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  • Nebraska law establishes a cryptocurrency bank charter

    State Issues

    On May 25, the Nebraska governor approved LB 649, the Nebraska Financial Innovation Act, which creates a bank charter for companies that hold cryptocurrencies. The new act defines “digital asset depository institutions” as banks or financial institutions that hold certain digital assets, and will allow existing state-chartered banks to establish areas focused on cryptocurrency services. New businesses will also be able to gain a state banking charter as digital asset depositories. The act provides, among other things, that “at all times, a digital asset depository shall maintain unencumbered liquid assets denominated in United States dollars valued at not less than one hundred percent of the digital assets in custody” and that “compliance with federal and state laws, including, but not limited to, know-your-customer and anti-money-laundering rules and the federal Bank Secrecy Act, is critical to ensuring the future growth and reputation of the blockchain and technology industries as a whole.”

    State Issues Digital Assets State Legislation Nebraska Cryptocurrency Bank Charter Bank Compliance Bank Secrecy Act

  • Fed highlights potential of central bank digital currencies

    Federal Issues

    On May 20, Federal Reserve Chairman Jerome Powell released a video message outlining the potential use of central bank digital currencies (CBDCs) in the U.S. payment system. Powell discussed how “the rise of distributed ledger technology, which offers a new approach to recording ownership of assets, has allowed for the creation of a range of new financial products and services—including cryptocurrencies,” which may carry potential risks to those users and to the broader financial system. Powell highlighted that the Fed is contemplating whether and how a U.S. CBDC would impact the domestic payments system, emphasizing that CBDCs “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar.” Powell also noted that, as part of the Fed’s ongoing efforts in exploring the potential benefits and risks of CBDCs from a variety of angles, the Fed will begin broader consideration of the creation of a U.S. CBDC by issuing a discussion paper and requesting public comment on benefits and risks. Powell stated he expects the Fed to play a leading role in developing international standards for CBDCs by “engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process.”

    Federal Issues Digital Assets Regulation Federal Reserve Cryptocurrency Bank Regulatory Fintech Central Bank Digital Currency

  • DOJ files criminal charges against individual who operated bitcoin money laundering service

    Federal Issues

    On April 28, the DOJ announced the arrest of a dual Russian-Swedish national on criminal charges related to his alleged operation of a bitcoin money laundering service on the darknet. The DOJ referred to the individual’s money-laundering service as the “longest-running cryptocurrency ‘mixer,’” stating that it moved over 1.2 million bitcoin valued at approximately $335 million at the time of transactions over the course of 10 years. According to the DOJ, the majority of the cryptocurrency came from darknet marketplaces tied to illegal narcotics, computer fraud, and abuse activities. The individual is charged with (i) money laundering; (ii) operating an unlicensed money transmitting business; and (iii) money transmission without obtaining a license in the District of Columbia.

    Federal Issues Digital Assets Financial Crimes DOJ Cryptocurrency Fintech Anti-Money Laundering Of Interest to Non-US Persons Money Service / Money Transmitters

  • SEC commissioner updates cryptocurrency safe harbor proposal

    Fintech

    On April 13, SEC Commissioner Hester M. Pierce released an updated version of her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. As previously covered by InfoBytes, last year Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. The three-year grace period for qualifying companies, Pierce suggested, would allow time for the development of decentralized or functional networks, adding that at the end of the three years, a successful network’s tokens would not be regulated as securities.

    The updates to the proposal reflect feedback from the cryptocurrency community, securities lawyers, and the pubic, and include, among other things:

    • A requirement for companies to provide semi-annual updates to the plan of development disclosure and a block explorer;
    • An exit report requirement, which would include either (i) an outside counsel analysis explaining why the network is decentralized or functional; or (ii) an announcement that the company will register the tokens under the Securities Exchange Act; and
    • Enhancements to the exit report requirement to address what the outside counsel’s analysis should address when explaining why a network is decentralized.

    The public is encouraged to provide feedback on the updated proposal.

    Fintech SEC Securities Agency Rule-Making & Guidance Safe Harbor Virtual Currency Cryptocurrency Digital Assets

  • Digital asset company to pay $6.5 million to settle CFTC allegations

    Securities

    On March 19, the CFTC announced a $6.5 million settlement with a California-based digital asset company to resolve allegations of false, misleading, or inaccurate reporting concerning its digital asset transactions that violated the Commodity Exchange Act or CFTC regulations. According to the CFTC, from January 2015 to September 2018, the company allegedly operated at least two trading programs that generated orders that, at times, matched each other. The CFTC claimed, among other things, that the transactional information provided on the company’s website and given to reporting services resulted “in a perceived volume and level of liquidity of digital assets. . .that was false, misleading or inaccurate.” Additionally, the CFTC alleged that the company was vicariously liable for a former employee’s use of “a manipulative or deceptive device” to intentionally place buy and sell orders that matched each other, creating a misleading appearance of interest in certain cryptocurrencies. The company did not admit or deny the CFTC’s findings and agreed to pay a $6.5 million civil penalty.

    Securities CFTC Enforcement Virtual Currency Commodity Exchange Act Cryptocurrency Digital Assets

  • New York warns of “extreme risk” with cryptocurrency trading

    State Issues

    On March 1, the New York attorney general issued two alerts warning investors about the “extreme risk” facing New Yorkers investing in virtual or “crypto” currency. The first investor alert directs investors to take caution when investing in virtual currencies because, among other reasons, virtual currency trading platforms provide limited protection from fraud as “[m]ost platforms are subject to little or no oversight.” The second industry alert is directed towards broker-dealers, salespersons, and investment advisors, and provides a reminder that “people and entities dealing in virtual or ‘crypto’ currencies that are commodities or securities in the state of New York, and who do not qualify for an exemption, must register with the Office of the Attorney General,” and that failing to do so will expose them to both civil and criminal liability. The alerts follow an agreement entered last month (covered by InfoBytes here) between the AG and the operators of a virtual currency trading platform and a “tether” virtual currency issuer, along with their affiliated entities, which resolved allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds. 

    State Issues State Attorney General Fintech Cryptocurrency Virtual Currency Digital Assets

  • New York reaches $18.5 million settlement with virtual currency operators

    State Issues

    On February 23, the New York attorney general announced a $18.5 million settlement with the operators of a virtual currency trading platform and the “tether” virtual currency issuer, along with their affiliated entities, to resolve allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds. According to the AG, one of the companies operated an online trading platform for exchanging and trading virtual currency, which allowed users to store virtual or fiat currency, convert virtual currency into fiat currency, and withdraw funds, while the “tether” virtual currency issuer represented that the “stablecoin” it issued was backed one-to-one by U.S. dollars in reserve. However, an AG investigation found, among other things, that the companies made false statements about the backing of the stablecoin and moved hundreds of millions of dollars between the two companies in an attempt to conceal massive losses, and that the stablecoins were, in fact, no longer backed one-to-one by U.S. dollars in reserve, contrary to the company’s representations. The AG also noted that a national bank, which acted as the correspondent bank for the companies and was used to fill orders for U.S. dollars, elected to stop processing U.S. dollar wire transfers from the companies, forcing the companies to find alternative banking arrangements and ultimately leading to a liquidity crisis. Further, the AG stated that the companies failed to disclose these issues to the public. In 2019, a court order enjoined the companies from engaging in activities that may have defrauded investors trading in cryptocurrency (covered by InfoBytes here).

    Under the terms of the settlement agreement, the companies and related entities must, among other things, (i) discontinue any further trading activity in the state; (ii) pay $18.5 million in monetary relief; and (iii) take steps to increase transparency, including maintaining internal controls and procedures designed to ensure that their products and services are not used by New York persons and entities, providing compliance reports to the AG, and providing a list of utilized payment processors.

    State Issues Digital Assets State Attorney General Enforcement Consumer Protection Cryptocurrency Fintech Settlement

  • Digital payment solutions company settles with OFAC for $500k

    Financial Crimes

    On February 18, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $507,375 settlement with a Georgia-based payment processing solutions company for 2,102 apparent violations of multiple sanctions programs. According to OFAC’s web notice, between 2013 and 2018, the company—which offers solutions for merchants to accept digital currency as payment for goods and services—allegedly processed thousands of transactions on behalf of individuals located in sanctioned jurisdictions based on IP addresses and invoice information. Specifically, OFAC alleged that the company “received digital currency payments on behalf of its merchant customers from those merchants’ buyers who were located in sanctioned jurisdictions, converted the digital currency to fiat currency, and then related that currency to its merchants.” While OFAC noted that the company screened its direct merchants against its List of Specially Designated Nationals and Blocked Persons and conducted due diligence to ensure merchants were not located in a sanctioned jurisdiction, the company’s transaction review process allegedly failed to screen identification and location data for its merchants’ buyers, many of whom were located in Crimea, Cuba, North Korea, Iran, Sudan, and Syria. As a result, these buyers, OFAC claimed, were able to make purchases from merchants located in the U.S. and elsewhere using digital currency on the company’s platform in violation of an executive order and multiple sanctions regulations.

    In arriving at the settlement amount, OFAC considered various aggravating factors, including that the company (i) “failed to exercise due caution or care for its sanctions compliance obligations” by allowing buyers in sanctioned jurisdictions to transact with merchants despite having “sufficient information to screen those customers”; and (ii) conveyed more than $128,000 in economic benefit to individuals in OFAC sanctioned jurisdictions.

    OFAC also considered various mitigating factors, including that the company (i) had implemented certain sanctions compliance controls, including due diligence and sanctions screening; (ii) trained employees—including senior management—that signing up merchants from sanctioned jurisdictions or trading with sanctioned persons is prohibited; (iii) cooperated with OFAC’s investigation; and (iv) terminated the conduct leading to the apparent violations and undertook remedial measures to minimize the risk of similar violations from occurring in the future. The base civil monetary penalty applicable in this action is $2,255,000; however, the lower settlement amount reflects OFAC’s consideration of the general factors under the Economic Sanctions Enforcement Guidelines.

    Financial Crimes Digital Assets OFAC Department of Treasury Cryptocurrency Sanctions Of Interest to Non-US Persons OFAC Designations Enforcement Settlement

  • OCC conditionally approves conversion of cryptocurrency trust company

    Federal Issues

    On February 5, the OCC announced that it conditionally approved a Washington state-chartered trust company’s application to convert to a national trust bank. According to the OCC, the trust company—which will provide cryptocurrency custody services for clients in a fiduciary capacity—“is currently in the organizational phase of development and will have up to 18 months to meet the terms of its conditional approval before it converts to a national trust bank and begins to operate.” By receiving a national trust bank charter, the trust company will be allowed to provide nationwide services to customers through offices in Seattle, Boston, and New York, and over the internet. The trust company also intends to expand its custody services to support additional types of digital assets beyond cryptocurrencies, including certain tokens and stable coins, and plans to eventually offer, among other things, client-to-client trading and lending platforms. The OCC notes that approval of the conversion is subject to several conditions, including that the trust company “not engage in activities that would cause it to be a ‘bank’ as defined in section 2(c) of the Bank Holding Company Act.”

    Federal Issues Digital Assets OCC Fintech Cryptocurrency Bank Charter Bank Holding Company Act Bank Regulatory

  • OCC conditionally approves conversion of digital bank

    Federal Issues

    On January 13, the OCC announced it has conditionally approved a South Dakota non-depository public trust company’s application to convert to a national trust bank. The digital bank—which offers digital asset and cryptocurrency custody services in certain states—has entered into an operating agreement as an enforceable condition of approval, which specifies capital and liquidity requirements and risk management expectations. By receiving a national trust bank charter, the digital bank will be allowed to expand its digital asset custody services nationally and may perform the functions and “activities of a fiduciary, agency, or custodial nature, in the manner authorized by federal and state law” with oversight being conducted by the OCC. According to the OCC, this approval “demonstrates that the national bank charters provided under the National Bank Act are broad and flexible enough to accommodate evolving approaches to financial services in the 21st century.”

    Federal Issues Digital Assets OCC Fintech Cryptocurrency Bank Charter National Bank Act Bank Regulatory

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