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FDIC’s Gruenberg discusses the prudential regulation of crypto assets
On October 20, FDIC acting Chairman Martin J. Gruenberg spoke before the Brookings Institution on the prudential regulation of crypto-assets. In his remarks, Gruenberg first discussed banking, innovation, and crypto-assets, which he defined as “private sector digital assets that depend primarily on the use of cryptography and distributed ledger or similar technologies.” He stated that innovation “can be a double-edged sword,” before noting that subprime mortgages, subprime mortgage-backed securities, collateralized debt obligations and credit default swaps were considered financial innovations before they were “at the center of the Global Financial Crisis of 2008.” Gruenberg further discussed that such innovations resulted in catastrophic failure because, among other things, consumers and industry participants did not fully understand their risks, which were downplayed and intentionally ignored. He then provided an overview of the FDIC’s approach to engaging with banks as they consider crypto-asset related activities, and the potential benefits, risks, and policy questions related to the possibility that a stablecoin could be developed that would allow for reliable, real-time consumer and business payments. He stated that “[f]rom the perspective of a banking regulator, before banks engage in crypto-asset related activities, it is important to ensure that: (a) the specific activity is permissible under applicable law and regulation; (b) the activity can be engaged in a safe and sound manner; (c) the bank has put in place appropriate measures and controls to identify and manage the novel risks associated with those activities; and (d) the bank can ensure compliance with all relevant laws, including those related to anti-money laundering/countering the financing of terrorism, and consumer protection.”
Gruenberg pointed to an April financial institution letter from the FDIC (covered by InfoBytes here), which requested banks to notify the agency if they engage in crypto asset-related activities. He added that as the FDIC and other federal banking agencies develop a better understanding of the risks associated with crypto-asset activities, “we expect to provide broader industry guidance on an interagency basis.” Regarding crypto-assets and the current role of stablecoins, Gruenberg noted that payment stablecoins could be significantly safer than available stablecoins if they were subject to prudential regulation, including issuing payment stablecoins through a bank subsidiary. He cautioned that disclosure and consumer protection issues should be “carefully” considered, especially if custodial wallets are allowed outside of the banking system as a means for holding and conducting transactions. Specifically, he said that “payment stablecoin and any associated hosted or custodial wallets should be designed in a manner that eliminates—not creates—barriers for low- and moderate-income households to benefit from a real-time payment system.” Gruenberg added that if a payment stablecoin system is developed, it should complement the Federal Reserve's forthcoming FedNow service—a faster payments network that is on track to launch between May and July of next year—and the potential future development of a U.S. central bank digital currency. In conclusion, Gruenberg stated that although federal banking agencies have significant authority to address the safety, soundness and financial stability risks associated with crypto assets, there are “clear limits to our authority, especially in certain areas of consumer protection as well as the provision of wallets and other related services by non-bank entities.”
FRBs to adopt new Fedwire format in 2025
On October 24, the Federal Reserve Board published a notice in the Federal Register announcing that the International Organization for Standardization’s (ISO) 20022 message format for the Fedwire Funds Service will be adopted on a single day, March 10, 2025. The Fedwire Funds Service is a real-time gross settlement system owned and operated by the Federal Reserve Banks that enables businesses and financial institutions to quickly and securely transfer funds using either balances held at the Reserve Banks or intraday credit provided by the Reserve Banks. A single-day implementation strategy is preferable to a three-phased implementation approach, the Fed said, explaining it is both simpler and more efficient and is likely to reduce users’ overall costs related to software development, testing, and training. The Fed also announced a revised testing strategy and backout strategy, as well as other details concerning ISO 20022’s implementation.
FSB releases G20 roadmap for enhancing cross-border payments
On October 10, the Financial Stability Board (FSB) published its priorities for the next phase of work under the G20 Roadmap for Enhancing Cross-Border Payments. According to the FSB, the plan includes steps to strengthen external engagement during the next phase of the group’s work. The FSB noted three priorities for the payment program’s next phase, which include: (i) payment system interoperability and extension; (ii) legal, regulatory and supervisory frameworks; and (iii) cross-border data exchange and message standards. The FSB further noted that it will coordinate work to develop further details of the actions that will take place to follow through with the plan, including discussions with industry participants. The updated roadmap will be provided during the first G20 Finance Ministers and Central Bank Governors meeting in 2023.
OFAC issues guidance on instant payment systems sanctions compliance
On September 30, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published Sanctions Compliance Guidance for Instant Payment Systems, which emphasizes the importance of taking a risk-based approach to managing sanctions risks in the context of new payment technologies, such as instant payment systems, and highlights considerations relevant to managing those risks. According to OFAC, the guidance “encourages developers of instant payment systems to incorporate sanctions compliance considerations and features as they develop these systems.” The guidance, among other things, describes: (i) risk factors and considerations for instant payment systems; (ii) domestic vs. cross-border payment system; (iii) availability of emerging sanctions compliance technologies and solution; (iv) nature and value of payment; and (v) OFAC engagement and resources.
Fed’s FedNow instant-payments platform to launch mid-2023
On August 29, the Federal Reserve Board announced that its FedNow service will launch mid-year 2023, targeting May to July as the production rollout window for the anticipated instant-payments platform. The FedNow pilot program is scheduled to enter technical testing in September with more than 120 organizations taking part. As covered by a Buckley Special Alert, in May, the Fed issued a final rule for its FedNow service that offers more clarity on how the platform will work. According to the Fed, the FedNow service will be accessible to financial institutions of any size to help expand the reach of instant payments to communities nationwide. FedNow pilot program participants “will complete a certification process to ensure operational and messaging readiness and then move into production once the service is launched,” the Fed said, noting that as the pilot program moves into the testing phase, it will engage non-pilot financial institutions and service providers interested in being early adopters.
“Just as the Federal Reserve has made a substantial commitment to our new instant payment infrastructure, we are calling on industry stakeholders to do the same,” Fed Vice Chair Lael Brainard said during a speech at the FedNow Early Adopter Workshop. “The shift to real-time payment infrastructure requires a focused effort, but the shift is inevitable. The time is now for all key stakeholders—financial institutions, core service providers, software companies, and application developers—to devote the resources necessary to support instant payments.”
Special Alert: New Fed guidelines clarify, but do not transform, master account and payment services access
The Federal Reserve Board recently issued final guidelines for the Reserve Banks to use in reviewing requests from a range of financial services providers for access to Federal Reserve master accounts and payment services. Master account and Federal Reserve services allow institutions to transfer money to other master accountholders directly and hold funds in the Federal Reserve System, while others must go through third parties — which can add cost, delay, and further complication to transactions.
The final guidelines are substantially similar to those proposed in 2021 and a supplement issued earlier this year. They make the application process more transparent by describing the risk factors that a Reserve Bank should take into consideration and by applying a three-tier approach regarding the intensity of a Reserve Bank’s review. However, the guidelines do not broaden the categories of entities that are eligible to apply in the first place, do not establish application processing timelines, and do not provide a clear path forward for entities that lack federal bank supervision, including novel charter types.
CFPB highlights risks associated with BNPL products
On August 4, the CFPB released a report highlighting risks associated with new product offerings that the agency claimed blur the line between payments and commerce. The report examined the development of new capabilities—like “super apps,” buy now, pay later (BNPL), and embedded commerce—that have the potential to streamline payments, facilitate commerce, and enhance user experience, but may also create opportunities for companies to aggregate and monetize consumer financial data. With respect to “super apps,” the Bureau warned that these services have “morphed” into a “bank in an app” model, providing a “wide array of financial, payment and commerce functions within a single app.” These financial services super apps may seem to be more convenient than having multiple relationships with different organizations, the Bureau said, but cautioned that using these products may limit consumer product and service choice. “While consumers can opt to use a payment offering outside an app, such super apps create the potential for providers to steer consumers to specific solutions and/or limit access to some products.”
The report also raised concerns about tech firms offering their own lending or BNPL products. The Bureau pointed out that BNPL options, which provide unsecured short-term credit allowing consumers to split purchases into four equal interest-free payments at the point of sale, have “soared in recent years” as a popular alternative to credit cards. The Bureau noted it is “carefully focused on the shift toward real-time payments in the United States,” and is “seeking to mitigate the potential consequences of large technology firms moving into this space.”
The Bureau further stressed it is “carefully monitoring the payments ecosystem as part of a multifaceted effort to promote fair, transparent, and competitive markets for consumer financial services,” and said it is currently working on Dodd-Frank Act rules that would give consumers more control over the personal financial data that they choose to share with finance and payment apps. The Bureau also stated that it is “assessing new models of lending integrated with payments and ecommerce, such as BNPL,” and plans to issue a report on its findings and make a determination as to whether any regulatory interventions are appropriate. Last year, the Bureau issued a series of orders to five companies seeking information regarding the risks and benefits of the BNPL credit model (covered by InfoBytes here).
Fed to implement new Fedwire message format in March 2025
On June 27, the Federal Reserve Board announced the final timeline and implementation details for the adoption of the International Organization for Standardization’s (ISO) 20022 message format for its Fedwire Funds Service—a real-time gross settlement system owned and operated by the Federal Reserve Banks that enables businesses and financial institutions to quickly and securely transfer funds. (See notice here.) The final details are “broadly similar” to the Fed’s proposal issued last October (covered by InfoBytes here). The Fed confirmed that ISO 20022 will be adopted on a single day as previously proposed instead of in three separate phases. Additionally, the Fed extended the implementation timeframe from a target date of November 2023 to March 10, 2025, based on comments received in response to the initial proposal. The Fed also provided information concerning its revised testing strategy and backout strategy, as well as other details concerning the implementation of the new message format.
Special Alert: Fed finalizes rule for FedNow platform
The Federal Reserve Board recently issued a final rule for its FedNow instant-payments platform that offers more clarity on how the new service will work while essentially adopting the proposed rule. FedNow will stand alongside private sector initiatives and, like more modern payments systems, will feature credit payments to push funds rather than debit payments to pull funds, offering faster processing.
Highlights of the new rule and FedNow
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
- Not a consumer or business app or service. Depository institutions that are eligible to hold Reserve Bank accounts will be able to use FedNow, which will be administered by the 12 Reserve Banks. Consumers and businesses may not participate in FedNow directly, and therefore, could not send payment orders to a Reserve Bank through it. They would instead send instant payments through their depository institution accounts.
- Bank v. nonbank direct participation in FedNow. Eligible institutions include banks, savings associations, credit unions, U.S. branches and agencies of non-U.S. banks, Edge or agreement corporations, some systemically important financial market utilities, and government-sponsored entities (including Fannie Mae and Freddie Mac). We use the term “banks” throughout to simplify the discussion.
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
FTC orders credit card payment ISO to comply with heightened monitoring practices
On May 24, the FTC finalized an order against an independent sales organization and its owners (collectively, “respondents”) to settle allegations that they violated the FTC Act and the Telemarketing Sales Rule by helping scammers launder millions of dollars of consumers’ credit card payments from 2012 to 2013 and ignored warning signs that the merchants were fake. According to the FTC’s administrative complaint, the respondents, among other things, created 43 different merchant accounts for fictitious companies and provided advice to the organizers of the scam on how to spread out the transactions among different accounts to evade detection (covered by InfoBytes here).
Under the terms of the final order, the respondents are required to make several substantial changes to their processes, and are prohibited from engaging in credit card laundering, as well as any other actions to evade fraud and risk monitoring programs. Additionally, the respondents are banned from providing payment processing services to any merchant that is, or is likely to be, engaged in deceptive or unfair conduct, and to any merchant that is flagged as high-risk by the credit card industry monitoring programs. Furthermore, the respondents are required to screen potential merchants who are engaged in certain activities that could harm consumers, and monitor and designate as necessary current merchants who may require additional screening. The FTC noted that it is unable to obtain a monetary judgment in this action due to the U.S. Supreme Court’s decision in AMG Capital Management v. FTC, which held that the FTC does not have statutory authority to obtain equitable monetary relief under Section 13(b) of the FTC Act (covered by InfoBytes here).