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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.”
CFPB seeks better refi, loss-mitigation options
On September 22, the CFPB issued a request for information (RFI) regarding ways to improve mortgage refinances for homeowners and how to support automatic short-term and long-term loss mitigation assistance for homeowners who experience financial disruptions. According to the Bureau, refinancing volume has decreased almost 70 percent from last year as interest rates have risen. Additionally, periods of economic turmoil, such as the Covid-19 pandemic, can pose significant challenges for mortgage borrowers, the Bureau noted. Throughout the pandemic, 8.2 million borrowers entered a forbearance program, and as of July 2022, 93 percent have exited. Of those who have exited forbearance, five percent are delinquent or in active foreclosure. The Bureau is interested in the features of pandemic-related forbearance programs that should be made more generally available to borrowers. Specifically, the RFI requests information regarding, among other things: (i) targeted and streamlined refinance programs; (ii) innovative refinancing products; and (iii) automatic forbearance and long-term loss mitigation assistance. Comments are due 60 days after publication in the Federal Register.
Treasury official discusses U.S. efforts in response to Russian invasion of Ukraine
On September 20, Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg delivered prepared remarks before a Senate Committee on Banking, Housing, and Urban Affairs hearing, in which she provided an overview of recent efforts taken by the U.S. Treasury Department to hold Russia accountable for its invasion of Ukraine. Rosenberg explained that these measures are intended to “squeeze Russia’s access to finance and technology for strategic sectors of its economy and degrade its industrial capacity for years to come” and highlighted sanctions imposed against hundreds of Russian individuals and entities, including Russia’s largest financial institutions and key nodes in the country’s military-industrial supply chains, to cut them off from the U.S. financial system. She noted that Treasury has also implemented restrictions on dealings in Russian sovereign debt and has “prohibited economic dealings with the so-called Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine” as well as new investments in the Russian Federation. Rosenberg added that Treasury has “also imposed prohibitions on importing certain commodities from Russia into the United States, including oil and natural gas, and similarly imposed prohibitions on exporting certain items like luxury goods and dollar-denominated banknotes.” Additionally, Rosenberg discussed international efforts, including “implementing the largest sanctions regime in modern history[,]” and working with allies to facilitate information sharing, law enforcement data, and relevant financial records. She emphasized that “Treasury has mounted an aggressive campaign to close the global financial policy and regulatory loopholes across jurisdictions that Russian aiders and abettors of this war, and other criminals, use to perpetuate their illicit activity[,]” and stated that Treasury remains focused on denying funds to Russia through its oil exports.
Find continuing InfoBytes coverage on the U.S. sanctions response to Russia’s invasion of Ukraine here.
Treasury issues guidance on Russian oil sales cap
On September 9, the U.S. Treasury Department announced preliminary guidance on implementing a maritime services policy and related price exception for seaborne Russian oil. As previously covered by InfoBytes, OFAC recently announced that it planned to publish preliminary guidance on implementing the price cap to provide a high-level overview of the directive, including how U.S. persons can comply in advance of formal guidance and legal implementation. According to the preliminary guidance, the policy is intended to establish a framework for Russian oil to be exported by sea under a capped price, and establish a ban on services for any shipments of seaborne Russian oil above the capped price. Objectives of the guidance include: (i) maintaining a reliable supply of seaborne Russian oil to the global market; (ii) reducing upward pressure on energy prices; and (iii) reducing the revenues the Russian Federation earns from oil after its own war of choice in Ukraine has inflated global energy prices. The policy contains an exception, which applies to “jurisdictions or actors that purchase seaborne Russian oil at or below a price cap to be established by the coalition (the “price exception”).” The policy, which relates to a broad range of services in connection with the maritime transportation of Russian Federation origin crude oil and petroleum products, will become effective December 5, 2022 for the maritime transportation of crude oil and on February 5, 2023 for the maritime transportation of petroleum products.
Treasury caps Russian oil sales; OFAC guidance coming soon
On September 2, the U.S. Treasury Department announced that G7 Finance Ministers confirmed their joint intention to implement a price cap on Russian-origin crude oil and petroleum products. According to the statement, G7 countries, along with other allies and partners, “plan to prohibit the provision of services that enable maritime transportation of such oil and products unless purchased at or below a price level determined by the coalition of countries adhering to and implementing the price cap.” Secretary of the Treasury Janet L. Yellen issued a statement commending the action. She noted that the price cap will “help deliver a major blow for Russian finances and will both hinder Russia’s ability to fight its unprovoked war in Ukraine and hasten the deterioration of the Russian economy,” while also maintaining supplies to global energy markets by keeping Russian oil flowing at lower prices.
In conjunction with the announcement, OFAC said it plans to publish preliminary guidance on implementing the price cap later this month. The guidance will provide a high-level overview of the mechanism, including how U.S. persons can comply in advance of formal guidance and legal implementation which will be issued at a later date.
FSB releases statement on crypto-asset activities
On July 11, the Financial Stability Board (FSB) released a statement regarding international regulation and supervision of crypto-asset activities following the “recent turmoil in crypto-asset markets.” The FSB called for “an effective regulatory framework” to “ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of crypto-assets and harnessing potential benefits of the technology behind them.” The statement also called for, among other things: (i) crypto-assets and markets to be subjected to effective regulation and oversight relative to their domestic and international risks; (ii) cryptocurrency service providers to ensure compliance with existing legal obligations in the jurisdictions where they operate; and (iii) stablecoins to be subject to “robust” regulations and supervision if they are to be adopted as a widely used means of payment or play an important role in the financial system. The FSB noted the “ongoing work of the FSB and the international standard-setting bodies to address the potential financial stability risks posed by crypto-assets,” and highlighted that member authorities will implement applicable international standards into national regulatory and supervisory frameworks “to the extent not already reflected and will adopt guidance, recommendations and best practices of international standard-setting bodies.”
OFAC sanctions entities connected to IRGC-QF
On May 25, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13224 against an international oil smuggling and money laundering network led by the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). According to OFAC, the designated network, “has acted as a critical element of Iran’s oil revenue generation, as well as its support for proxy militant groups that continue to perpetuate conflict and suffering throughout the region.” As a result, all property, and interests in property of the designated individuals and entities, “and of any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons, must be blocked and reported to OFAC.” U.S. persons are generally prohibited from engaging in transactions with the designated persons. OFAC further warned that “engaging in certain transactions with the individuals and entities designated today entails risk of secondary sanctions.”
Brainard discusses central bank digital currency at House hearing
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.”
9th Circuit: Incomplete loan modification application bars plaintiff's CA Homeowner Bill of Rights claims
On May 11, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a plaintiff’s allegations that a lender violated RESPA and the California Homeowner Bill of Rights (HBOR), breached its contract, and breached the implied covenant of good faith and fair dealing. The court also dismissed the plaintiff’s request for promissory estoppel. In affirming the district court, the appellate court determined that the plaintiff’s HBOR claims failed, specifically because the plaintiff insufficiently showed that she incurred actual damages because of a RESPA violation. The appellate court also agreed that the plaintiff’s HBOR claims failed because she did not submit a complete application. Under HBOR, mortgage servicers are prohibited from reporting a notice of default if a lender’s “complete application for a first lien loan modification” is pending. The appellate court concluded that the plaintiff failed to sufficiently show that she had submitted a complete loan modification application, and did not demonstrate that she took follow-up action in response to a letter stating her loan modification application was incomplete, meaning her claim failed.
With respect to the plaintiff’s remaining claims, the 9th Circuit held, among other things, that the lender’s “alleged promise to consider plaintiff’s loan modification application upon dismissal of her lawsuit was neither sufficiently definite to create a contract nor sufficiently ‘clear and unambiguous to support a promissory estoppel.’” Moreover, the plaintiff’s claim for breach of the covenant of good faith and fair dealing also failed because she could not prove breach of contract. Specifically, she did not state a claim for breach of the deed of trust because, as the plaintiff herself noted, “she failed to perform under the deed of trust when she did not make loan payments, and performance under the contract is a necessary element of a breach of contract claim.”
The dissenting judge disagreed with the majority in two key respects. First, the judge argued the majority wrongfully rejected the plaintiff’s HBOR claim because the complaint contended that the lender “would send out such boilerplate letters so that it did not have to comply with the requirement that it cease foreclosure activities once an application is complete,” and that “a lender’s bad faith conduct does not render a borrower’s application incomplete.” Regarding the plaintiff’s good faith and fair dealing claim, the judge argued that the plaintiff plausibly alleged that she submitted a complete application to the lender. According to the complaint, the plaintiff submitted the necessary documents and was allegedly informed by the lender’s lawyer that “her application was ‘in review, which meant that plaintiff’s application was complete.’”
1st Circuit: Bankruptcy Code “unequivocally strips tribes” of their sovereign immunity to sue
On May 6, the U.S. Court of Appeals for the First Circuit reversed a district court’s decision, ruling that American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy. The debtor (plaintiff) in 2019 took out a $1,100 payday loan from a creditor (appellee), who is a subsidiary of a tribe. He voluntarily filed a Chapter 13 bankruptcy petition, listing his debt to the appellee, which had increased to approximately $1,600, as a nonpriority unsecured claim. He also listed the appellee on the petition’s creditor matrix, and his attorney mailed the appellee a copy of the proposed Chapter 13 plan. When the plaintiff filed the petition, the Bankruptcy Code imposed an automatic stay enjoining “debt-collection efforts outside the umbrella of the bankruptcy case.” The appellee continued to attempt to contact the plaintiff regarding the debt, but the plaintiff had allegedly previously notified the appellee’s representatives that he had filed for bankruptcy. Two months after the plaintiff filed the petition, he claimed that his “mental and financial agony would never end,” and blamed his agony on the appellee’s “regular and incessant telephone calls, emails and voicemails.” To stop the appellee’s collection efforts, the plaintiff relocated to enforce the automatic stay against the appellee and its corporate parents and sought an order prohibiting future collection efforts, as well as damages, attorney's fees, and expenses. In response, the tribe and its affiliates asserted tribal sovereign immunity and moved to dismiss the enforcement proceeding. The bankruptcy court agreed with the tribe and granted the motions to dismiss.
On the appeal, the tribe argued that the Bankruptcy Code cannot abrogate tribal sovereign immunity because it never uses the word “tribe.” The appellate court noted that the argument “boils down to a magic-words requirement” that tribes must be mentioned in order to be covered by a law, but U.S. Supreme Court precedent “forbids us from adopting a magic-words test.” However, the appellate court further noted that Congress did not determine that tribes were subject to the Code, stating that “[e]ven if Congress need not use magic words to make clear that its abrogation provision applies to Indian tribes, it must at least use words that clearly and unequivocally refer to Indian tribes if it wishes to make that abrogation provision apply to them.” The appellate court ruled that Congress took away tribes' sovereign immunity as “domestic governments” covered by the Bankruptcy Code, stating that even though tribes are not explicitly named in the Code, “we have no doubt that Congress understood tribes to be domestic dependent nations,” and since those “are a form of domestic government, it follows that Congress understood tribes to be domestic governments.”