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OCC releases bank supervision operating plan for FY 2024
On September 28, the OCC’s Committee on Bank Supervision released its bank supervision operating plan for fiscal year 2024. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) asset and liability management; (ii) credit; (iii) allowances for credit losses; (iv) cybersecurity; (v) operations; (vi) digital ledger technology activities; (vii) change in management; (viii) payments; (ix) Bank Secrecy Act/AML compliance; (x) consumer compliance; (xi) Community Reinvestment Act; (xii) fair lending; and (xiii) climate-related financial risks.
Two of the top areas of focus are asset and liability management and credit risk. In its operating plan the OCC says that “Examiners should determine whether banks are managing interest rate and liquidity risks through use of effective asset and liability risk management policies and practices, including stress testing across a sufficient range of scenarios, sensitivity analyses of key model assumptions and liquidity sources, and appropriate contingency planning.” With respect to credit risk, the OCC says that “Examiners should evaluate banks’ stress testing of adverse economic scenarios and potential implications to capital” and “focus on concentrations risk management, including for vulnerable commercial real estate and other higher-risk portfolios, risk rating accuracy, portfolios of highest growth, and new products.”
The plan will be used by OCC staff to guide the development of supervisory strategies for individual national banks, federal savings associations, federal branches and agencies of foreign banking organizations, and certain identified third-party service providers subject to OCC examination.
The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes has previously covered here.
NYDFS updates criteria for virtual currency regulation
Adrienne Harris, Superintendent of the New York State Department of Financial Services (“DFS”) issued an update on the VOLT initiative, an ongoing project to enhance DFS’s role as a virtual currency regulator. Superintendent Harris published proposed guidance adopting enhanced criteria for procedures to list and de-list virtual currencies as well as updated guidance for designating virtual currencies to the DFS “Greenlist.”
The new General Framework for Greenlisted Coins sets (i) heightened risk assessment standards for coin-listing policies and enhances requirements for consumer-facing products; and (ii) new requirements associated with coin-delisting policies. Under the new guidance, a virtual currency entity that seeks to self-certify coins must create a coin-listing policy and may not self-certify any coins until such possibly has a written approval from DFS. A coin-listing policy must contain and be based on a robust governance structure; comprehensive risk assessment; consideration of factors to identify and mitigate risks involved in each coin and its uses; and policies and procedures to conduct continued monitoring of the coin to ensure consistent safety and soundness compliance.
The new framework does not require prior approval from the DFS to list coins included on the Greenlist, but does require virtual currency entities that choose to list such coins to (i) provide advance notification to DFS and (ii) have a DFS-approved coin-delisting policy.
SEC conducts its first-ever NFT enforcement again
On August 28, the SEC entered an order against a Los Angeles-based media and entertainment company charging them with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). According to the order, the company offered and sold different tiers of NFTs to hundreds of investors between October and December of 2021, and ultimately raised approximately $30 million from the sales. The SEC alleged that the company encouraged potential investors to purchase the unregistered NFTs in return for an investment in the business, promising “tremendous value” to the purchasers if the company was successful in its attempts to “build the next Disney” and launch other creative projects. The order found that the NFTs were ultimately investment contracts and therefore securities, and that the company subsequently violated federal securities laws by offering and selling crypto assets in an unregistered securities offering that was not otherwise exempt from registration requirements.
The SEC noted that all securities, in whatever form, are required to be registered and that when companies fail to register securities, “investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.” The company did not admit or deny the findings set forth in the order but agreed to cease-and-desist from violating registration provisions of the 1933 Act and pay a combined penalty of over $6.1 million in fees. The order also establishes a “Fair Fund” to return money to investors who paid to purchase NFTs.
On the same day, the SEC released a statement from Republican commissioners, Hester M. Peirce and Mark T. Uyeda, underscoring the significance of the commission’s first NFT enforcement action. “People are experimenting with a lot of different uses of NFTs,” said the commissioners in their partial dissents. “Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty.” The commissioners further criticized the SEC’s failure to provide guidance on NFTs when they first started proliferating and raised several questions.
District Court splits order against crypto platform
On August 11, a split U.S District Court of the Southern District of New York partially granted and partially denied a crypto platform’s (defendant) motion to dismiss most charges for failure to state a claim upon which relief can be granted. Four months after plaintiff opened an account with defendant, a hacker siphoned approximately $5 million worth of Bitcoin from the account. Between the time the hacker accessed the account and withdrew the Bitcoin, plaintiff contacted the platform about being locked out of the account, to which defendant responded that the password change email could be in plaintiff’s spam folder. The complaint alleged that had the company locked the account, plaintiff would still have access to their Bitcoin, and that the platform has a duty to protect its customers’ assets and accounts. Among other things, the complaint also alleged that the platform violated the Electronic Fund Transfer Act (EFTA), the New York General Business Law, and the Michigan Consumer Protection Act.
In its motion to dismiss, defendant argued that Regulation E does not apply to the platform because the EFTA language does not explicitly cover cryptocurrency and only references denominations of the U.S. dollar. Although a separate case against the same defendant determined EFTA did apply to the platform since the statute’s “funds” reference could reasonably cover cryptocurrency (covered by InfoBytes here), the judge’s order focused on, “electronic fund transfer”. The court more closely considered the purpose of the account, expressing uncertainty as to whether it was for personal, family, or household purposes. The court found that the definition of an “account” under EFTA does not include plaintiff’s electronic fund transfer account which was established for investment purposes. In the previous case against the same defendant, the court held that the defendant deceived the users regarding its security measures, but the judge presiding over this case disagreed. The court cut the claims of misrepresentation finding that plaintiff failed to allege that the statements were false at the time they were made. The order denies two claims: (i) that the defendant misrepresented its security level; and (ii) that the defendant failed to meet EFTA requirements and its implementing Regulation E, because investment purposes accounts are precluded from the statute’s protections. The court granted the other four counts.
Senators ask Treasury, White House for answers on North Korea’s crypo-crime funding
On August 4, Senators Elizabeth Warren (D-MA), Tim Kaine (D-VA), and Chris Van Hollen (D-MD) sent a letter to the White House National Security Advisor and the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence regarding their concerns over North Korea’s use of cyberattacks and cryptocurrency theft to skirt international sanctions and embargos. The letter urges the Treasury to provide details on its plan to stop North Korea from using digital assets to evade sanctions and continue with the development of nuclear weapons and ballistic missiles. The senators noted that a UN report found that in 2016, “North Korea exhibited a ‘clear shift’ to attacking cryptocurrency exchanges for the purposes of ‘generating financial revenue’” that is difficult to trace and subject to less government oversight. The letter highlights the effects of the cyberattacks, including how they have generated about $2 billion, which is then used to fund the North Korean military. The extent of the cybercrime and cryptocurrency thefts show its use is “key” to the regime’s survival, and notes that the regime has a workforce of thousands of IT workers who operate out of many different countries. The senators asked for a response to their five questions by August 16.
SEC charges companies, founder for operating an unregistered exchange
On July 31, the SEC filed a complaint in the U.S. District Court for the Eastern District of New York against three cryptocurrency trading platforms and their founder for allegedly conducting unregistered offerings of crypto asset securities that raised more than $1 billion in crypto assets from investors. The SEC also claimed that the founder and one of the platforms fraudulently misappropriated at least $12 million of offering proceeds to purchase luxury goods including sports cars, watches, and diamonds.
According to the SEC’s complaint, as early as 2018 the defendants began marketing what they claimed to be the first high-yield “blockchain certificate of deposit,” and promoting tokens as an investment designed to make people “rich.” It is further alleged that from at least December 2019 through November 2020, the defendants offered and sold tokens in an unregistered offering and collected more than 2.3 million cryptocurrency units through “recycling” transactions that enabled the defendants to surreptitiously gain control of more tokens.
The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, penalties, and other equitable relief.
ETF, founder to pay SEC $4.4M for misleading trustees
On August 1, the SEC settled for $4.4 million with an investment adviser and entities he founded (collectively, the “respondents”) on charges that they breached both their duty of care and duty of loyalty to their client, an exchange traded fund (ETF), in violation of the Investment Advisers Act and the Investment Company Act. As alleged in the settlement, the respondents needed funds to settle a substantial private litigation judgment, and to secure the funds to do so, committed to keep the client’s security lending business with the company providing the financing to the respondents. However, there were better offers on better terms from other securities lenders that could have provided millions more in revenue to the client, and the respondents did not disclose this information to their client or to the client’s independent trustees. In addition to the civil penalties, without admitting or denying the findings, respondents agreed to various non-monetary penalties, including cease-and-desist orders, an associational bar for the investment adviser and censures for the respondent entities.
EU-U.S. release statement on Joint Financial Regulatory Forum
On July 20, participants in the U.S.-EU Joint Financial Regulatory Forum, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, issued a joint statement regarding the ongoing dialogue that took place from June 27-28, noting that the matters discussed during the forum focused on six themes: “(1) market developments and financial stability risks; (2) regulatory developments in banking and insurance; (3) anti-money laundering and countering the financing of terrorism (AML/CFT); (4) sustainable finance and climate-related financial risks; (5) regulatory and supervisory cooperation in capital markets; and (6) operational resilience and digital finance.”
Participants acknowledged that the financial sector in both the EU and the U.S. is exposed to risk due to ongoing inflationary pressures, uncertainties in the global economic outlook, and geopolitical tensions as a result of Russia’s war on Ukraine. During discussions, participants emphasized the significance of strong bank prudential standards, effective resolution frameworks, and robust supervision practices. They also stressed the importance of international cooperation and continued dialogue to monitor vulnerabilities and strengthen the resilience of the financial system. Participants took note of recent developments relating to, among other things, recent bank failures, digital finance, the crypto-asset market, and the potential adoption of central bank digital currencies.
FSB finalizes crypto framework
On July 17, the Financial Stability Board (FSB) released its global regulatory framework for promoting comprehensive, international consistency of regulatory and supervisory approaches for crypto-asset activities and stablecoins, while also supporting responsible innovations potentially brought by technological changes. Based on the principle of “same activity, same risk, same regulation,” FSB’s framework consists of two distinct sets of recommendations. The first set of recommendations focuses on regulating, supervising, and overseeing crypto-asset activities and markets at a high level. The recommendations establish a global regulatory baseline for promoting a framework that is technology-neutral and focuses on underlying activities and risks (FSB notes that some jurisdictions may choose to take more restrictive regulatory measures). The second set provides revised high-level recommendations specifically for the regulation, supervision, and oversight of “global stablecoin” arrangements. The recommendations also seek to promote consistent and effective regulation, supervision and oversight of global stablecoin arrangements across jurisdictions to address potential financial stability risks posed at both the domestic and international level, while further “supporting responsible innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.”
The final recommendations “take account of lessons from events of the past year in crypto-asset markets, as well as feedback received during the public consultation of the FSB’s proposals,” the announcement said, noting that central bank digital currencies are not subject to these recommendations. The FSB and sectoral standard-setting bodies (SSBs) will continue to coordinate work to promote the development of a comprehensive and coherent global regulatory framework that is appropriate for the risks associated with crypto-asset market activities, including providing more detailed guidance through SSBs and monitoring and public reporting.
Agencies charge crypto platform and former executives
On July 13, the FTC announced a proposed settlement to resolve allegations that a crypto platform engaged in unfair and deceptive acts or practices in violation of the FTC Act. The FTC also alleges that the defendants violated the Gramm-Leach-Bliley Act by acquiring customer information from a financial institution regarding someone else by providing false or misleading statements. The New Jersey-based crypto company offers various cryptocurrency products and services to customers, such as interest-bearing accounts, personal loans backed by cryptocurrency deposits, and a cryptocurrency exchange. On the heels of its bankruptcy filing in July 2022, the FTC lodged a complaint in federal court alleging that three former executives falsely promised that deposits would be “safer” than bank deposits and always available for withdrawal, and that the platform posed “no risk” or “minimal risk.”
The proposed stipulated order imposes a $4.72 million judgment against the corporate defendants, which is suspended based on their financial condition. The order also bans the corporate defendants from, among other things, “advertising, marketing, promoting, offering, or distributing, or assisting in the advertising, marketing, promoting, offering, or distributing of any product or service that can be used to deposit, exchange, invest, or withdraw assets, whether directly or through an intermediary.”
Other agencies also took action against the company and its former CEO on the same day, including the SEC, which alleges the company sold unregistered crypto asset securities in one of its program offerings. The SEC’s complaint further alleges the company made false and misleading statements and engaged in market manipulation. Additionally, the DOJ unsealed an indictment charging the former CEO and the company’s former chief revenue officer with conspiracy, securities fraud, market manipulation, and wire fraud for illicitly manipulating the price of the company’s token. Additionally, the CFTC filed a civil complaint charging the company and former CEO with fraud and material misrepresentations in connection with the operation of the company’s digital asset-based finance platform. The CFTC alleges the company operated as an unregistered commodity pool operator (CPO), and its former CEO operated as an unregistered associated person of a CPO. The complaint also accuses the former CEO of violating the Commodity Exchange Act and CFTC regulations, among other things. According to the press release, the company agreed to resolve the complaint, while the former CEO is continuing litigation.