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Financial Services Law Insights and Observations


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  • SEC opens comment period on defining “exchange”

    Agency Rule-Making & Guidance

    On April 14, the SEC reopened the comment period on proposed amendments to the statutory definition of “exchange” under Exchange Act rule 3b-16, which now includes systems that facilitate the trading of crypto asset securities. (See also SEC fact sheet here.) The comment period was reopened in response to feedback requesting information about how existing rules and the proposed amendments would apply to systems that trade crypto asset securities and meet the proposed definition of an exchange, or to trading systems that use distributed ledger or blockchain technology, including such systems characterized as decentralized finance (DeFi). The SEC also provided supplement information and economic analysis for systems that would now fall under the new, proposed definition of exchange. The reopened comment period allows an opportunity for interested persons to analyze and comment on the proposed amendments in light of the supplemental information. Comments are due 30 days after publication in the Federal Register.

    “[G]iven how crypto trading platforms operate, many of them currently are exchanges, regardless of the reopening release we’re considering today,” SEC Chair Gary Gensler said. “These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods. That’s the definition of an exchange—and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.” He added that crypto-market investors must receive the same protections that the securities laws afford to all other markets. Commissioners Mark T. Uyeda and Hester M. Peirce voted against reopening the comment period. Uyeda cautioned against expanding the definition of an “exchange” in an “ambiguous manner,” saying it could “suppress further beneficial innovation.” Peirce also dissented, arguing that the proposal stretches the statutory definition of an “exchange” beyond a reasonable reading in an attempt to “reach a poorly defined set of activities with no evidence that investors will benefit.”

    Agency Rule-Making & Guidance Federal Issues Digital Assets Securities SEC Securities Exchange Act Decentralized Finance Blockchain Cryptocurrency Fintech

  • Treasury recommends stronger DeFi supervision

    Financial Crimes

    On April 6, the U.S. Treasury Department published a report on illicit finance risks in the decentralized finance (DeFi) sector, building upon Treasury’s other risk assessments, and continuing the work outlined in Executive Order 14067, Ensuring Responsible Development of Digital Assets (covered by InfoBytes here).

    Written by Treasury’s Office of Terrorist Financing and Financial Crimes, in consultation with numerous federal agencies, the Illicit Finance Risk Assessment of Decentralized Finance is the first report of its kind in the world. The report explained that, while there is no generally accepted definition of DeFi, the term has broadly referred to virtual asset protocols and services that allow for automated peer-to-peer transactions through the use of blockchain technology. Used by a host of illicit actors to transfer and launder funds, the report found that “the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT [anti-money laundering and countering the financing of terrorism] obligations.” These obligations include establishing effective AML programs, assessing illicit finance risks, and reporting suspicious activity, the report said.

    The report made several recommendations for strengthening AML/CFT supervision and regulation of DeFi services, such as “closing any identified gaps in the [Bank Secrecy Act (BSA)] to the extent that they allow certain DeFi services to fall outside the scope of the BSA’s definition of financial institutions.” The report also recommended, “when relevant,” the “enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations,” and suggested continued research and engagement with the private sector on this subject.

    In addition, the report pointed to a lack of implementation of international AML/CFT standards by foreign countries, “which enables illicit actors to use DeFi services with impunity in jurisdictions that lack AML/CFT requirements,” and commented that “poor cybersecurity practices by DeFi services, which enable theft and fraud of consumer assets, also present risks for national security, consumers, and the virtual asset industry.” To address these concerns, the report recommended “stepping up engagements with foreign partners to push for stronger implementation of international AML/CFT standards and advocating for improved cybersecurity practices by virtual asset firms to mitigate these vulnerabilities.” The report seeks input from the public sector to inform next steps.

    Financial Crimes Agency Rule-Making & Guidance Of Interest to Non-US Persons Department of Treasury Anti-Money Laundering Combating the Financing of Terrorism Illicit Finance Decentralized Finance Supervision Bank Secrecy Act Digital Assets Fintech

  • FinCEN’s Das discusses agency’s priorities

    Financial Crimes

    On December 6, FinCEN acting Director Himamauli Das spoke before the ABA/ABA Financial Crimes Enforcement Conference about how FinCEN is addressing new threats, new innovations, and new partnerships, in addition to its efforts to implement the AML Act. Das first began by speaking about beneficial ownership requirements of the Corporate Transparency Act (CTA). He noted that a final rule was issued in September, which implemented the beneficial ownership information reporting requirements (covered by InfoBytes here). He also stated that a second rulemaking, concerning access protocols to the beneficial ownership database by law enforcement and financial institutions, may be released before the end of the year, and that work is currently underway on a third rulemaking concerning revisions to the customer due diligence rule. With regard to anti-corruption, Das noted that the agency has been working with the Biden administration, and highlighted three alerts issued by FinCEN in 2022 that highlight “the risks of sanctions and export controls evasion by Russian actors, including through real estate, luxury goods, and other high-value assets.” Das explained that the alerts “complement ongoing U.S. government efforts to isolate sanctioned Russians from the international financial system.”

    Transitioning into discussing effective AML/CFT programs, Das said that the “AML Act’s goal of a strengthened, modernized, and streamlined AML/CFT framework will ultimately play out over a series of steps as we implement all of the provisions of the AML Act.” He then described how the AML Act requires FinCEN to work with the FFIEC and law enforcement agencies to establish training for federal examiners in order to better align the examination process. He further noted that the AML/CFT priorities and their incorporation into risk-based programs as part of the AML Program Rule are “crucial” for providing direction to examiners on approaches that improve outcomes for law enforcement and national security.

    Das also highlighted the digital asset ecosystem as a key priority area for FinCEN and acknowledged that the area has seen “continuing evolution” since 2013 and 2019, when the agency released its latest related guidance documents on the topic. Das explained that FinCEN is taking a “close look” at the elements of its AML/CFT framework applicable to virtual currency and digital assets to determine whether additional regulations or guidance are necessary, which “includes looking carefully at decentralized finance and its potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT efforts.”

    Financial Crimes Department of Treasury FinCEN Digital Assets Of Interest to Non-US Persons Decentralized Finance Customer Due Diligence Corporate Transparency Act FFIEC Examination Anti-Money Laundering Combating the Financing of Terrorism

  • Treasury seeks to mitigate digital asset financial risks

    Federal Issues

    On November 18, Assistant Secretary for Terrorist Financing and Financial Crimes at the U.S. Department of Treasury Elizabeth Rosenberg spoke before the Crypto Council for Innovation. In her prepared remarks, Rosenberg discussed an Action Plan to Mitigate the Illicit Finance Risks of Digital Assets (the “Action Plan”), which, according to Rosenberg, is a roadmap for how the U.S. government, led by Treasury, will bring greater transparency to the digital asset sector. The Action Plan is issued pursuant to President Biden’s Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here). Rosenburg noted that the Action Plan identifies seven priority actions, including improving global anti-money laundering/countering the financing of terrorism (AML/CFT) regulation and enforcement, strengthening U.S. supervision of the virtual asset service providers sector, and engaging with the private sector. She emphasized that it is “critical” to work with the private sector, and between private sector entities, to detect and counter illicit finance. Rosenberg noted that to deepen Treasury’s insight, the agency released a Request for Comment (RFC) in September, seeking feedback on the Action Plan, the assessment of illicit financing risks, and opportunities to strengthen public-private collaboration.

    As previously covered by InfoBytes, the RFC also sought public feedback on AML/CFT regulation and supervision, global implementation of AML/CFT standards, and central bank digital currencies. Rosenberg discussed two issues addressed in the comment letters: (i) a need for regulatory clarity; and (ii) more public-private engagement. Specifically, she noted that “[m]any of the comments acknowledged that in the United States, virtual asset service providers are subject to a regulatory framework for AML/CFT and have sanctions obligations.” She further noted that “industry commenters identified specific areas, such as questions around decentralized finance (DeFi), where they could benefit from additional regulatory clarity or guidance.” Rosenberg also emphasized that Treasury wants to “ensure that safeguards are in place to promote the responsible development of virtual assets to maintain privacy and shield against arbitrary or unlawful surveillance.” She further noted that the goal and intention of Treasury “is not to deter the development of technologies that provide privacy for virtual asset transfers,” and that Treasury “welcome[s] opportunities to further engage with industry on how these technologies can both promote privacy while also mitigating illicit finance risks and complying with regulatory and sanctions obligations.”

    Federal Issues Digital Assets Financial Crimes Department of Treasury Cryptocurrency Decentralized Finance Anti-Money Laundering Combating the Financing of Terrorism

  • OCC says digital asset innovators must avoid another financial crisis

    Federal Issues

    On September 21, acting Comptroller of the Currency Michael J. Hsu spoke before the Blockchain Association to discuss similarities between the current growth of cryptocurrencies and decentralized finance (DeFi) and credit default swaps in the early 2000s. In prepared remarks, Hsu emphasized that while innovation is exciting and presents the opportunity for unlocking great potential—especially in areas relating to blockchain, distributed ledger technologies and DeFi—innovators and leaders have a responsibility to learn from the past to avoid repeating mistakes that led to the 2008 financial crisis. Noting that many people believe crypto/DeFi “can dramatically increase financial inclusion,” Hsu pointed to a poll showing that should it be proven that there is “fool’s gold” within the cryptocurrency space, the underbanked and non-Whites will bear the burden the most as they reportedly own more cryptocurrency than other consumers. Hsu instructed innovators to make sure financial innovation is anchored in purpose and actually serves to expand access to banking services and credit. He also highlighted the importance of speaking up and raising difficult and inconvenient questions to “help ensure better and more sustained innovation in the long term,” as well as having a straightforward explanation for how money is made and lost in the crypto/DeFi space. Hsu’s observations may signal increased scrutiny by the OCC of digital assets, including in the areas of risk management and safety, and soundness generally.

    Federal Issues OCC Digital Assets Cryptocurrency Decentralized Finance Fintech Bank Regulatory

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