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House subcommittee holds hearing on stablecoin regulation
The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion recently held a hearing to examine stablecoins’ role in the payment system and to discuss proposed legislation for creating a federal framework for issuing stablecoins. A subcommittee memorandum identified different types of stablecoins (the most popular being pegged to the U.S. dollar to diminish volatility) and presented an overview of the market, which currently consists of more than 200 different types of stablecoins, collectively worth more than $132 billion. The subcommittee referred to a 2021 report issued by the President’s Working Group on Financial Markets, along with the FDIC and OCC (covered by InfoBytes here), in which it was recommended that Congress pass legislation requiring stablecoins to be issued only by insured depository institutions to ensure that payment stablecoins are subject to a federal prudential regulatory framework. The subcommittee discussed draft legislation that would define a payment stablecoin issuer and establish a regulatory framework for payment stablecoin issuers, including enforcement requirements and interoperability standards.
Subcommittee Chairman, French Hill (R-AR), delivered opening remarks, in which he commented that the proposed legislation would require stablecoin issuers to comply with redemption requirements, monthly attestation and disclosures, and risk management standards. Recognizing the significant amount of work yet to be done in this space, Hill said he believes that “innovation is fostered through choice and competition,” and that “one way to do that is through multiple pathways to become a stablecoin issuer, though with appropriate protections [to] prevent regulatory arbitrage and a race to the bottom.” He cited reports that digital asset developers are leaving the U.S. for countries that currently provide a more established regulatory framework for digital assets, and warned that this will stymie innovation, jobs, and consumer/investor protection. He also criticized ”the ongoing turf war between the SEC and CFTC” with respect to digital assets, and warned that “[w]hen you have two agencies contradicting each other in court about whether one of the most utilized stablecoins in the market is a security or a commodity, what you end up with is uncertainty.”
Witness NYDFS Superintendent Adrienne A. Harris discussed the framework that is currently in place in New York and highlighted requirements for payment stablecoin issuers operating in the state. In a prepared statement, Harris said many domestic and foreign regulators call the Department’s regulatory and supervisory oversight of virtual currency the “gold standard,” in which virtual currency entities are “subject to custody and capital requirements designed to industry-specific risks necessary for sound, prudential regulation.” Harris explained that NYDFS established “additional regulations, guidance, and company-specific supervisory agreements to tailor [its] oversight” over financial products, including stablecoins, and said the Department is the first agency to provide regulatory clarity for these types of products. She highlighted guidance released last June, which established criteria for regulated entities seeking to issue USD-backed stablecoins in the state (covered by InfoBytes here), and encouraged a collaborative framework that mirrors the regulatory system for more traditional financial institutions and takes advantage of the comparative strengths offered by federal and state regulators. Federal regulators will be able to comprehensively address “macroprudential considerations” and implement foundational consumer and market protections, while states can “leverage their more immediate understanding of consumer needs” and more quickly modernize regulations in response to industry developments and innovation, Harris said.
NYDFS to impose supervision fees on virtual currency licensees
On April 17, NYDFS announced the adoption of a final regulation establishing how certain licensed virtual currency businesses will be assessed for supervision and examination costs. Under 23 NYCRR Part 102, licensed virtual currency companies holding a Bitlicense will be assessed for their supervisory costs, similar to other licensees regulated by the Department. Last year, NYDFS first proposed a provision in the state budget authorizing the Department to collect supervisory costs from virtual currency businesses licensed pursuant to the Financial Services Law in order to add talent to its virtual currency regulatory team. (Covered by InfoBytes here.) NYDFS explained that the regulation will only apply to licensed virtual currency businesses and that the fees will only cover the costs and expenses associated with the Department’s oversight of a licensee’s virtual currency business activities. A licensee’s total annual assessment fee will be the sum of its supervisory component and its regulatory component, as defined in the regulation, and will be billed five times per fiscal year, once per quarter and a final true-up at the end of the fiscal year. The background to the final regulation notes that to the extent that a person holds multiple licenses to engage in virtual currency business activities, or concurrently acts as a money transmitter, such person will be billed separately for each license, adding that “[p]ersons who engage in virtual currency business activities as a limited purpose trust company or a banking organization will continue to be assessed under 23 NYCRR Part 101.” The final regulation takes effect upon publication of the Notice of Adoption in the New York State Register.
NYDFS, crypto payment company reach AML/cybersecurity settlement
On March 16, NYDFS issued a consent order against a payment service provider for allegedly failing to comply with the state’s virtual currency and cybersecurity regulations. The company was licensed to engage in virtual currency business activity in the state pursuant to 23 NYCRR Part 200. Licensees under Part 200 are required to, among other things, comply with federal and state laws mandating effective controls to guard against money laundering and certain other illegal activities. A 2022 NYDFS examination revealed that, although the company made improvements to address deficiencies within its AML and cybersecurity compliance programs that were identified during a 2018 examination, the programs still required additional improvements to achieve regulatory compliance. NYDFS concluded that the company violated sections of Part 200 by allegedly failing to develop adequate internal policies and controls to maintain compliance with applicable AML laws or to develop procedures to ensure compliance with necessary risk management requirements under applicable OFAC regulations. Furthermore, the company violated the state’s cybersecurity regulation (23 NYCRR Part 500) by failing to conduct periodic cybersecurity risk assessments and failing to timely appoint a designated chief information security officer responsible for overseeing, implementing, and reporting on the company’s cybersecurity program. Under the terms of the consent order, the company agreed to pay a $1 million civil monetary penalty and submit an action plan to NYDFS within 180 days detailing its remediation efforts. The company also agreed to conduct a comprehensive cybersecurity risk assessment within 150 days and to continue to strengthen its controls, policies, and procedures to prevent future violations.
OFAC sanctions darknet marketplace for selling stolen data
On April 5, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Order (E.O.) 13694, as amended by E.O. 13757, against one of the world’s largest darknet marketplaces for its involvement in the theft and sale of device credentials and related sensitive information. According to OFAC, the marketplace accesses victims’ devices without authorization and sells the stolen data, including usernames and passwords, on the darknet. The action was taken in coordination with the DOJ and international partners from a dozen countries who are also taking action against market users across multiple jurisdictions and seizing associated website domains. The designation built upon previous actions taken against darknet marketplaces, including sanctions issued last year against the world’s most prominent darknet market. (Covered by InfoBytes here.) OFAC also referenced FinCEN’s 2019 Advisory on Illicit Activity Involving Convertible Virtual Currency, to warn “that darknet markets frequently include offers for the sale of illicit goods and services that use virtual currencies as a method of payment.” (Covered by InfoBytes here.) As a result of the sanctions, all property and interests in property belonging to the sanctioned entity in the U.S. must be blocked and reported to OFAC. OFAC noted that U.S. persons are prohibited from participating in transactions with sanctioned persons, and that “persons that engage in certain transactions with the entity designated today may themselves be exposed to sanctions.”
The DOJ stated in its press release that, along with its partners, it had “dismantled” the marketplace and “arrested many of its users around the world.” The DOJ explained that the marketplace “was also one also one of the most prolific initial access brokers [] in the cybercrime world,” and “attract[ed] criminals looking to easily infiltrate a victim’s computer system.” The marketplace sold access to ransomware actors looking to attack computer networks in the United States and globally, the DOJ said, adding that the marketplace also sold device “fingerprints” used to trick third-party websites into thinking the marketplace user was the actual account owner.
CFPB received nearly 1.3 million consumer complaints in 2022
On March 31, the CFPB published its Consumer Response Annual Report for 2022, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2022. According to the report, the Bureau received approximately 1,287,000 consumer complaints last year and sent more than 820,000 complaints for review and response to roughly 3,200 companies. Among other trends, the Bureau found that complaints about credit or consumer reporting continued to increase, accounting for more than 75 percent of all complaints received last year. Checking and savings account-related complaints also increased. Many consumers reported issues with managing their accounts, including account closures, fraudulent activity, and issues with customer service. While complaints relating to student loans comprised a small percentage of complaints overall, the Bureau noted a significant increase from prior years, largely due to consumers reporting issues with their lender or servicer. Consumers described issues with repayment pause extensions, proposed changes to the federal loan program, and forgiveness programs. Additionally, the Bureau observed an increase in complaints about money service fraud and scams, where consumers reported losing money through phishing/smishing scams or via fraudsters who posed as investment or financial institution representatives to steal virtual currency. The most complained-about products and services—representing approximately 95 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 money transfers and virtual currency; vehicle finance; student, personal, and payday loans; prepaid cards; credit repair; and title loans.
FinCEN looks at business email threat in real estate
On March 30, FinCEN released a Financial Trend Analysis examining threat patterns and trends identified in Bank Secrecy Act (BSA) data relating to business email compromise (BEC) in the real estate sector during 2020 and 2021. According to the analysis, BEC attackers target businesses and financial institutions that routinely conduct large wire transfers and rely on email for communication about these wires. FinCEN explained in its announcement that attackers “may obtain unauthorized access to networks and systems to misappropriate confidential and proprietary information,” noting in its analysis that “[p]erpetrators typically compromise a key email account by using computer intrusions or social engineering and send an email that fraudulently directs funds to criminal-controlled accounts” where many times “the victim is tricked into thinking a legitimate email from a trusted person or entity is directing them to make a payment.” According to the Federal Bureau of Investigation’s Internet Crime Compliant Center, BEC incidents resulted in more than $43 billion in worldwide losses between June 2016 and December 2021.
FinCEN’s analysis found that attackers most commonly impersonated title and closing entities and personnel, and that 1,767 incidents involved initial domestic transfers of fraudulent funds to accounts at U.S. depository institutions (151 incidents involved initial transfers of fraudulent funds to international institutions). Additionally, the analysis found that 83 of the 2,103 reported real estate-related BEC incidents involved convertible virtual currency.
FinCEN reiterated that financial institutions, real estate sector entities, and the public “may all play an important role in protecting the U.S. financial system from [real estate] BEC attacks through awareness of actions to detect and mitigate attacks, information sharing mechanisms that can prevent attacks, and various ways to report incidents when they occur.” FinCEN further encouraged these entities to “[a]ssess the vulnerability of their business processes with respect to BEC and consider actions to ‘harden’ or increase the resiliency of their processes and systems against email fraud schemes.” This includes understanding quantifiable risks associated with the authentication of participants involved in communications, the authorization of transactions, and the communication of information and changes about transactions. Additionally, entities should “[a]dopt a multi-faceted transaction verification process—as well as training and awareness-building—to identify and evade spear phishing attempts.” FinCEN emphasized that “[i]dentifying fraudulent transaction payment instructions before payments are issued is essential to preventing and reducing unauthorized transactions.”
Wyoming to issue stable tokens
On March 17, the Wyoming governor signed SF 127 enacting the Wyoming Stable Token Act, creating the Wyoming stable token commission, and authorizing the issuance of stable tokens in the state. Under the Act, a Wyoming stable token is “a virtual currency representative of and redeemable for one (1) United States dollar held in trust by the state of Wyoming” that may only be issued in exchange for a USD. Stable tokens will be issued by the Wyoming stable token commission—created by the Act and to be comprised of no more than four virtual currency/fintech subject matter experts. The commission is authorized to, among other things, (i) establish “the means used to issue, maintain and manage the Wyoming stable tokens and the manner of and requirements for redemption”; (ii) select which financial institutions will manage the stable tokens, and make and enter into contracts and arrangements for such services; (iii) seek rulings and other guidance from federal agencies related to the provisions outlined in the Act; (iv) prior to issuing any such tokens, issue a comprehensive report to a select committee overseeing blockchain, financial technology, and digital innovation technology, among others, on all actions taken under the Act; and (v) promulgate rules and regulations as necessary to administer the Act and ensure compliance. The Act also outlines criteria relating to liability limitations and requires that the commission endeavor to issue at least one Wyoming stable token no later than December 31.
Virginia credit unions may offer virtual currency custody
On March 23, the Virginia governor signed HB 1727, which amends the Virginia code to allow credit unions operating in the commonwealth to engage in virtual currency custody services, provided the credit union “has adequate protocols in place to effectively manage risks and comply with applicable laws and, prior to offering virtual currency custody services, the credit union has carefully examined the risks in offering such services through a methodical self-assessment process.” The amendments stipulate that in order to engage in such services, a credit union must implement effective risk management systems and controls, confirm adequate insurance coverage, and maintain a service provider oversight program.
The amendments further provide that a credit union may offer such services in a fiduciary or nonfiduciary capacity; however, in order to provide virtual currency custody services in a fiduciary capacity, the credit union must first obtain approval from the State Corporation Commission. Commission approval is contingent upon a credit union having sufficient capital structure to support providing such services, credit union personnel being adequately trained to ensure compliance with governing laws and regulations, and that granting such authority is in the public interest. The amendments are effective July 1.
New York AG continues crackdown on unregistered crypto trading platforms
On March 9, the New York attorney general filed a petition in state court against a virtual currency trading platform (respondent) for allegedly failing to registeras a securities and commodities broker-dealer and falsely representing itself as a cryptocurrency exchange. The respondent’s website and mobile application enable investors to buy and sell cryptocurrency, including certain popular virtual currencies that are allegedly securities and commodities. The AG noted that this is one of the first times a regulator is making a claim in court that one of the largest cryptocurrencies available in the market is a security. According to the announcement, this cryptocurrency “is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders.” As such, the respondent was required to register before selling the crypto assets, the AG said, further maintaining that the respondent also sells unregistered securities in the form of a lending and staking product. According to the AG, securities and commodities brokers are required to register with the state, which the respondent allegedly failed to do. Additionally, the respondent claimed to be an exchange but failed to appropriately register with the SEC as a national securities exchange or be designated by the CFTC as required under New York law. Nor did the respondent comply with a subpoena requesting additional information about its crypto-asset trading activities in the state, the AG said, noting that the respondent has already been found to be operating in multiple jurisdictions without proper licensure. The state seeks a court order (i) preventing the respondent from misrepresenting that it is an exchange; (ii) banning the respondent from operating in the state; and (iii) directing the respondent to undertake measures to prevent access to its mobile application, website, and services from within New York.
Last month the AG filed a similar petition against another virtual currency trading platform alleging similar violations (covered by InfoBytes here).
New York AG sues crypto trading platform for failing to register
On February 22, the New York attorney general filed a petition in state court against a virtual currency trading platform (respondent) for allegedly failing to register as a securities and commodities broker-dealer and falsely representing itself as a cryptocurrency exchange. The respondent’s website and mobile application enable investors to buy and sell cryptocurrency, including certain popular virtual currencies that are allegedly securities and commodities. According to the AG, securities and commodities brokers are required to register with the state, which the respondent allegedly failed to do. The AG further maintained that the respondent claimed to be an exchange but failed to appropriately register with the SEC as a national securities exchange or be designated by the CFTC as required under New York law. Nor did the respondent comply with a subpoena requesting additional information about its crypto-asset trading activities in the state, the AG said. The state seeks a court order (i) preventing the respondent from misrepresenting that it is an exchange; (ii) banning the respondent from operating in the state; and (iii) directing the respondent to undertake measures to prevent access to its mobile application, website, and services from within New York.