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Federal Reserve chair delivers semi-annual congressional testimony, discusses U.S. financial conditions and regulatory relief act
On July 17, Federal Reserve Chair Jerome Powell testified before the Senate Banking Committee and spoke the next day before the House Financial Services Committee. In his semi-annual congressional testimony, Powell presented the Federal Reserve’s Monetary Policy Report, and discussed the current economic situation, job market, inflation levels, and the federal funds rate. Powell stressed, among other things, that interest rates and financial conditions remain favorable to growth and that the financial system remains in a good position to meet household and business credit needs. Chairman of the Committee, Senator Mike Crapo, R-Idaho, remarked in his opening statement that, while recent economic developments are encouraging, an effort should be made to focus on reviewing, improving, and tailoring regulations to be consistent with the recently passed Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174 (the Act). During the hearing, Powell confirmed that the Fed plans to implement provisions of the Act as soon as possible. (See previous InfoBytes coverage here.) When questioned by Senator Sherrod Brown, D-Ohio, about the direction the Fed plans to take to address stress test concerns, Powell responded that the Fed is committed to using stress tests, particularly for the largest, most systemically important institutions, and that going forward, the Fed wants to strengthen the tests and make the process more transparent. Powell also indicated the Fed intends to “publish for public comment the range of factors [the Fed] can consider” when applying prudential standards. Powell also stated that he believes government-sponsored-enterprise reform would help the economy in the long term.
When giving testimony to the House Financial Services Committee, Powell also commented that cryptocurrency does not currently impair the Fed’s work on monetary policy and that the Fed will not seek jurisdiction over cryptocurrency and instead will defer to the SEC’s oversight as well as Treasury’s lead to identify the right regulatory structure.
Financial Stability Board publishes report discussing methods for monitoring crypto-asset risk
On July 16, the Financial Stability Board (FSB) published a report, which asserts that, while “crypto-assets do not pose a material risk to global financial stability at this time,” there exists a need for “vigilant monitoring in light of the speed of developments and data gaps.” According to “Crypto-assets: Report to the G20 on work by the FSB and standard-setting bodies” (the Report), the FSB and the Committee on Payments and Market Infrastructures (CPMI) have developed a framework to monitor and assess vulnerabilities in the financial system resulting from developments in the crypto-asset markets. As previously covered in InfoBytes, the FSB earlier released a letter to G20 Finance Ministers and Central Bank Governors in March noting that “[c]rypto-assets raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing.” The Report specifically discusses actions being undertaken by international regulatory bodies, including (i) the CPMI’s investigation into distributed ledger technologies and monitoring of payment innovations; (ii) the International Organization of Securities Commissions creation of an Initial Coin Offering (ICO) Consultative Network, development of a framework for members to use when dealing with investor-protection issues stemming from ICOs, and exploration into regulatory issues regarding crypto-assets platforms; and (iii) the Basel Committee on Banking Supervision’s assessment of the materiality of banks’ crypto-asset exposures, exploration of appropriate prudential treatment of those exposures, and monitoring of crypto-asset and other financial technology developments. The Financial Action Task Force is also working separately on a report to the G20 on crypto-asset concerns regarding money laundering and terrorist financing risks.
Bitcoin and ether not considered securities by SEC
On June 14, the Director of the SEC Division of Corporation Finance, William Hinman, stated that the SEC does not consider the cryptocurrencies bitcoin and ether to be securities. In his remarks at the Yahoo Finance All Markets Summit, Hinman emphasized a number of factors that are considered when assessing whether a cryptocurrency or ICO should be considered a security. These factors include, primarily, whether a third party drives the expectation of a return—the central test used by the Supreme Court in SEC v. W.J. Howey Co.. According to Hinman, bitcoin’s and ether’s networks are decentralized without a central third party controlling the enterprise and, thus, applying the disclosure rules of federal securities laws to these cryptocurrencies would add little value to the market. Hinman did note that whether something is considered a security is not static and emphasized that if a cryptocurrency were to be placed into a fund and interests were sold, the fund would be considered a security.
CFTC, NASAA enter cryptocurrency, fraud information sharing partnership; CFTC releases virtual currency derivative guidance
On May 21, the U.S. Commodity Futures Trading Commission (CFTC) announced it had signed a mutual cooperation agreement with the North American Securities Administrators Association (NASAA) to increase cooperation and information sharing on cryptocurrencies and other potential market fraud. The memorandum of understanding (MOU) is designed to “assist participants in enforcing the Commodity Exchange Act, which state securities regulators and state attorneys general are statutorily authorized to do alongside the CFTC,” leading to the possibility of additional enforcement actions brought under other areas of law. In order to receive the benefits—including investigative leads, whistleblower tips, complaints, and referrals provided to NASAA members by the CFTC—individual jurisdictions will be required to sign the MOU.
The same day, the CFTC’s Division of Market Oversight and Division of Clearing and Risk (DCR) issued a joint staff advisory providing guidance on several enhancements to which CFTC-registered exchanges and clearinghouses should adhere when listing derivatives contracts based on virtual currencies. The advisory addresses the following five key areas for market participants: (i) “[e]nhanced market surveillance”; (ii) “[c]lose coordination with CFTC staff’; (iii) “[l]arge trader reporting”; (iv) “[o]utreach to member and market participants”; and (v) “Derivatives Clearing Organization risk management and governance.” According to the DCR director, the information provided is intended in part, “to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products . . . [and] to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”
President Trump issues new Executive Order prohibiting the purchase of debt from the Venezuelan government
On May 21, President Trump issued an Executive Order (E.O.) prohibiting U.S. companies or individuals from buying debt or accounts receivable from the Venezuelan government “in light of the recent activities of the Maduro regime, including endemic economic mismanagement and public corruption at the expense of the Venezuelan people and their prosperity.” The sanctions specifically prohibit transactions related to the following: (i) “the purchase of debt owed to the Venezualan government, including accounts receivable;” (ii) debt pledged as collateral after May 21, including accounts receivable; and (iii) “the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest.”
The E.O., issued in conjunction with E.O. 13692, follows two prior E.O.s, which also targeted the Maduro regime—E.O. 13827, which prohibits U.S. persons from engaging in transactions that involve digital currency issued by, for, or on behalf of the Venezuelan government, and E.O. 13808, which prohibits transactions related to new debt, bonds, and dividend payments in conjunction with the Venezuelan government and the state-owned oil company. (See previous InfoBytes coverage here and here.). The E.O. took effect on May 21 at 12:30 p.m. EDT.
See here for continuing InfoBytes coverage of actions related to Venezuela.
Federal Reserve Governor discusses potential impact of digital innovations on the financial system
On May 15, Federal Reserve Board Governor Lael Brainard spoke at a digital currency conference sponsored by the Federal Reserve Bank of San Francisco to discuss how digital innovations may impact the financial system, specifically in the areas of payments, clearing, and settlement. Brainard discussed, among other things, the importance of understanding the impact these innovations may have on (i) investor and consumer protection issues, and (ii) cryptocurrency and distributed ledger technology governance, particularly with respect to Bank Secrecy Act/anti-money laundering concerns. In addition, Brainard commented on the inherent risks and challenges surrounding the concept of a central bank digital currency, and noted that at this time, “there is no compelling demonstrated need for a Fed-issued digital currency [because] [m]ost consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps.” Brainard noted, however, that the Federal Reserve is monitoring these technological developments as “digital tokens for wholesale payments and some aspects of distributed ledger technology—the key technologies underlying cryptocurrencies—may hold promise for strengthening traditional financial instruments and markets” in the coming years.
Maryland expands scope of unfair and deceptive practices under the Maryland Consumer Protection Act, increases maximum civil penalties
On May 15, the Maryland governor signed HB1634, the Financial Consumer Protection Act of 2018, which expands the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MPCA) to include “abusive” practices, and violations of the federal Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The law also, among other things:
- Civil Penalties. Increases the maximum civil penalties for certain consumer financial violations to $10,000 for the initial violation and $25,000 for subsequent violations
- Debt Collection. Prohibits a person from engaging in unlicensed debt collection activity in violation of the Maryland Collection Agency Licensing Act or engaging in certain conduct in violation of the federal FDCPA.
- Enforcement Funds. Requires the governor to appropriate at least $700,000 for the Office of the Attorney General (OAG) and at least $300,000 to the Office of the Commissioner of Financial Regulation (OCFR) for certain enforcement activities.
- Student Loan Ombudsman. Creates a Student Loan Ombudsman position within the OCFR and establishes specific duties for the role, including receiving, reviewing, and attempting to resolve complaints from student loan borrowers.
- Required Studies. Requires the OCFR to conduct a study on Fintech regulation, including whether the commissioner has the statutory authority to regulate such firms. The law also requires the Maryland Financial Consumer Protection Commission (MFCPC) to conduct multiple studies, including studies on (i) cryptocurrencies and initial coin offerings and (ii) the CFPB’s arbitration rule (repealed by a Congressional Review Act measure in November 2017).
CFTC stresses importance of coordinating regulatory requirements with the SEC
On May 2, the U.S. Commodity Futures Trading Commission (CFTC) reiterated the importance of coordinating and harmonizing regulatory requirements with the SEC. In prepared remarks issued before FIA’s 40th Annual Law and Compliance Conference, CFTC Commissioner Brian Quintenz stated that its internal cryptocurrency enforcement task force will work in cooperation with its SEC counterparts on cases involving virtual currency. “Both agencies’ Divisions of Enforcement have demonstrated their commitment to work closely to prosecute fraud and ensure that differences in product nomenclature do not enable bad actors to slip through jurisdictional cracks,” Quintenz said. The agencies plan to update their existing 10-year-old memorandum of understanding to facilitate the sharing of information related to, among other things, swaps and security-based swaps data, fintech developments, and market events.
New York Attorney General launches cryptocurrency integrity initiative
On April 18, the New York Attorney General’s office announced the launch of an initiative designed to protect virtual currency investors and increase transparency and accountability within the cryptocurrency industry. Attorney General Eric T. Schneiderman sent questionnaires to 13 virtual currency trading platforms, requesting information on their operations, policies, and internal controls as part of a “fact-finding inquiry.” “[T]oo often, consumers don't have the basic facts they need to assess the fairness, integrity, and security of these trading platforms,” the Attorney General stated. The Virtual Markets Integrity Initiative asks the trading platforms to disclose several categories of information, including ownership and control information, operation and fees, trading policies and procedures, internal controls, and privacy and money laundering risks and safeguards. Responses will be analyzed, compared across platforms, and presented to the public. Questionnaires are due May 1.
Massachusetts securities division halts five initial coin offerings
On March 27, Massachusetts’s Office of the Secretary of the Commonwealth Securities Division (Division) entered into separate consent orders with five companies that allegedly violated the Massachusetts Uniform Securities Act by promoting initial coin offerings (ICOs) using unregistered securities. The five companies, which conduct business in Massachusetts, offered the ICOs via websites, including social media platforms. Under the terms of the consent orders, the companies are prohibited from selling unregistered or non-exempt securities in the state and are censured by the Division.
Visit here for additional InfoBytes coverage on ICOs.