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California attorney general settles with crypto-asset company
On September 4, California Attorney General (AG) Rob Bonta announced a settlement with a cryptocurrency trading platform for allegedly failing to comply with state cryptocurrency laws. According to the settlement, the company failed to allow customers to withdraw cryptocurrency from accounts and failed to disclose certain aspects of its trading and order handling procedures. Under the terms of the settlement, the company has agreed, among other things, to (i) permit customers to withdraw their cryptocurrency assets to external wallets in accordance with applicable law; (ii) ensure the accuracy of written representations to customers about trading and order handling practices; and (iii) update its customer agreement to address potential delays in transaction settlements.
Additionally, the company has agreed to pay $3.9 million allocated to: (i) fees and costs incurred by the AG in connection with the investigation; (ii) fees and costs to be incurred in connection with monitoring and enforcing the settlement agreement; (iii) any litigation relating to monitoring and enforcing the settlement; and (iv) all potential claims to be released by the AG under the settlement.
CFTC awards over $1M to whistleblower
On August 8, the CFTC announced a $1+ million award to a whistleblower whose original information and voluntary assistance led to a successful CFTC digital assets-related enforcement action. According to the redacted order, the information from the whistleblower, who was the first, prompted the investigation’s start and led to the charges. The first whistleblower’s information also led to the discovery of the misconduct at issue, although it was “somewhat limited.” Conversely, the commission recommended denying the award applications of two other whistleblowers because the information they provided did not lead to the charges. Additionally, the commission also recommended denying the first whistleblower’s application for a related action award with respect to another agency because the other action was not based on the whistleblower’s original information.
SEC files complaint against a digital platform for unregistered offer and sales of securities and acting as unregistered broker
Recently, the SEC released its complaint against a digital platform that acted as an unregistered broker and seller of crypto-asset securities transactions. The SEC alleges that since 2020 the platform brokered over 36 million crypto-asset transactions between investors and third parties, collecting over $250 million in fees. Since at least 2023, the platform allegedly engaged in unregistered offers and sales of securities. The SEC alleged the platform was not registered as a broker despite operating as one in violation of Section 15(a) of the Securities Exchange Act of 1934. Additionally, the SEC alleged the platform also engaged in unregistered offers and sales of securities in violation of Sections 5(a) and (c) of the Securities Act of 1933. Further, the SEC alleged the platform acted as an underwriter and distributor of securities. The SEC seeks (i) to permanently enjoin the platform from violating these securities laws and (ii) payment of civil money penalties.
Florida appellate court reverses crypto-asset company’s money license suspension
On May 22, a Florida appellate court set aside the state’s Office of Financial Regulation (OFR) Emergency Suspension Order (ESO), suspending a Florida-based digital assets company’s (Petitioner) money services business (MSB) license. The OFR issued the ESO because Petitioner’s controlling shareholder and CEO had entered into federal plea agreements for BSA/AML violations. Under Fla. Stat. § 120.60(6), the OFR “may” suspend an MSB’s license if the OFR finds the licensee posed an “immediate serious danger” to “public health, safety, or welfare.” However, the OFR may only take such action by procedure that would be “fair under the circumstances,” and must describe its “reasons” for concluding that the procedure was fair. Petitioner argued that the ESO, among other things, did not meet this standard, and the Court agreed.
The OFR’s ESO did not state specific reasons for concluding that its procedures were fair, and instead merely relied on § 120.60(6) for blanket authorization. According to the court, the ESO should have offered an explanation as to why less drastic measures were insufficient or acknowledged the potential harm to Florida consumers. To comply with the ESO, for example, Petitioner would need to liquidate all digital asset holdings for all Florida customers, with a total of 170,000 accounts, which would threaten financial harm and might create “unplanned and extensive” tax liabilities to customers. Because the ESO did not discuss the OFR’s reasoning or alternative remedies, the court held the ESO was not fair under the circumstances. As such, the court set aside the ESO, but stayed its order pending timely and authorized motions for rehearing.
DFPI annual report highlights consumer protection efforts and upcoming regulations
On April 25, the California DFPI released its Annual Report of Activity under the California Consumer Financial Protection Law (CCFPL), highlighting investigations, public actions, and consumer outreach efforts under the CCFPL. According to the report, the DFPI (i) experienced a 70 percent increase in CCFPL complaints, which predominantly involved crypto assets and debt collectors; (ii) opened 734 CCFPL-related investigations and issued 181 public CCFPL actions; (iii) launched the Crypto Scam Tracker and a new consumer complaints portal; and (iv) advanced two rules, including unlawful, unfair, deceptive, or abusive acts and practices (UUDAAP) protections for small businesses and new registration requirements (pending final approval by the Office of Administrative Law) for earned wage access, debt settlement services, debt relief services, and private postsecondary education financing products.
The report emphasized that the new regulations specified that optional payments, such as tips, collected by California Financing Law (CFL)-licensed lenders would be considered charges under the law. According to the DFPI, these updates will reinforce the CFL by blocking potential loopholes and ensuring compliance among CFL-licensed lenders. Once these regulations would be approved, DFPI will oversee these financial service providers. Upon adoption, DFPI says it will be a pioneer in defining “earned wage access” as loans and regulating income advance services and the treatment of tips as charges, all through regulatory measures rather than statutory enactment.
UK financial regulators issue new authority on securities sandbox
On April 3, the U.K.’s Financial Conduct Authority and the Bank of England released a consultation paper seeking comments on their proposal to implement the Digital Securities Sandbox (DSS), a new regime for financial firms to work on a testing ground for new technologies regarding digital assets. The goal of this testing ground would allow these firms to better issue, trade, and settle digital securities. The U.K. regulators believed that using securities on distributed ledgers (i.e., digital securities) has the potential to consolidate trade functions and reduce settlement times, reducing risk and streamlining processes. The DSS would oversee developing financial technologies, such as distributed ledger technology (DLT), during security trading. The three aims of the DSS would include promoting a safe and efficient financial system by removing potential barriers, protecting financial stability using DLT, and promoting market integrity. The securities regulated by the DSS include equities, bonds, money market instruments, and emissions allowances; however, unbacked cryptocurrencies (e.g., bitcoin) would remain outside the scope. The first sandbox entrants are expected after fall 2024.
South Dakota enacts new money transmission law, aligning the law to the Money Transmission Modernization Act
Recently, the Governor of South Dakota, Kristi Noem, signed into law SB 58, which amended and repealed many parts of the state’s money transmission law enacted in 2023 to bring the law more into alignment with a model Money Transmitter Model Law. South Dakota was one of several states that have enacted the model law since 2022 (covered by InfoBytes here, here, here, and here), to harmonize the licensing and regulation of money transmitters between states.
Among many other new provisions, the Act defined “money” to mean a “medium of exchange that is authorized or adopted by the United States or a foreign government” but excluded any central bank digital currency. Additionally, the Act provided for several exemptions, such as the “agent of a payee” exemption, which exempted an agent who collects and processes payment from a payor to a payee for goods and services other than money transmission itself from the Act’s coverage, under certain specified circumstances.
The Act also imposed a licensing regime on persons engaged in the business of money transmission and authorizes and encourages the South Dakota Director of the Division of Banking (Director) to coordinate the licensing provisions with other states and utilize the Nationwide Multistate Licensing System for the license applications, maintenance, and renewals. SB 58 amended the required surety bond amount from $100,000 to $500,000, to the greater of $100,000 or an amount equal to the licensee’s average daily money transmission liability in South Dakota for the most recent three-month period, up to a maximum of $500,000, or if the licensee’s tangible net worth exceeds 10% of total assets, $100,000.
Once a license application is completed, the Director will have 120 days to approve or deny the application. In addition to the license application process, the Act also outlined the criteria for renewing, maintaining, and changing control of the license, as well as the licensee’s responsibility to keep records and maintain permissible investments. Notably, if a licensee is transmitting virtual currencies, then the licensee must “hold like-kind virtual currencies of the same volume as that held by the licensee but that is obligated to consumers” instead of the permissible investments otherwise listed under the Act. The Act will go into effect on July 1.
Wyoming SF 96 amends regulations for banks offering custodial or fiduciary services for digital assets
On March 15, the Governor of Wyoming signed SF 96 (the “Act”), which amended regulations for banks offering custodial or fiduciary services for digital assets, made conforming adjustments, and set an effective date. The Act clarified the commissioner’s ability to petition for discharge of receivership duties at the commencement of a bankruptcy proceeding. With respect to digital asset custodial services, the Act included two new provisions which detailed how (i) a bank will be permitted to offer custody services for stablecoin reserves as long as these services align with the guidelines of the Act and adhere to the commissioner's rules and regulations; and (ii) a supervised trust company chartered within Wyoming will be authorized to offer custodial services for digital assets, provided that it would meet the requirements of the Act and follow the commissioner's rules and regulations. The Act will go into effect on July 1.
FDIC Vice Chair delivers remarks on tokenization
On March 11, FDIC Vice Chairman Travis Hill delivered prepared remarks on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues.” The speech addressed the evolution of money and payment systems, focusing on the recent innovation of tokenizing commercial bank deposits and other assets and liabilities. Hill distinguished tokenization from assets like Bitcoin and Ether: “tokenization involves a representation of ‘real-world assets’ on a distributed ledger, including… commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Hill highlighted the potential benefits of tokenization, such as improved efficiency in payments and settlements, 24/7/365 operations, programmability, atomic settlement (the settlement, or the act of transferring ownership of an asset from seller to buyer, combining instant and simultaneous settlements) and the creation of an immutable audit trail. He also mentioned that these innovations could streamline complex processes like cross-border transactions and bond issuances, offering notable advantages over traditional banking systems.
The speech also acknowledged challenges and risks associated with tokenization, including technical, operational, and legal uncertainties. Questions remain about the structure of the future financial system, interoperability between different blockchains, and the legal implications of transferring ownership via tokens, Hill added.
Regarding the regulatory approach to digital assets and tokenization, Hill expressed the need for as much clarity as possible, even in areas whether the technology is evolving quickly. For example, Hill noted that “it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should… explain how and why.”
Department of Energy discontinues crypto mining survey following a settlement agreement
On March 1, a cryptocurrency company (plaintiff) and the U.S. Department of Energy submitted a settlement agreement to the U.S. District Court for the Western District of Texas to discontinue an emergency crypto mining survey once approved by the Office of Management and Budget.
According to the settlement agreement, the Department of Energy initiated an emergency three-year collection of a Cryptocurrency Mining Facilities Survey in January, which the plaintiff claimed did not comply with various statutory and regulatory requirements for the emergency collection of information. Following the court’s approval of the plaintiff’s temporary restraining order, which protected plaintiffs from completing the survey issued by the Department of Energy and protected any information they may have already submitted, the Department of Energy discontinued its emergency collection, and said it will proceed through notice-and-comment procedures for approval of any collection of information covering such data. As a result of the discontinuation of the emergency collection request, no entity or person is required to respond to the survey.
As part of the settlement agreement, the Department of Energy will destroy any information it had already received from survey responses. In addition to a $2,199.45 payment for the plaintiffs’ litigation expenses, the Department of Energy also agreed to publish a new Federal Register notice of a proposed collection of information and withdraw its original notice.