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Senate confirms Gruenberg, FDIC board members
On December 19, the U.S. Senate confirmed Martin J. Gruenberg to be a board member and chairman of the FDIC. Gruenberg has served as acting chairman since former chair, Jelena McWilliams, resigned a year ago. Since joining the FDIC Board of Directors in 2005, Gruenberg has served as vice chairman, chairman, and acting chairman. Prior to joining the FDIC, Gruenberg served on the staff of the Senate Banking Committee as senior counsel of the full committee, and as staff director of the Subcommittee on International Finance and Monetary Policy. (Covered by InfoBytes here.)
The senators also voted to confirm Travis Hill as vice chairman and Jonathan McKernan as an FDIC board member. As previously covered by InfoBytes, during his tenure at the FDIC, Hill previously served as senior advisor to the chairman and deputy to the chairman for policy. Prior to that, Hill served as senior counsel at the Senate Banking Committee. Jonathan McKernan is a senior counsel at the FHFA and currently is on detail from the agency to the Senate Banking Committee where he is counsel on the minority staff. Previously, McKernan served as a senior policy advisor at the U.S. Treasury Department.
On January 5, Gruenberg was sworn in as the 22nd FDIC chairman. The same day, Hill was sworn in as vice chairman and McKernan as a board member.
Senate Banking holds hearing on crypto
On December 14, the Senate Banking Committee held a hearing to hear from witnesses about how customer and investor protections should apply to cryptocurrencies, among other topics. Committee Chairman Sherrod Brown (D-OH) opened the hearing by emphasizing that it is the committee’s job “to keep learning more about the collapses” of crypto firms, and that there should be collaboration with regulators to put consumers—not the crypto industry—first. Brown warned that crypto has “ushered in a whole new dimension of fraud and threats to national security.” Senator Elizabeth Warren (D-MA) expressed similar concerns, stating that the “dark underbelly of crypto is its critical link to financing terrorism and human trafficking and drug dealing and helping rogue nations like North Korea and Iran.” Warren went on to describe her bipartisan bill, the Digital Asset Anti-Money Laundering Act, noting that it “requires crypto to follow the same money laundering rules” that every bank and every broker are subjected to. Senator Cynthia Lummis (R-WY) also advocated for the regulation of digital asset trading, and providing consumers with adequate bankruptcy protection, disclosures, and stable coin regulation. Ranking Member Pat Toomey (R-PA) expressed openness to the possibility of regulations tailored to crypto, including more disclosure from issuers and oversight of secondary market trading. Toomey argued against pausing cryptocurrency before legislation. Additionally, some witnesses discussed drafting potential cryptocurrency legislation. One witness told the committee that when crypto assets are made from thin air, they can be “used to obscure financial realities.” Another witness said cryptocurrencies are “at best a vehicle for speculation, an exercise in a zero-sum game of chance, much like online poker,” but, “at worst, they are an instrument of crime.”
Senators ask federal agencies about banks’ ties to crypto firms
On December 7, Senators Elizabeth Warren (D-MA) and Tina Smith (D-MN) sent letters to the heads of the Federal Reserve Board, FDIC, and OCC seeking information on how the agencies assess risks associated with banks’ relationships with cryptocurrency firms. The senators expressed concerns related to recent revelations that “crypto may be more integrated into the banking system than regulators are aware.” The senators asked the agencies a series of questions, including (i) whether the regulators plan to conduct a review of crypto firms’ relationships with banks; (ii) the names of regulated banks engaged in crypto-related activities, such as providing crypto custody services and acting as nodes to verify customer payments; and (iii) the estimated total dollar volume for each specific activity per bank. The responses were requested by December 21.
Senators request information from California bank on its relationship with collapsed crypto exchange
On December 5, Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS) asked the CEO of a California-based bank for information regarding its relationship with several cryptocurrency firms founded by the CEO of a now-collapsed crypto exchange. In their letter, the senators pressed the CEO for an explanation for why the bank failed to monitor for and report suspicious transactions to the Financial Crimes Enforcement Network, and asked for information about how deposits it was holding on behalf of the collapsed exchange and related firm were being handled. The senators stressed that the bank has a legal responsibility under the Bank Secrecy Act to maintain an effective anti-money laundering program that may have flagged suspicious activity. “Your bank's involvement in the transfer of [the collapsed exchange’s] customer funds to [the related firm] reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” the letter said. The senators asked the bank to respond to a series of questions by December 19.
Brown urges Yellen to coordinate efforts to combat crypto risks
On November 30, Senator Sherrod Brown (D-OH) sent a letter urging Treasury Secretary Janet Yellen to join forces on drafting legislation that will “create authorities for regulators to have visibility into, and otherwise supervise, the activities of the affiliates and subsidiaries of crypto asset entities.” Recognizing the “troubling risks” within the crypto asset markets and pointing to the recent collapse of a major crypto exchange, Brown suggested that Treasury develop a broad framework for all crypto assets to ensure risks “are contained and do not spillover into traditional financial markets and institutions.” Copying the heads of the SEC, CFTC, Federal Reserve Board, NCUA, CFPB, FDIC, and OCC, Brown encouraged the agencies to enforce existing laws as well as supervisory and regulatory authorities in order to “take on the significant noncompliance with current law among crypto asset firms and minimize, if not eliminate, the opportunities for regulatory arbitrage.” Brown further asked the regulators to “assess the impact of vertical integration in crypto asset markets,” and to coordinate efforts to improve entity and crypto-asset disclosures, market integrity, and transparency.
Senator launches inquiry into crypto exchanges’ consumer protection measures
On November 28, Senator Ron Wyden (D-OR) sent letters to the six largest cryptocurrency exchanges requesting information about their finances, internal controls, and how customers’ funds are used. The inquiry follows the recent bankruptcy of a major crypto exchange accused of engaging in widespread mismanagement and misusing customers’ funds. Wyden asked the exchanges to respond to a series of questions related to, among other things, (i) the number of subsidiaries that fall under an exchange’s umbrella; (ii) whether customer assets are segregated from corporate or institutional assets; (iii) the treatment of customers’ funds; (iv) safeguards for preventing market manipulation; (v) the use of customer data for proprietary trading purposes; (vi) debt-to-asset and debt-to equity ratios, balance sheets, reserves, and audit procedures; (vii) insurance coverage; and (viii) steps taken by the exchanges to work with other crypto companies to develop protections for investors and customers. Senator Wyden further announced, “As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions and securities brokers.”
Senators demand answers on collapsed cryptocurrency exchange; NYDFS seeks tougher crypto approach
On November 16, Senator Elizabeth Warren (MA-D) and Senator Richard Durbin (IL-D) sent a letter to the ex-CEO and his successor of a cryptocurrency exchange that filed for bankruptcy. In the letter, the senators requested a series of files from the cryptocurrency exchange, including copies of internal policies and procedures regarding the relationship between the firm and its affiliated crypto hedge fund. The senators stated that the cryptocurrency exchange’s customers and Americans “fear that they will never get back the assets they trusted to [the cryptocurrency exchange] and its subsidiaries.” Additionally, the senators argued that “the apparent lack of due diligence by venture capital and other big investment funds eager to get rich off crypto, and the risk of broader contagion across the crypto market that could multiply retail investors’ losses, ‘call into question the promise of the industry.’” The senators emphasized that “the public is owed a complete and transparent accounting of the business practices and financial activities leading up to and following the cryptocurrency lending firm's collapse and the loss of billions of dollars of customer funds.” Among other things, the senators asked the cryptocurrency exchange to provide requested information by November 28, including: (i) complete copies of all the firm’s and its subsidiaries’ balance sheets, from 2019 to the present; (ii) an explanation of how “a poor internal labeling of bank-related accounts” resulted in the firm’s liquidity crisis; (iii) a list of all the firm’s transfers to its affiliated crypto hedge fund; (iv) copies of all written policies and procedures regarding the relationship between the firm and its affiliated crypto hedge fund; and (v) an explanation of the $1.7 billion in the firm’s customer funds that were allegedly reported missing.
The same day, NYDFS Superintendent Adrienne Harris participated in a “fireside chat” before the Brooking Institute’s event, Digital asset regulation: The state perspective - Effective regulatory design and implementation for virtual currency. During the chat, Harris expressed her support for a national framework similar to what New York has because she believes that “it is proving itself to be a very robust and sustainable regime.” Harris also discussed NYDFS priorities regarding digital assets for the future, stating that crypto companies can expect more guidance on a number of key regulatory issues. Specifically, Harris disclosed that NYDFS will “have more to say on capitalization,” and “on consumer protection, disclosures, advertising … [and] complaints, making sure these companies have an easy way for consumers to complain.” She also warned that NYDFS will “bolster and broaden” its authority, adding that there is “lots of work for us to do to make clear the expectations that we have already, and to make sure that the things we have on the books equip us well to keep up with this marketplace.”
Senators Warren and Sheldon Whitehouse (D-RI) also sent a letter to the DOJ asking that the former CEO and any complicit company executives be held personally accountability for wrongdoing following the cryptocurrency exchange’s collapse.
On December 13, the House Financial Services Committee will hold a hearing to discuss the cryptocurrency exchange’s collapse and the possible implications for other digital asset companies.
Senators urge FTC to investigate social media company’s privacy compliance
On November 17, seven Democratic senators sent a letter to FTC Chair Lina Khan requesting that the Commission investigate whether recent changes made to a global social media company will impact the company’s compliance with privacy and security regulations. The senators also encouraged Khan to investigate any breach of the company’s 2011 consent order, which prohibits misrepresentation and requires the company to maintain a comprehensive information security program. The FTC was already alerted to allegations made by a former security employee concerning the company’s supposedly inadequate security practices even prior to the company’s recent acquisition, the senators said, adding that the company also previously agreed to pay a $150 million penalty to the FTC and DOJ to settle allegations that it violated the FTC Act and the 2011 consent order related to misleading claims about its privacy and security practices. (Covered by InfoBytes here.) The senators urged the FTC “to vigorously oversee its consent decree with [the company] and to bring enforcement actions against any breaches or business practices that are unfair or deceptive, including bringing civil penalties and imposing liability on individual [company] executives where appropriate.”
Separately, Senator Charles E. Grassley (R-IA) sent a letter to the company’s CEO expressing concerns with its security practices. Citing an unanswered request for information sent to the former head of security related to alleged security failures, Grassley asked the current CEO to perform a threat assessment of the company’s security protocol to ensure user data and privacy is protected and requested that findings be submitted to the Senate Judiciary Committee.
Republican senators oppose FTC’s ANPR on data privacy and security
On November 3, three Republican Senators sent a letter to FTC Chair Lina Khan expressing their opposition to the FTC’s Advanced Notice of Proposed Rulemaking (ANPR) for the Trade Regulation Rule on Commercial Surveillance and Data Security. As previously covered by InfoBytes, in August the FTC announced the ANPR covering a wide range of concerns about commercial surveillance practices, specifically related to the business of collecting, analyzing, and profiting from information about individuals. In the letter, the Senators argued that both consumers and businesses would benefit if Congress enacted comprehensive federal legislation addressing data privacy. According to the Senators, the FTC “lacks the authority to create preemptive standards” and the proposed rulemaking “would only add uncertainty and confusion to an already complicated regulatory landscape, increasing compliance costs, reducing competition, and ultimately harming consumers.” The Senators requested that the FTC withdraw its rulemaking proposal, explaining that “[c]onsumer data privacy and security are complex issues which will require standards that are robust, adaptive, and can balance the interests of consumers with the needs of businesses.” The Senators noted that they believe “that this balance can only be struck within federal legislation that is comprehensive and preemptive, such that the law creates a single national standard.”
Dems ask regulators to address crypto’s “revolving door”
On October 24, Democratic lawmakers sent letters to the leaders of the SEC, CFTC, Treasury Department, Federal Reserve, FDIC, OCC and CFPB regarding concerns about “the revolving door between [] financial regulatory agencies and the cryptocurrency (crypto) industry.” In the letters, the lawmakers argued “that the crypto revolving door risks corrupting the policymaking process and undermining the public’s trust in our financial regulators.” The letters also noted that Treasury saw the most movement from the Treasury Department, with 31 former employees joining the crypto industry. The SEC was second with 28 former employees, according to Tech Transparency Project. The lawmakers argued that “Americans should be able to trust that financial rules are crafted to reduce risk, improve security, and ensure the fair and efficient functioning of the market,” and that “Americans should be confident that regulators are working on behalf of the public, rather than auditioning for a high-paid lobbying job upon leaving government service.” The letters requested that the agencies provide information by November 7, including answers to inquiries about each agency’s ethics guidelines and polices in place to protect the agency from being influenced by current or former employees’ potential conflicts of interest.