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FTC, DOJ participate in G-7 digital competition summit
On October 12, the DOJ and FTC announced their participation in a G7 Joint Competition Policy Makers & Enforcers Summit (Summit) as part of the 2022 G7 Digital and Technology Track. The Summit, hosted by the German Bundeskartellamt and Ministry for Economic Affairs and Climate Action, examined how G7 governments approach competition policy and enforcement in digital markets. According to the agencies, the Summit provided “a unique opportunity for competition officials to discuss common areas of interest and consider areas for increased cooperation and coordination to support competitive digital markets.” The participating delegates included G7 competition authorities and economic ministries in Canada, France, Germany, Italy, Japan, the U.K., and the U.S., in addition to the European Commission. The agencies also noted that to prepare for the Summit, the agencies “contributed to the Compendium of Approaches to Improving Competition in Digital Markets, with highlights from G7 competition authority’s work on digital markets," as well as the Policy Makers Inventory of legislative approaches to competition in digital markets within the G7. According to FTC Chair Lina Khan, “international cooperation is especially crucial as enforcers navigate the global challenges posed by dominant digital platforms and work to promote fair competition and the many benefits it delivers.”
Fed vice chair discusses regulating financial innovation
On October 12, Federal Reserve Vice Chair for Supervision Michael S. Barr delivered remarks at D.C. Fintech Week in a speech titled Managing the Promise and Risk of Financial Innovation. Barr’s remarks focused on financial innovation supported by new technologies, or fintech. Among other things, Barr discussed supporting innovation with appropriate regulation, striking the right balance for crypto-asset activity, regulating stablecoins, recognizing the risks of tokenizing bank liabilities, advancing customer autonomy, and providing public sector support for payment innovation. Barr noted that cryptoassets’ rapid growth, in market capitalization and activity outside and inside supervised banks requires oversight, including safeguards to ensure that crypto service providers are subject to similar regulations as other financial services providers. Barr stated that “[t]he same type of activity should be regulated in the same way,” and this remains the case “even when the activity may look different from the typical activities we regulate, or when it involves an exciting new technology or a new way to provide traditional financial services.” He also disclosed that there are additional types of crypto asset-related activities where the Fed may need to provide guidance to the banking sector in the future. Barr noted that since “crypto assets have proved to be so volatile, they are unlikely to grow into money substitutes and become a viable means to pay for transactions.” He also warned banks seeking to experiment with these new technologies that they should only do so "in a controlled and limited manner.” Regarding the risks of tokenizing bank liabilities, Barr expressed concerns, stating that banks’ crypto-asset-related activities pose “novel risks,” and said that stablecoins could eventually pose a risk to financial stability and that regulators need to put in guardrails before their adoption is more widespread. Barr also acknowledged that not all tokenization arrangements are the same. He stated that potential designs “range from issuance of tokens on private, controlled networks to facilitate payments within or among banks, to proposals that explore issuance of freely circulating tokens on open, permissionless networks.”
Hsu says regulators should coordinate efforts to mitigate crypto risks
On October 11, acting Comptroller of the Currency Michael J. Hsu delivered remarks before DC Fintech Week 2022, discussing the importance of identifying and monitoring cryptocurrency risks to protect consumers and the financial system. Among other things, Hsu noted that crypto “is an immature industry based on an immature technology.” He added that the industry still needs to deal with “the unabating volume of scams, hacks, and fraud.” Hsu voiced his concerns about integrating crypto into the traditional financial system without a more “accurate and complete” view of the risks. He noted that “[t]he largest crypto players today want to provide an increasingly broad range of services seamlessly under one roof for their customers.” Hsu pointed out that even though commingling crypto activities could “offer convenience for consumers and cost savings for crypto firms, conflicts abound and the riskiest activity threatens the whole bundle.” He warned that banks looking “to engage in crypto activities may want to carefully consider the scope of what they want to do, start with what can be most readily risk managed, and impose gates, through limits and other controls, to prevent uncontrolled expansion and growth into higher-risk activities.”
Hsu also delivered remarks before the Harvard Law School and Program on International Financial Systems Roundtable on Institutional Investors and Crypto Asset, discussing the need for clarifying supervisory expectations related to crypto activities and the role of regulators to ensure safety and soundness while promoting responsible innovation. Hsu said that regulators should coordinate efforts to write rules that help mitigate risks associated with digital assets. He emphasized that the term “don’t chase” for financial regulators means “not lowering our standards when dealing with crypto.” He further pointed out that “[s]haring information with peer agencies and seeking a common understanding of the risks and opportunities in the space can help ensure that regulatory standards remain high and the playing field stays level.” Hsu concluded by reiterating that he is a “crypto skeptic,” stating that his “skepticism of crypto stems from a frustration that the most promising innovations have been crowded out by hype and a fixation on trading,” and said that “[p]rogrammability, composability, and tokenization hold promise.”
FSB reports on stablecoins and crypto-asset activities
Recently, Financial Stability Board (FSB) Chair Klaas Knot sent a letter to the G20 Finance Ministers and Central Bank Governors concerning global financial stability, followed by the release of two FSB reports. The letter stated that “turmoil in crypto-asset markets has validated many of the FSB’s concerns about crypto assets,” and noted that the “‘crypto winter’ has reinforced [its] assessment of existing structural vulnerabilities.” The letter expressed concerns that the risks crypto assets pose to financial stability are "likely to come back to the fore sooner rather than later.” Knot stated that the FSB’s report on stablecoins expanded recommendations for the regulation of stablecoins, which are digital tokens that aim to maintain a one-on-one value with less volatile assets such as the euro or dollar. In the stablecoin report, the FSB stated that most existing stablecoins would not meet its recommendations at present, and would require “significant improvements” to their governance, risk management, stabilization mechanisms and disclosures. Knot also discussed the FSB's report on crypto-asset activities and markets, which focuses on regulatory, supervisory, and oversight issues relating to crypto-assets to help ensure safe innovation. The report noted that “[c]orrelations between crypto-asset prices and mainstream equity indices have been steadily increasing since year-end 2021 and peaked in May 2022, when the market stress began.” The letter further described that in 2020, G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments to address the frictions that payments currently face, and thereby achieve faster, cheaper, more transparent and more inclusive cross-border payment services. As previously covered by InfoBytes, Knot stated that the recent FSB report on the roadmap presents “priorities for this new phase of the work, and proposes an intensified public-private sector collaboration to take this forward.” In regard to cyber risks, he stated that cyber-risk safeguards are important due to rapidly growing cyber incidents. He further stated that the FSB “is working to promote a resilient global financial system in the near term and over the longer run, supporting policymakers in the G20 to foster stronger, equitable and inclusive growth.”
White House proposes AI “Bill of Rights”
Recently, the Biden administration’s Office of Science and Technology Policy released a Blueprint for an AI Bill of Rights. The blueprint’s proposed framework identifies five principles for guiding the design, use, and deployment of automated systems to protect the public as the use of artificial intelligence grows. The principles center around topics related to stronger safety measures, such as (i) ensuring systems are safe and effective; (ii) implementing proactive protections against algorithmic discrimination; (iii) incorporating built-in privacy protections, including providing the public control over how data is used and ensuring that the data collection meets reasonable expectations and is necessary for the specific context in which it is being collected; (iv) providing notice and explanation as to how an automated system is being used, as well as the resulting outcomes; and (v) ensuring the public is able to opt out from automated systems in favor of a human alternative and has access to a person who can quickly help remedy problems. According to the announcement, the proposed framework’s principles should be incorporated into policies governing systems with “the potential to meaningfully impact” an individual or community’s rights or access to resources and services related to education, housing, credit, employment, health care, government benefits, and financial services, among others.
FSOC reports on cryptocurrency systemic risks
On October 3, the Financial Stability Oversight Council (FSOC) released its Report on Digital Asset Financial Stability Risks and Regulation. As called for by Executive Order 14067, “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here), the report reviewed financial stability risks and regulatory gaps posed by various types of digital assets and provided recommendations to address such risks. Among other things, the report noted three gaps in the existing cryptocurrency regulatory framework: (i) limited direct federal oversight of the spot market for crypto-assets that are not securities; (ii) opportunities for regulatory arbitrage; and (iii) whether vertically integrated market structures can or should be accommodated under existing laws and regulations. The report stated that FSOC recommended that Congress pass legislation that would create “a comprehensive prudential framework for stablecoin issuers that also addresses the associated market integrity, investor and consumer protection and payments system risks, including for entities that perform services critical to the functioning of the stablecoin arrangement.” FSOC further recommended that the member agencies should follow several guiding principles, including “same activity, same risk, same regulatory outcome,” and “technology neutrality.” The report also requested that agencies consider whether “vertical integration” or other business models where retail customers can directly access markets instead of going through a broker-dealer “can or should be accommodated.” The report noted that if banks “scale up their participation in the crypto-asset ecosystem, such activity could potentially entail much greater access to the crypto-asset market by a broad range of institutional investors, corporations, and retail customers than currently exists.” The U.S. Treasury Department released a Fact Sheet summarizing the report’s key findings and recommendations.
Treasury Secretary Janet Yellen noted in a statement that the “report adds to analysis of digital asset issues that have been covered in other recent reports, including on the future of money and payments; consumers and investor protection; illicit finance; and a framework for international engagement.” Acting Comptroller of the Currency Michael J. Hsu released a statement supporting the report, emphasizing that “it is critical for the Council and Congress to prioritize Recommendation 4 regarding interagency coordination, Recommendation 5 regarding a federal prudential framework for stablecoin issuers, and Recommendation 6 regarding regulatory visibility and authorities over all of the activities of crypto-asset entities.” SEC Chair Gary Gensler also expressed his support in a statement, noting that he looks “forward to working with Congress to achieve our public policy goals, consistent with maintaining the regulation of crypto security tokens and related intermediaries at the SEC.” Texas Banking Commissioner and FSOC state banking representative Charles G. Cooper released a statement of support through the Conference of State Bank Supervisors saying that the report should “inform the work that we do as individual agencies and on an interagency basis to balance responsible innovation with safeguarding our financial markets and consumers.”CFPB Director Rohit Chopra released a statement, noting that “agencies have already taken steps to address discrete issues related to deposit insurance misrepresentation and to lay groundwork to address concerns related to fraud, hacks, and scams,” and emphasized the need “to tackle broader risks to the financial system.”
SEC files charges against fintech company for manipulating crypto-asset securities
On September 28, the SEC filed a complaint against a Florida-based fintech company, the company’s former CEO, and the CEO of a “market making” firm (collectively, “defendants”) for allegedly perpetrating a scheme to manipulate the trading volume and prices of crypto-asset securities. According the SEC, the company and the former CEO created and distributed a token using several methods, including paying individuals with tokens in exchange for promotions. They then allegedly hired the “market making” firm “to create the false appearance of robust market activity” for the token through the use of customized trading software, and then engaged in unregistered offers and sales of the token in an artificially inflated market in order to generate profits on the company’s behalf. The SEC claimed this scheme yielded more than $2 million for the company. The complaint charges the defendants with violating numerous provisions of the federal securities laws, including certain registration, antifraud, and market manipulation provisions, and seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and conduct-based injunctions. The SEC also seeks an officer and director bar against the former CEO. Based on the SEC’s announcement, the market making firm’s CEO has consented to a judgment, subject to court approval and without admitting or denying the allegations, which would permanently ban him from violating these provisions and from participating in future securities offerings. The market making firm’s CEO is also ordered to pay $36,750 in disgorgement as well as prejudgment interest of $5,118, with civil monetary penalties to be determined by the court.
“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” Associate Director of the SEC’s Enforcement Division Carolyn M. Welshhans said. “As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”
Treasury discusses future of digital assets, says CBDC may take years
On September 23, the U.S. Treasury Department’s Under Secretary for Domestic Finance Nellie Liang discussed ways in which digital assets could alter the future of money and payments in the U.S. Speaking at the Brookings Institution, Liang highlighted recommendations presented in an agency report released earlier in September as part of President Biden’s Executive Order on Ensuring Responsible Development in Digital Assets (covered by InfoBytes here). The report, Crypto-assets: Implications for Consumers, Investors, and Businesses, outlined several significant areas of concern, including “frequent instances of operational failures, market manipulation, frauds, thefts, and scams.” The report advised federal agencies, including the CFPB, SEC, CFTC, and DOJ, to (i) continue to aggressively pursue enforcement actions focused on the crypto-asset sector; (ii) clarify existing authorities to ensure they are appropriately applied to crypto-assets; (iii) coordinate efforts to increase compliance; and (iv) take collaborative measures to improve the quality of information about crypto-assets for consumers, investors, and businesses.
Liang also commented on the potential benefits of adopting a U.S. central bank digital currency (CBDC), “such as preserving the uniformity of the currency, or providing a base for further innovation,” but warned that further research and development on the technology needed to support such a currency may take years. “There are many important design choices that would require additional consideration,” Liang said, stating, for example, “a retail CBDC would be broadly available to the public, while a wholesale CBDC would be limited to banks and other financial institutions.” Liang said Treasury plans to lead an inter-agency working group to advance further work on a possible CBDC and “consider the implications of CBDC in areas such as financial inclusion, national security and privacy.”
Liang also discussed other recommendations made in the report related to the possible establishment of a federal regulatory framework for nonbank providers of payment services. “A federal framework could provide a common floor for minimum financial resource requirements and other standards that may exist at the state level,” Liang pointed out. “It also would complement existing federal [anti-money laundering/combating the financing of terrorism] obligations and consumer protection requirements that apply to nonbank payment providers,” and “could work in conjunction with a U.S. CBDC or with instant payment systems.” She also commented on Treasury’s work to develop a faster, cheaper cross-border international payment system and noted the agency will consider potential risks, such as privacy and human rights considerations.
Treasury seeks info on illicit finance, national security risks of digital assets
On September 19, the U.S. Treasury Department issued a request for comment (RFC) seeking feedback on illicit finance and national security risks posed by digital assets. The RFC, issued pursuant to Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here), requests public input on illicit finance risks, anti-money laundering and combating the financing of terrorism (AML/CFT) regulation and supervision, global implementation of AML/CFT standards, private sector engagement, and central bank digital currencies. The RFC also seeks feedback on actions the U.S. government and Treasury should take to mitigate these risks, in addition to whether public-private collaboration may improve efforts to address risks. Comments on the RFC are due November 3.
“Without appropriate controls and enforcement of existing laws, digital assets can pose a significant risk to national security by facilitating illicit finance, such as money laundering, cybercrime and terrorist actions,” U.S. Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement. “As we work to implement the Illicit Finance Action Plan, hold bad actors accountable and identify potential gaps in existing enforcement, we look forward to receiving the public’s input on this urgent work.”
The RFC follows the September 16 release of Treasury’s Action Plan to Address Illicit Financing Risks of Digital Assets (covered by InfoBytes here).
White House presses regulators on framework for digital assets
On September 16, the White House published a comprehensive framework for the responsible development of digital assets, calling on federal regulators to “provide innovative U.S. firms developing new financial technologies with regulatory guidance, best-practices sharing, and technical assistance.” The framework follows an executive order (E.O.) issued by the Biden administration in March (covered by InfoBytes here), which outlined the first “whole-of-government” strategy for coordinating a comprehensive approach to ensuring responsible innovation in digital assets policy. Consistent with the E.O.’s deadline, nine reports have been submitted to President Biden to date that “call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets.” The reports also “call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining.”
Among other things, the reports (i) direct the Federal Reserve Board to continue its research and experimentation on issuing a central bank digital currency, and request the creation of a U.S. Treasury Department-led interagency working group to support Fed efforts; (ii) encourage the SEC and CFTC to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space”; (iii) urge the CFPB and FTC to address consumer complaints related to unfair, deceptive, or abusive practices in the crypto space; (iv) encourage agencies to issue guidance and rules for addressing current and emergent risks in the digital asset ecosystem; (v) urge agencies and law enforcement to take joint measures to address digital asset risks impacting consumers, investors, and businesses; and (vi) encourage agencies to share data on consumers’ digital asset complaints. To promote access to safe and affordable financial services, the administration said it plans to explore how crypto-related technologies can bolster financial inclusion, and will encourage the adoption of instant payment systems, weigh recommendations for creating a federal framework for non-bank payment service oversight, and prioritize efforts to improve cross-border payment efficiency. Additionally, the administration said it is exploring the possibility of amending the Bank Secrecy Act and other related statutes to “explicitly” apply to digital asset exchanges and non-fungible token platforms, and is considering a legislative request to toughen penalties for unlicensed money transmitters and give the DOJ more jurisdictional digital asset prosecution authority.
The Treasury released three reports addressing the future of money and payment systems, consumer and investor protection, and illicit finance risks in response to the E.O. The reports, The Future of Money and Payments, Crypto-Assets: Implications for Consumers, Investors, and Businesses, and Action Plan to Address Illicit Financing Risks of Digital Assets call on regulators to mitigate crypto-related risks to consumers, investors, and businesses. “Innovation is one of the hallmarks of a vibrant financial system and economy,” Treasury Secretary Janet Yellen said. “But as we have learned painfully from the past, innovation without appropriately addressing the impact of these developments can result in significant disruptions and harm to the financial system and individuals, especially our more vulnerable populations.” The reports examine the future of digital assets and offer recommendations to address consumer and investor protection concerns, combat illicit finance risks, and improve the payments system to support a more competitive, efficient, and inclusive landscape.
The same day, the DOJ also released a report in response to the E.O. The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets examines ways illicit actors exploit digital asset technologies and addresses challenges posed by digital assets to criminal investigations. The report provides recommendations to further enhance law enforcement’s ability to address digital asset crimes, such as strengthening criminal penalties and extending the statutes of limitations for crimes involving digital assets from five to ten years, and identifies three priorities: (i) “expanding to virtual asset service providers the laws preventing employees of financial institutions from tipping off suspects to ongoing investigations”; (ii) “strengthening the law criminalizing the operation of unlicensed money transmitting businesses”; and (iii) “extending the statute of limitations of certain statutes to account for the complexities of digital assets investigations.” The DOJ also launched the Digital Asset Coordinator Network, which will serve as the agency’s primary source for obtaining and disseminating information related to digital assets crimes.