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  • SEC, DFPI charge unregistered crypto platform

    Securities

    On February 7, the SEC and DFPI announced charges against a Florida-based crypto platform, for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase crypto assets into an account in exchange for promised interest payments.  

    The SEC found that crypto asset accounts with the “interest feature” were offered and sold by the company as securities in the form of investment contracts but failed to register its offer and sale as required by law. Despite voluntarily halting the offering of the interest feature in 2022, the company agreed to pay a $1.5 million penalty to settle the SEC's charges. The SEC also noted that the company announced its intention to terminate all crypto-related products and services in the U.S. on February 22.   

    In addition, DFPI also entered a consent order with the platform to settle an investigation into the platform’s interest-earning program. The resolution is part of a multistate settlement facilitated by a task force led by California and Washington, comprising of eight state securities regulators. The investigation found that from 2020 through 2022, the platform engaged in the unregistered offer and sale of securities through its crypto interest-earning program. The platform offered the program to investors, allowing them to passively earn interest on crypto assets loaned to the platform. The platform maintained “total discretion” over revenue-generating activities to generate returns for investors, DFPI added. As part of the settlement with DFPI, the company agreed to pay a $1.5 million penalty to the DFPI on behalf of 51 U.S. jurisdictions, mirroring a similar settlement with the SEC for the same amount. 

    Securities DFPI SEC Registration Securities Exchange Commission Consent Order Digital Assets

  • OCC Acting Deputy Comptroller Murphy testifies on OCC’s Office of Financial Technology

    Federal Issues

    On December 5, the Acting Deputy Comptroller of the OCC’s Office of Financial Technology, Donna Murphy, testified before the U.S. House Subcommittee on Digital Assets, Financial Technology and Inclusion. Her testimony focused on the OCC’s supervision and regulation of new and emerging fintech products.

    Created in October 2022, the Office of Financial Technology regulates and supervises all aspects of fintech innovation in the federal banking system, including bank-fintech partnerships, artificial intelligence, and digital assets. Murphy testified that a strong risk management plan against third parties is essential. She referenced the joint guidance issued earlier this year by the OCC, Federal Reserve, and FDIC (previously covered by InfoBytes, here).

    Murphy also discussed the use of artificial intelligence and algorithms in banking, highlighting the many ways they can strengthen safety and soundness, enhance consumer protection, improve compliance, address financial crime, and increase fairness and access to the banking system. However, Murphy highlighted the need for banks to focus on software design, testing, security, and data management when implementing artificial intelligence. Lastly, Murphy iterated the OCC’s commitment to reducing inequality in banking and increasing access to financial services for all. 

    Federal Issues OCC Testimony House Financial Services Committee Digital Assets Fintech

  • DFPI opens comment period for the Digital Financial Assets Law

    On November 20, DFPI announced it is seeking public comment before it begins its formal rulemaking process on its Digital Financial Assets Law (DFAL), which was enacted on October 13. As previously covered by InfoBytes, DFAL created a licensing requirement for businesses engaging in digital financial asset business activity and is effective on July 1, 2025.

    For comments that recommend rules, DFPI encourages comments that “propose specific rule language and provide an estimate, with justification, of the potential economic impact on business and individuals that would be affected by the language.” Additionally, DFPI requests metrics, applicable information about economic impacts, or quantitative analysis to support comments. Among other topics, DFPI especially asks for comments related to (i) application fees and potential fee adjustments based on application complexity; (ii) surety bond or trust account factors; (iii) if capital minimums should vary by the type of activity requiring licensure; and (iv) its stablecoin approval process. 

    Comments must be received by January 12, 2024. On January 8, 2024, DFPI will host a Virtual Informal Listening Session with stakeholders to discuss feedback on this informal invitation for comments.

    Licensing State Issues Agency Rule-Making & Guidance DFPI California State Legislation Digital Assets Cryptocurrency

  • DFPI shares trends in consumer crypto complaints

    State Issues

    DFPI recently published a report on consumer crypto-related complaints collected through its new online complaint portal. According to the third-quarter 2023 CSO report, some of the most common complaints include (i) consumers being scammed into transferring digital assets from a legitimate crypto account to a fraudulent platform; (ii) consumers losing access to funds after transferring to an unknown wallet; (iii) consumers who invest in sham crypto investments by sending US dollars to a scammer’s platform, wallet, or bank; (iv) consumers making additional investments to scammers after receiving the first and only return; (v) consumers with concerns regarding their account activity on legitimate crypto platforms; and (vi) consumers approached by scammers via text message and social media. DFPI shared tips on how consumers can protect themselves against scams as well, noting that “[i]f it seems too good to be true, it probably is.” 

    State Issues Cryptocurrency DFPI California Digital Assets

  • SEC charges crypto firm for failing to register and mitigate risk factors

    Securities

    On November 20, the SEC filed a complaint in the U.S. District Court of the Northern District of California against a crypto trading platform, which allows customers to buy and sell crypto assets through an online market, for allegedly acting as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC is also claimed defendant’s business practices, internal controls, and recordkeeping were inadequate and presented additional risks to consumers, that would also be prohibited had defendant been properly registered with the commission. For instance, the SEC cited practices including commingling billions of dollars of consumers’ cash and crypto assets with defendant’s own crypto assets and cash, which defendant’s 2022 independent auditor identified as “a significant risk of loss."

    Director of the SEC’s Division of Enforcement, Gurbir S. Grewal said, “[Defendant’s] choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding [defendant] accountable for its misconduct and sending a message to others to come into compliance.”

    The SEC seeks to (i) permanently enjoin defendant from violating Section 5 and section 17A of the Exchange Act; (ii) permanently enjoin defendant from offering or selling securities through crypto asset staking programs; (iii) disgorge defendant’s allegedly illegal gains and pay prejudgment interest; and (iv) impose a civil money penalty.

    Securities SEC Cryptocurrency Enforcement California Digital Assets Broker

  • IOSCO releases report advising country regulators on crypto asset regulation

    Securities

    On November 16, the International Organization of Securities Commissions (IOSCO) released a report titled “Policy Recommendations for Crypto and Digital Asset Markets” for centralized financial bodies to put forth parallel, global policies on crypto assets, including a country’s stablecoin.

    IOSCO’s report aims to protect retail investors from illegal crypto-asset market activities, including regulatory non-compliance, financial crime, fraud, market manipulation, and money laundering that have led to investor losses. The report puts forth 18 policy recommendations summarized within six key themes: conflicts from firms doing too much at once; market manipulation, insider trading, and fraud; cross-border risks and regulatory cooperation; operational and technological risks; and retail access, suitability, and distribution. ISOCO maintains its principles on global regulation are within the “same activities, same risks, same regulation/regulatory outcomes.” IOSCO also mentioned it plans on releasing a second report on decentralized finance before the year’s end.

    Securities International Of Interest to Non-US Persons Cryptocurrency Digital Assets Risk Management

  • NYDFS introduces guidelines for coin-listing and delisting policies in virtual currency entities

    State Issues

    On November 15, NYDFS announced new regulatory guidance which adopts new requirements for coin-listing and delisting policies of DFS-regulated virtual currency entities, updating its 2020 framework for each policy. After considering public comments, the new guidance aims to enhance standards for self-certification of coins and includes requirements for risk assessment, advance notification, and governance. It emphasizes stricter criteria for approving coins and mandates adherence to safety, soundness, and consumer protection principles. Virtual currency entities must comply with these guidelines, requiring DFS approval for coin-listing policies before self-certifying coins, and submitting detailed records for ongoing compliance review. The guidance also outlines procedures for delisting coins and necessitates virtual currency entities to have an approved coin-delisting policy.

    As an example under coin listing policy framework, the letter states that a virtual currency entity risk assessment must be tailored to a virtual currency entity's business activity and can include factors such as (i) technical design and technology risk; (ii) market and liquidity risk; (iii) operational risk; (iv) cybersecurity risk; (v) illicit finance risk; (vi) legal risk; (vii) reputational risk; (viii) regulatory risk; (ix) conflicts of interest; and (x) consumer protection. Regarding consumer protection, NYDFS says that virtual currency entities must “ensure that all customers are treated fairly and are afforded the full protection of all applicable laws and regulations, including protection from unfair, deceptive, or abusive practices.”

    Similar to the listing policy framework, the letter provides a fulsome delisting policy framework. The letter also stated that all virtual currency entities must meet with the DFS by December 8 to preview their draft coin-delisting policies and that final policies must be submitted to DFS for approval by January 31, 2024.

    State Issues Privacy Agency Rule-Making & Guidance Fintech Cryptocurrency Digital Assets NYDFS New York Consumer Protection

  • Bank of England and Financial Conduct Authority seek feedback on stablecoin regulatory proposals

    Securities

    On November 6, the Bank of England and the Financial Conduct Authority (FCA) requested feedback on their proposal to regulate a form of cryptocurrency known as stablecoins. Stablecoins are a cryptoasset that “maintain a stable value relative to a fiat currency by holding assets as backing” and fall within the UK Government’s plan to regulate them for future retail payment use. In addition to retail use, the Bank of England and FCA’s wish to regulate stablecoins is meant to “prevent money laundering… and safeguard financial stability.”

    The Bank of England published a handy road map with similar regulators on how to best navigate rolling out new technological payment innovations, such as the digital pound. Each of the financial regulators provided two white papers: (i) the FCA’s discussion paper outlines how the FCA can regulate cryptoassets under the Financial Services and Markets Act 2000, including providing information on backing assets, custody requirements, and allowing overseas stablecoins used as a form of tender in the UK; and (ii) the Bank of England’s discussion paper examines proposed regulations for sterling-dominated stablecoins in the hopes of becoming widespread for retail use. Furthermore, this paper details proposed regulations for everyday use, including money transfers and providing digital wallets.

    Both regulators’ comment period is open until February 6, 2024.

    Securities Of Interest to Non-US Persons Digital Assets Cryptocurrency Stablecoins

  • SEC charges crypto company with fraud and anti-registration violations

    Securities

    On November 1, the SEC charged a crypto company and its executive team with fraud through the unregistered sale of crypto asset securities. According to the complaint, the defendants represented in marketing materials, website, social media posts, and other communications with the public that a certain percentage of funds for each transaction would be retained and inaccessible by any party for a period of four years as a safety mechanism against asset misappropriation. Instead, the complaint alleges, the defendants accessed the funds and misappropriated tens of millions of dollars for various purposes, including manipulation of the market for the crypto asset, business expenses, investments in unrelated companies, and personal use. The complaint charges defendants with violating the registration and anti-fraud provisions of the Securities Act of 1933 and the anti-fraud provisions of the Securities Exchange Act of 1934.

    Securities Federal Issues Venture Capital Risk Management Digital Assets

  • FinCEN announces NPRM for new regulation to combat CVC mixing

    Agency Rule-Making & Guidance

    On October 19, FinCEN announced a notice of proposed rulemaking (NPRM) that identifies international Convertible Virtual Currency mixing (CVC) as a primary money laundering concern. In its NPRM, FinCEN highlighted the prevalence of illicit actors, including Hamas and Palestinian Islamic Jihad, who use CVC mixing to fund their illegal activity, and how increased transparency can combat their efforts. According to FinCEN, CVC mixing is used to conceal the source, destination, or amount involved in transactions. The proposed rule would require covered financial institutions to collect records of, and report suspicious CVC mixing transactions, as defined, to FinCEN within 30 days of initial detection. The proposed rule would not require covered financial institutions to source additional report information from the transactional counterparty, adding that the information required for the report is similar to information already collected by financial institutions. FinCEN also noted this is its first ever use of its authority under Section 311 of the USA PATRIOT Act.

    FinCEN invites comments for the proposed rule, including responses to questions addressing the impact of the proposed rule, definitions, reporting, and recordkeeping. Comments must be received by January 22, 2024, and they can be submitted via instructions found in the announcement.

    Agency Rule-Making & Guidance Federal Issues FinCEN Cryptocurrency Patriot Act Financial Crimes Digital Assets

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