Digital Identity Proofing for Digital Financial Services, solutions developed from this Tech Sprint will inform future FDIC, FinCEN, and industry-led efforts, plans, and programs to: (i) increase efficiency and account security; (ii) decrease fraud and other forms of identity-related crime, money laundering and terrorist financing; and (iii) foster customer confidence in the digital banking environment. According to the agencies, digital identity proofing is “challenged by the proliferation of compromised personally identifiable information, the increasing use of synthetic identities, and the presence of multiple, varied approaches for identity proofing.” The FDIC and FinCEN will open registration in the coming weeks, and stakeholders interested in participating will have approximately two weeks to submit applications.

    Fintech FDIC FDiTech Consumer Finance Bank Regulatory FinCEN Privacy/Cyber Risk & Data Security

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  • FATF updates virtual assets and service provider guidance

    On October 28, the Financial Action Task Force (FATF) updated pre-existing guidance on its risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The updated guidance revises guidance originally released in 2019. According to FATF standards, countries are required to “assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities.” The guidance includes updates on certain key areas, such as: (i) expanding the definitions of VAs and VASPs; (ii) applying FAFT standards to stablecoins; (iii) adding guidance regarding the risks and the tools available to countries for the purpose of addressing money laundering and terrorist financing risks for peer-to-peer transactions; (iv) revising VASP licensing and registration guidance; (v) adding guidance for the public and private sectors on the implementation of the “travel rule”; and (vi) adding a section for principles of information-sharing and co-operation amongst VASP Supervisors. FATF also noted that the “guidance addresses the areas identified in the FATF’s 12-Month Review of the Revised FATF Standards on virtual assets and VASPs requiring further clarification and also reflects input from a public consultation in March - April 2021.”

    Licensing Fintech Digital Assets Agency Rule-Making & Guidance FATF Virtual Currency Of Interest to Non-US Persons Anti-Money Laundering Financial Crimes Combating the Financing of Terrorism

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  • OCC says synthetic banking providers require supervision

    Federal Issues

    On November 3, acting Comptroller of the Currency Michael J. Hsu spoke before the American Fintech Council’s Fintech Policy Summit 2021 and warned that “[t]he rebundling of banking services by fintechs and the fragmented supervision of universal crypto firms pose significant medium- to long-term risks to consumers, businesses, and financial stability.” Hsu also noted that large “universal” cryptocurrency firms interested in offering a wide range of financial services should “embrace comprehensive, consolidated supervision” like that given to banks. “Crypto firms today are regulated at most only partially and selectively, with no single regulator having a comprehensive view of the firm as a whole,” Hsu stated, adding “[t]his warrants greater attention as crypto firms, especially the universals, get bigger, engage in a wider range of activities and risk-taking, and deepen their interconnectedness within the crypto ecosystem and with traditional finance.” Warning that these “synthetic banking providers” (SBPs) could create a “run risk” and regulatory arbitrage, Hsu stressed the importance of removing “the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards.” He further warned that customers’ needs must be met in a way that is reliable, consistently safe, sound, and fair, and discussed several reasons why more SBPs have not sought to become banks, including that “regulators have been unpredictable with regards to chartering new banks and approving fintech acquisitions of banks.” Establishing a clear, shared approach to the bank regulatory perimeter related to emerging technologies can address this challenge, he advised.

    Hsu also announced that the OCC concluded its review of recent bank charter applications and cryptocurrency-related interpretive letters and stated that the agency will communicate its determinations and feedback to bank charter applicants in the coming weeks. Findings from a “crypto sprint” done in conjunction with the FDIC and Federal Reserve will also be communicated shortly. “The content of these communications—on the chartering decisions, interpretive letters, and the crypto sprint—will be broadly aligned with the vision for the bank regulatory perimeter laid out here today,” Hsu stated.

    Federal Issues Digital Assets Fintech OCC Bank Regulatory Cryptocurrency Consumer Finance Bank Charter FDIC Federal Reserve Supervision Nonbank Supervision

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