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  • State Banking Regulators Issue Model Regulatory Framework for Virtual Currency Activities

    Fintech

    On September 15, the Conference of State Bank Supervisors (CSBS) issued its Model Regulatory Framework for State Regulation of Certain Virtual Currency Activities (Model Framework). The CSBS Emerging Payments Task Force developed the Model Framework to assist states in licensing and regulating virtual currency activities. The Model Framework includes key components to a regulatory scheme that the CSBS hopes will protect consumers and the larger marketplace while facilitating innovation. It also defines virtual currency and describes specifically covered virtual currency activities, such as those involving third-party controls of virtual currency. Additionally, the Model Framework provides flexibility in denominating permissible investments, tailoring cybersecurity audits to a company’s business model, and includes an addition to the BSA/AML Compliance section that recommends that states require verification of an entity’s service users and account holders. The Model Framework also includes a supervision component that requires the establishment of policies and procedures that protect customer access to funds in the event of an institutional failure.

    The Model Regulatory Framework for State Regulation of Certain Virtual Activities can be seen here.

    CSBS Virtual Currency

  • Eighth Circuit Denies Consumers' Appeal to Intervene in FTC Suit

    Fintech

    On August 25, a three judge panel of the U.S. Court of Appeals for the Eighth Circuit affirmed a lower court’s decision to deny consumers’ motion to intervene in the FTC’s suit against BF Labs, Inc. d/b/a/ Butterfly Labs (“Butterfly”). Alexander v. Fed. Trade Comm’n, No. 14-3286 (8th Cir. Aug. 25, 2015). Butterfly marketed and sold bitcoin mining computers. In April 2014, two consumers filed a class action suit against Butterfly, alleging “deceptive and unconscionable business practices.” In September 2014, the FTC also filed suit against Butterfly, alleging “deceptive acts or practices.” The FTC sought preliminary injunctive relief, including staying all suits against Butterfly, which the district court granted. The consumers moved to intervene permissively and of right but the district court denied their motion; the consumers appealed the denial of their motion to intervene of right. In order to have standing to intervene, a party must establish injury, causation, and redressability. The Court of Appeals found the consumers failed to show injury because their alleged injury (risk of financial harm) is contingent on various factors, including the FTC winning its case and precluding their recovery. Even if the consumers had standing to intervene, the consumers must meet the requirements of Rule 24(a) of the Federal Rules of Civil Procedure; the intervenor must (i) have a recognized interest in the subject matter of the litigation that; (ii) might be impaired by the disposition of the case; and that (iii) will not be adequately protected by the existing parties. Any government entity, such as the FTC is presumed to be representing the interests of the public. Thus, the consumers had to meet a very high burden to show the FTC was not adequately protecting their interests in the case, which they did not.

    FTC Virtual Currency

  • FinCEN Determines That Issuing a Digital Certificate Evidencing Ownership in Precious Metals, and Buying and Selling Precious Metals, Are Subject to The BSA

    Fintech

    On August 14, FinCEN issued an Administrative Ruling, FIN-2015-R001, determining that a company who: i) provides Internet-based brokerage services between buyers and sellers of precious metals; ii) buys and sells precious metals on its own account; and iii) holds precious metals in custody, opens a digital wallet, and issues a digital proof of custody certificates evidencing ownership of such metals, is subject to the BSA.

    FinCEN determined that, as a broker or dealer in e-currencies and e-precious metals, the company did not fall under the e-currencies or e-precious metals trading exemption from money transmission:  “when the Company issues a freely transferable digital certificate of ownership to buyers, it is allowing the unrestricted transfer of value from a customer’s commodity position to the position of another customer of a third-party, and it is no longer limiting itself to the type of transmission of funds that is a fundamental element of the actual transaction necessary to execute the contract for the purchase of sale of the currency or the other commodity.” As such, it is acting as a convertible virtual currency administrator (the freely transferable digital certificates being the commodity-backed virtual currency). Further, the purchases and sales of precious metals made on its own account render the Company a dealer in precious metals (subject to certain monetary thresholds and other considerations), and thus a financial institution for purposes of the BSA.

    FinCEN Bank Secrecy Act Virtual Currency

  • OCC Comptroller Talks Future of Financial Services, Eyes FinTech Industry

    Privacy, Cyber Risk & Data Security

    On August 7, OCC Comptroller Thomas Curry delivered remarks at the Federal Home Loan Bank of Chicago, which was hosting a conference highlighting the future of financial services. Specifically, Curry discussed innovation in the emerging financial technology industry, or “fintech,” noting the risks and benefits associated with mobile payments, virtual currency, and peer-to-peer lending products within the U.S. banking system. With respect to virtual currency, Curry stressed how important it is for financial institutions to implement adequate procedures to deter money laundering and terrorist financing. Curry also recognized that the OCC is “still early in the process” of evaluating a regulatory framework to examine some new and innovative products and services. Rounding out his remarks, Curry expressed his growing concerns with so called “neobanks,” which operate primarily online but provide similar services to brick and mortar retail branch banks, including the heightened privacy risks that neobanks present in light of recent cybersecurity attacks.

    Nonbank Supervision OCC Mobile Payment Systems Consumer Lending Virtual Currency Fintech Privacy/Cyber Risk & Data Security

  • DOJ Announces Charges Against Two Florida Men for Operating Underground Bitcoin Exchange

    Privacy, Cyber Risk & Data Security

    On July 21, U.S. Attorney for the Southern District of New York Preet Bharara, along with the Assistant Director-in-Charge of the New York Field Office of the FBI and the Special Agent-in-Charge of the New York Field Office of the United States Secret Service, announced the unsealing of criminal complaints filed against Anthony R. Murgio and Yuri Lebedev. According to the complaints, since at least late 2013, the two men and their co-conspirators illegally ran a money transfer operation called Coin.mx, which allowed customers to exchange cash for bitcoins for a fee. Murgio's and Lebedev’s allegedly illegal money transfer operation involved exchanging cash for people whom they believed may be engaging in criminal activity, as well as allowing victims of “ransomware” attacks to trade cash for bitcoins. During these “ransomware” attacks, cybercriminals would “electronically block access to a victim’s computer system until a sum of ‘ransom’ money, typically in bitcoins, [was] paid to them.” In an attempt to evade detection, Murgio, Lebedev, and their co-conspirators operated through “Collectables Club,” a fake front-company. Also in an attempt to avoid detection, Murgio obtained beneficial control of a New Jersey-based federal credit union, then placed Lebedev and others on the Board of Directors so that Coin.mx’s operations could be transferred to the credit union. The individuals used the credit union as a “captive bank for their unlawful business,” until at least early 2015, at which point, the NCUA discovered the illegal activity and forced the credit union to “cease engaging in such activity,” but Murgio “thereafter found new, overseas payment processing channels for his unlawful business.” Murgio and Lebedev are each being charged with one count of conspiracy to operate an unlicensed money transmitting business, and one count of operating an unlicensed money transmitting business. Each of these charges carries a maximum prison sentence of five years. Murgio also was charged with one count of money laundering and one count of willful failure to file a suspicious activity report. These additional charges carry maximum prison sentences of 20 years and 5 years, respectively‎.

    Anti-Money Laundering DOJ Virtual Currency Privacy/Cyber Risk & Data Security

  • Financial Action Task Force Issues Guidance Urging Risk-Based Approach to Virtual Currencies and Services

    Fintech

    On June 29, the Financial Action Task Force (FATF) issued a report, Guidance for a Risk-Based Approach to Virtual Currencies,part of a staged approach focusing on the points of intersection that provide gateways to the regulated financial system, in particular, convertible virtual currency exchangers.  The Guidance explains the application of the risk-based approach to AML/CFT measures in the virtual currency context, identify the entities involved in virtual currency payment products and services (VCPPS), and clarify the application of the relevant FATF Recommendations to convertible virtual currency exchangers.  The guidance provides, among other things, recommendations and encourages member nations to adopt regulations and guidelines similar to those applicable to traditional financial institutions to reduce risk exposure to the banking system.

    Payment Systems Anti-Money Laundering Virtual Currency FATF Combating the Financing of Terrorism

  • Mobile App Developer Settles with FTC and New Jersey AG Over Virtual Currency Mining

    Privacy, Cyber Risk & Data Security

    On June 29, a mobile app developer entered into an agreement with the FTC and the New Jersey AG to settle allegations that the developer engaged in deceptive and unfair practices by marketing its rewards app, called “Prized,” as being free of malicious software, also known as “malware.” However, according to the FTC, the true purpose of the mobile app was to uploaded malware onto consumers’ mobile devices capable of mining virtual currencies for the software developer.  This process allegedly reduced the battery life of consumers’ devices and caused consumers to burn through their monthly data plans. Under terms of settlement, the developer and accompanying mobile app are (i) prohibited from creating and distributing malicious software, and (ii) required to pay $50,000 to the state of New Jersey, with $5,200 due immediately, and the remaining $44,800 payable if the developer fails to comply with the terms of the consent order or the New Jersey Consumer Fraud Act within three years of the order.

    FTC State Attorney General Mobile Commerce Enforcement Virtual Currency Digital Commerce UDAAP

  • DOJ Assistant AG Caldwell Delivers Remarks at the ABA's National Institute on Bitcoin and Other Digital Currencies

    Fintech

    Today, Assistant Attorney General Leslie Caldwell delivered remarks at the ABA’s National Institute on Bitcoin and Other Digital Currencies. Speaking on the DOJ Criminal Division’s approach to the developing landscape of virtual currency, Caldwell acknowledged the legitimate uses of virtual currencies, such as having the ability to lower costs for brick and mortar businesses and its potential to promote a more efficient online marketplace, while also addressing the Department’s concern for the criminal activity surrounding  virtual currencies, noting, “virtual currency facilitates a wide range of traditional criminal activities as well as sophisticated cybercrime schemes.” Citing recent actions against various individuals and groups involved in criminal activities that “sought to exploit decentralized systems such as Bitcoin” – specifically, Silk Road and Ross Ulbricht; and Carl Force and Shaun Bridges, both involved in the Baltimore Silk Road Task Force – Caldwell stressed that there are “many exchanges that don’t concern themselves with following the law.” She explained that the primary legal bases for enforcement are money services business, money transmission, and anti-money laundering statutes, as well as state money transmitter licensing laws and, in some states like New York, virtual-currency specific licensing requirements. Caldwell also noted the Department’s partnership with FinCEN, summarizing its involvement in the Ripple Labs resolution to show that “compliance and remediation can lead to a more favorable resolution of criminal investigations.”  Further, Caldwell observed that while there is no “one-size-fits-all” compliance program, the adherence to regulations and state licensing laws by those involved in virtual currency businesses will reduce liability and complying with anti-money laundering guidelines will allow “the legitimate use of virtual currency to grow and be responsive to infiltration and abuse by criminal elements.”

    FinCEN DOJ Enforcement Money Service / Money Transmitters Virtual Currency

  • August 10 Deadline Set for New York Virtual Currency Firms to Apply for BitLicense

    Fintech

    On June 24, the New York State Register published the Department of Financial Services’ BitLicense framework, requiring companies and individuals who provide virtual currency services involving New York or a New York Resident to apply for a BitLicense by August 10, 2015. Virtual currency firms must submit the 31-page application providing information including, among other things, (i) written policies and procedures including, but not limited to BSA/AML, cybersecurity, privacy and information security, (ii) company information, (iii) biographical information on company directors and stockholders, and (iv) an explanation of the methodology used to calculate the value of virtual currency in fiat currency. In addition, the NYDFS released a set of FAQs to help clarify the BitLicense requirements.

    Virtual Currency Digital Commerce NYDFS

  • NY DFS Reveals Final BitLicense Requirements for Digital Currency Firms

    Fintech

    On June 3, New York’s departing superintendent of financial services, Benjamin Lawsky, revealed that the agency has adopted final regulations of the BitLicense, the regulatory framework in which digital currency firms operate within the state. In prepared remarks delivered at the BITS Emerging Payments Forum in Washington, D.C., Lawsky announced that the final BitLicense – which has undergone two previous updates – contains key consumer protection, AML compliance, and cybersecurity requirements. Moreover, Lawsky advised of the latest changes, and provided guidance clarifying that (i) firms that wish to obtain both a BitLicense and a money transmitter license will not have to submit separate applications, if they can satisfy the requirements for both; (ii) firms filing suspicious activity reports (SARS) with federal regulators, such as FinCEN, will not have to file a duplicate set of SARS with the state; (iii) firms must obtain prior approval for changes to their products or business models; (iv) firms will not require prior approval from the regulator for each round of venture capital funding, unless the investor seeks to oversee the company’s management and policies. Lawsky also clarified that the DFS intends to regulate only financial intermediaries who hold customer funds, rather than software developers who specifically focus on developing software, and do not hold customer funds.

     

    Virtual Currency Digital Commerce NYDFS

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