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Financial Services Law Insights and Observations


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  • Agencies discuss crypto-asset next steps

    Agency Rule-Making & Guidance

    On November 23, the FDIC, OCC, and Federal Reserve Board issued a joint statement summarizing a recent series of interagency “policy sprints” focused on crypto-assets. During the policy sprints, the agencies conducted preliminary analysis on issues related to banking organizations’ potential involvement in crypto-asset-related activities, and identified and assessed key risks related to safety and soundness, consumer protection and compliance. The agencies also, among other things, analyzed the applicability of existing regulations and guidance on this space and identified several areas where additional public clarity is needed. Throughout 2022, the agencies intend to provide greater clarity on whether certain crypto-asset-related activities conducted by banking organizations are legally permissible. The agencies also plan to expand upon their safety and soundness expectations related to: (i) crypto-asset safekeeping and traditional custody services; (ii) ancillary custody services; (iii) facilitation of customer purchases and the sale of crypto-assets; (iv) loans collateralized by crypto-assets; (v) issuance and distribution of “stablecoins”; and (vi) activities involving a bank’s holding of crypto-assets on its balance sheet. The joint statement, which does not alter any current regulations, also states that the agencies plan to “evaluate the application of bank capital and liquidity standards to crypto-assets for activities involving U.S. banking organizations” and that the agencies will continue to monitor developments in this space as the market evolves.

    Agency Rule-Making & Guidance Digital Assets FDIC OCC Federal Reserve Federal Issues Cryptocurrency Fintech Bank Regulatory Consumer Protection Consumer Finance

  • OCC calls for modernization of financial regulatory perimeter as fintechs/crypto firms increase

    Federal Issues

    On November 16, acting Comptroller of the Currency Michael J. Hsu told attendees at the Federal Reserve Bank of Philadelphia’s Fifth Annual Fintech Conference that the federal banking agencies are “approaching crypto activities very carefully and with a high degree of caution” and “expect banks to do the same.” Hsu pointed out what while changes to the financial regulatory perimeter generally occur as a response to crises and failures, regulatory agencies need to take proactive modernization measures given the astounding growth and expansion of fintechs and cryptocurrencies. Hsu highlighted several important questions that agencies must consider, including whether fintech and crypto firms will start to function like banks and whether bringing them into the bank regulatory perimeter would be the proper solution. He also stated that regulatory agencies must consider whether the risks faced by banks and fintech/crypto firms are the same and, subsequently, whether agencies need to modernize or maintain their status quo. Hsu focused on two specific areas of concern: (i) synthetic banking, or fintechs, operating outside the bank regulatory perimeter but that offer a range of services, including extending various forms of credit and offering interest on cash held in accounts (emphasizing the importance of fintech-bank partnerships); and (ii) the fragmented supervision of universal crypto firms, where Hsu asserted that gaps in supervision are driven by the fact that crypto firms are not subject to comprehensive consolidated supervision.

    Hsu announced that the agencies will soon issue a statement conveying results from a recent interagency “crypto sprint,” and that the OCC will also provide clarity on its recently concluded review of crypto-related interpretive letters. Hsu explained that “safety and soundness is paramount” when banks engage in crypto activities and that the agencies’ clarifications “should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative, and diligent approach to a novel and risky area.”

    Federal Issues Digital Assets OCC Fintech Cryptocurrency Bank Regulatory Bank Supervision

  • DFPI addresses several MTA licensing exemptions

    Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:

    • Cryptocurrency and Agent of Payee Exemption. The redacted opinion letter reviewed whether MTA licensure is required for a company’s proposal to offer payment processing services that would enable merchants to receive payments in U.S. dollars from buyers of goods and services, automatically exchange these payments into dollar-denominated tokens on a blockchain network, and to store the tokens in a custodial digital wallet. DFPI currently does not require licensure for companies to receive U.S. dollars from a buyer for transfer to a merchant’s wallet as dollar tokens. DFPI explained that even if it did regulate this activity, the structure of the company’s payment processing services satisfies the requirements of the agent-of-payee exemption, wherein the company acts as the agent of the merchant pursuant to a preexisting written contract and the company’s receipt of payment satisfies the buyer’s obligation to the merchant for goods or services. DFPI further explained that while storing dollar tokens in a custodial digital wallet or making subsequent transfers out of a wallet do not currently require licensure under the MTA, DFPI may later determine the activities are subject to regulatory supervision.
    • Asset-Backed Tokens and Other Cryptocurrency. The redacted opinion letter asked DFPI whether an MTA license is required to (i) provide technical services to enable owners of metal to create digital assets representing interests in that metal; (ii) facilitate trading in these digital assets; or (iii) provide digital wallets to customers. The company intends to create a platform to facilitate the creation, sale, and trading of metal asset-backed tokens, whereby a customer purchases metal asset-backed tokens (ABTs) or currency tokens using fiat currency stored in an FBO account. Customers will not be allowed to transmit fiat currency to each other except to facilitate the purchase of ABTs or currency tokens, to receive proceeds from ABTs, or to pay platform fees. DFPI explained that while issuing stored value is generally considered money transmission, “[p]roviding technical services to assist in the creation of a [m]etal ABT and [i]ndustrial [t]okens and issuing a digital wallet holding the [m]etal ABT does not require licensure.” DFPI noted that the company is not itself issuing the ABT or industrial tokens. DFPI further concluded that the company does not need an MTA license to issue a digital wallet holding metal ATBs because the digital wallet is not stored value nor can the wallet’s contents be redeemed for money or monetary value or be used as payment for goods or services. DFPI separately indicated that a license is not currently required to facilitate the sale of ABTs, nor the issuance and sale of currency tokens. However, DFPI warned the company that the opinion only pertains to MTA, and that the company should be aware that metal ABTs and industrial tokens “could be considered a commodity and California Corporations Code section 29520 generally prohibits the sale of a commodity, unless an exception applies.”
    • Cryptocurrency-to-Precious Metals Dealer. The redacted opinion letter reviewed whether an online cryptocurrency-to-precious metals dealer, which accepts a variety of different cryptocurrencies in exchange for precious metals and also purchases precious metals from customers using different cryptocurrencies, requires MTA licensure. The company referenced a 2016 decision where DFPI determined that a company operating a software technology platform to facilitate the purchase and sale of gold was not engaged in money transmission, that gold and other precious metals were not payment instruments, that the transactions did not represent selling or issuing stored value, and that “the activity did not constitute receiving money for transmission because the sale or repurchase of gold was a bargained-for-exchange and did not involve transmission to a third party.” The company argued that purchasing and selling precious metals with cryptocurrency is similar and should not trigger MTA’s licensing requirement. DFPI agreed that the company’s business activities do not meet the definition of money transmission because precious metals are not payment instruments, and as such, purchasing and selling precious metals for cryptocurrency does not represent the sale or issuance of a payment instrument. Additionally, DFPI concluded that the company is not selling or issuing stored value, nor do the transactions “involve the receipt of money or monetary value for transmission within or outside the U.S.”
    • Virtual Currency Wallet. The redacted opinion letter asked whether an MTA license is required to operate a platform that will provide customers with an account to store and transfer virtual currencies. The company will also provide customers access to an exchange where they can facilitate the purchase or sale of virtual currencies in exchange for other virtual currencies. Fiat currency will not be used on the platform. DFPI stated that it does not currently require companies to obtain an MTA license to operate a platform that provides customers with an account to store and transfer virtual currencies. DFPI further stated that a license is not required to operate a platform that gives customers access to an exchange to purchase or sell virtual currencies in exchange for other virtual currencies.
    • Purchase of Cryptocurrency. The redacted opinion letter examined whether a company that offers clients a direct opportunity to buy cryptocurrency in exchange for fiat currency requires MTA licensure. The company explained, among other things, that there is no transmission of cryptocurrency to third parties and that it does not offer money transmission services. DFPI concluded that because the company’s activities are limited to directly selling cryptocurrency to clients, it “does not require an MTA license because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”

    DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions. Moreover, the letters do not relieve the companies from any FinCEN or federal regulatory obligations.

    Licensing Digital Assets State Issues DFPI California Money Transmission Act Money Service / Money Transmitters California Cryptocurrency Fintech

  • OCC says synthetic banking providers require supervision

    Federal Issues

    On November 3, acting Comptroller of the Currency Michael J. Hsu spoke before the American Fintech Council’s Fintech Policy Summit 2021 and warned that “[t]he rebundling of banking services by fintechs and the fragmented supervision of universal crypto firms pose significant medium- to long-term risks to consumers, businesses, and financial stability.” Hsu also noted that large “universal” cryptocurrency firms interested in offering a wide range of financial services should “embrace comprehensive, consolidated supervision” like that given to banks. “Crypto firms today are regulated at most only partially and selectively, with no single regulator having a comprehensive view of the firm as a whole,” Hsu stated, adding “[t]his warrants greater attention as crypto firms, especially the universals, get bigger, engage in a wider range of activities and risk-taking, and deepen their interconnectedness within the crypto ecosystem and with traditional finance.” Warning that these “synthetic banking providers” (SBPs) could create a “run risk” and regulatory arbitrage, Hsu stressed the importance of removing “the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards.” He further warned that customers’ needs must be met in a way that is reliable, consistently safe, sound, and fair, and discussed several reasons why more SBPs have not sought to become banks, including that “regulators have been unpredictable with regards to chartering new banks and approving fintech acquisitions of banks.” Establishing a clear, shared approach to the bank regulatory perimeter related to emerging technologies can address this challenge, he advised.

    Hsu also announced that the OCC concluded its review of recent bank charter applications and cryptocurrency-related interpretive letters and stated that the agency will communicate its determinations and feedback to bank charter applicants in the coming weeks. Findings from a “crypto sprint” done in conjunction with the FDIC and Federal Reserve will also be communicated shortly. “The content of these communications—on the chartering decisions, interpretive letters, and the crypto sprint—will be broadly aligned with the vision for the bank regulatory perimeter laid out here today,” Hsu stated.

    Federal Issues Digital Assets Fintech OCC Bank Regulatory Cryptocurrency Consumer Finance Bank Charter FDIC Federal Reserve Supervision Nonbank Supervision

  • Chopra testifies on CFPB direction

    Federal Issues

    On October 27, newly sworn in CFPB Director Rohit Chopra appeared for the first time before the House Financial Services Committee to offer some of the first insights into his priorities at the Bureau. Chopra’s opening remarks focused on concerns regarding “Big Tech” and its control over the flow of money in the economy (these comments followed the issuance of information requests to six technology companies, covered by InfoBytes here). Chopra also focused on a need to ensure robust competition in financial markets and listen to local financial institutions and nascent players about obstacles they face when seeking to challenge dominant incumbents. Chopra also stressed the importance of holding “repeat offenders” accountable, highlighted an intent to coordinate efforts with federal and state regulators, and indicated a preference for scrutinizing larger market participants over smaller entities. He noted, however, potential leniency for companies that self-identify their own issues and violations. Additional highlights of the hearing include the following:

    Enforcement. Chopra noted that “markets work well when rules are easy to follow and easy to enforce.” He also expressed his view that the CFPB should focus its resources on larger industry participants and “repeat offenders” rather than “strong-arming” small businesses into settlements to create law. Chopra also expressed a preference for setting regulatory guidelines through enforcement, indicating that “markets work well when rules are easy to follow, and easy to enforce.”

    Section 1033 of Dodd-Frank. With respect to implementing this set of requirements, which deals with consumers’ rights to access information about their financial accounts, Chopra indicated a desire to “unlock more competition,” but warned that there also needs to be assurance that “banks and nonbanks are operating under the same set of rules” and that there is “not regulatory arbitrage.” While Chopra did not specify a timeline for promulgating the final rule implementing this section, he noted that the process is underway and that the Bureau is consulting with various experts. (Issuance of the ANPR was covered by InfoBytes here.)

    Abusive acts and practices. Chopra said that he agreed with former acting Director Dave Uejio’s decision to rescind a policy statement on “abusive” conduct issued by former Director Kathy Kraninger. Chopra stated he has “huge aspirations to create durable jurisprudence” regarding the definition of “abusive” in Dodd-Frank. He noted that “it could be a mix” of judicial decisions and “how the CFPB may use rules and guidance to help articulate those standards.”

    Cryptocurrency and stablecoins. Chopra expressed concerns about the potential for big payment platforms to process stablecoins—cryptocurrencies pegged to stable commodities or currencies like the dollar. However, Chopra clarified that it is not his intention to use his regulatory authority to ban or limit the use of cryptocurrency or blockchain technology. Regarding the CFPB’s role in cryptocurrency, Chopra claimed that depending on the laws implicated, there is a “fact-based determination as to any sort of law that cryptocurrencies or digital currencies have to comply with.” He further described that this is “something that the CFPB is working with the other regulators on,” and emphasized that “where digital payments [are] involved, the Electronic Fund Transfer Act is a key law with key consumer protections.”

    QM Rule. When asked about the postponement of the mandatory compliance date of the General Qualified Mortgage final rule to October 2022 (covered by InfoBytes here), Chopra said he is eager “to hear of places where it needs to be changed” but emphasized that the postponement was before his time and that the rule has gone into effect. He also stated that “QM is a key part of the mortgage market and the mortgage regulatory guidelines.” Therefore, he wants to ensure that the CFPB is always looking at it to make sure the objectives that Congress laid forward in Dodd-Frank are being carried out. When asked about his support of the proposed change in the QM rule, Chopra said he did not know but wants “to make sure he understands the full basis of it.”

    Chopra echoed such sentiments in his October 28 testimony before the Senate Banking Committee.

    Federal Issues Digital Assets CFPB Enforcement Supervision UDAAP Consumer Finance Dodd-Frank House Financial Services Committee Senate Banking Committee Small Business Lending Section 1033 Abusive Cryptocurrency Fintech Mortgages Qualified Mortgage

  • New York takes action on cryptocurrency lending platforms

    State Issues

    On October 18, the New York attorney general ordered two unregistered cryptocurrency lending platforms to immediately cease their activities in the state and directed three additional platforms to provide information about their activities and products. The AG clarified that most virtual currency lending products “fall squarely within any of several categories of ‘security’ under the Martin Act,” and therefore platforms must comply with the Martin Act’s registration requirements unless exempt. According to the AG, the virtual currency lending products identified in these actions “promise a fixed or variable rate of return to investors, and claim to deliver those returns by, among other things, trading with, or further lending those virtual assets.” As such, the products are securities under the Martin Act, particularly those that accept virtual currencies in exchange for a rate of return. The press release provided a redacted version of a cease letter sent to one of the two unregistered platforms, which stated that platforms engaging in unregistered activity have committed a fraudulent practice under the Martin Act and may face civil remedies. The platform is ordered to cease the alleged activity within 10 days or explain why the AG should not take further action. A different redacted letter requested information about the recipient’s products, where it operates, how the platform uses deposited virtual currency, whether U.S. dollars can be deposited or withdrawn from the platform, all financial institutions that are used, and whether the companies accept tethers, among other things. The letter also requested examples of agreements, contracts, and risk disclosures, as well as due diligence policies and procedures. These letters follow other actions taken recently by the AG against cryptocurrency trading platforms and token issuers (see e.g. InfoBytes here and here).

    State Issues Digital Assets State Attorney General Fintech Cryptocurrency Enforcement New York

  • DOJ team to address cryptocurrency

    Federal Issues

    On October 6, the DOJ announced the launch of the National Cryptocurrency Enforcement Team (NCET), which will focus on addressing “complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.” According to the DOJ, the NCET will combine “the expertise of the Department of Justice Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), Computer Crime and Intellectual Property Section (CCIPS) and other sections in the division, with experts detailed from U.S. Attorneys’ Offices.” Among other things, the NCET will: (i) develop strategic priorities for investigations and prosecutions involving cryptocurrency; (ii) identify areas for increased investigative and prosecutorial focus; (iii) develop and maintain relationships with federal, state, local, and international law enforcement agencies involved in cryptocurrency cases; (iv) train federal prosecutors and law enforcement agencies in investigative and prosecutorial strategies; and (v) coordinate with private sector actors in cryptocurrency matters. In announcing the program, Deputy Attorney General Lisa Monaco stated that “[a]s the technology advances, so too must the Department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems.”

    Federal Issues DOJ Cryptocurrency Anti-Money Laundering Enforcement Financial Crimes Virtual Currency Fintech Digital Assets

  • CSBS responds to regulators’ request on emerging technologies

    Federal Issues

    On September 27, the Conference of State Bank Supervisors (CSBS) sent a letter to Ranking Member of the Senate Banking Committee Senator Pat Toomey (R-PA) detailing state bank regulators’ role in supervising money transmission and virtual currencies, in addition to recommending an activities-based approach to regulation. The letter is in response to a request by Senator Toomey for input on the regulation of financial technologies earlier this year. In Senator Toomey’s August 26 letter, he requested collection of public comments on proposed legislative language, among other things, to regulate emerging technologies. The Senator also requested that each proposal have a brief description that includes “how it will encourage the growth of cryptocurrency and blockchain technology” in the U.S. According to the letter from CSBS, state bank regulators are encouraging “Congress and federal regulators to focus on the activities at issue and making clarifications in existing laws, regulations, and interpretations,” and believe that “[a]n activities-based approach must be performed with collaboration from all stakeholders or risk one regulatory view overextending into areas where it would hurt innovation and consumers.” CSBS also points out that the Money Transmission Modernization Act established a regulatory baseline and represents a critical step in enhancing multistate harmonization in the money transmission industry. CSBS further discussed Networked Supervision, a strengthened collaboration which permits states to operate as a network. According to the letter, earlier this year, CSBS approved public priorities, which highlighted efforts that states will take to advance Networked Supervision  focused on money services businesses. CSBS states that these priorities “emphasize the states’ commitment to harmonization, collaboration, and innovation throughout the state regulatory system.”

    Federal Issues Digital Assets CSBS State Issues Supervision Money Service / Money Transmitters Cryptocurrency Fintech

  • OCC says digital asset innovators must avoid another financial crisis

    Federal Issues

    On September 21, acting Comptroller of the Currency Michael J. Hsu spoke before the Blockchain Association to discuss similarities between the current growth of cryptocurrencies and decentralized finance (DeFi) and credit default swaps in the early 2000s. In prepared remarks, Hsu emphasized that while innovation is exciting and presents the opportunity for unlocking great potential—especially in areas relating to blockchain, distributed ledger technologies and DeFi—innovators and leaders have a responsibility to learn from the past to avoid repeating mistakes that led to the 2008 financial crisis. Noting that many people believe crypto/DeFi “can dramatically increase financial inclusion,” Hsu pointed to a poll showing that should it be proven that there is “fool’s gold” within the cryptocurrency space, the underbanked and non-Whites will bear the burden the most as they reportedly own more cryptocurrency than other consumers. Hsu instructed innovators to make sure financial innovation is anchored in purpose and actually serves to expand access to banking services and credit. He also highlighted the importance of speaking up and raising difficult and inconvenient questions to “help ensure better and more sustained innovation in the long term,” as well as having a straightforward explanation for how money is made and lost in the crypto/DeFi space. Hsu’s observations may signal increased scrutiny by the OCC of digital assets, including in the areas of risk management and safety, and soundness generally.

    Federal Issues OCC Digital Assets Cryptocurrency Decentralized Finance Fintech Bank Regulatory

  • New Jersey, Texas flag company for crypto practices

    State Issues

    On September 17, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a blockchain-based marketplace company for allegedly selling unregistered securities in the form of interest-earning crypto-asset accounts that raised approximately $14 billion. According to the Bureau, the company funded its cryptocurrency lending operations and proprietary trading partially through unregistered securities sales, in violation of the New Jersey Securities Law. The company allegedly solicited investments by depositing certain eligible cryptocurrencies into investors’ accounts at the company and pooling these cryptocurrencies together to fund its income generating activities, including lending and trading operations. According to the order, the company’s website fails to disclose that its product is not currently registered with any federal or state securities regulator, even though it is subject to such requirements. The Bureau also notes that this is the “second time in less than two months that the Bureau has taken action against a cryptocurrency firm for selling unregistered securities in New Jersey.” (Covered by InfoBytes here.)

    The same day, the Texas State Securities Board issued a notice of hearing to determine whether to issue a proposal for decision for the entry of a cease and desist order against the company for allegedly violating the Securities Act by offering and selling securities in Texas without being registered as dealers or agents, among other things.

    State Issues Digital Assets New Jersey Texas Securities Cryptocurrency State Regulators Enforcement Fintech


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