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U.S.-EU release statement on Joint Financial Regulatory Forum
On March 24 and 25, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S.-EU Joint Financial Regulatory Forum to discuss topics of mutual interest, including those related to (i) “next steps” for Covid-19 recovery and for mitigating financial stability risks; (ii) “sustainable finance”; (iii) banking and insurance multilateral and bilateral engagement; (iv) capital market regulatory and supervisory cooperation; (v) regulatory and supervisory developments pertaining to financial innovation, including the importance of promoting ongoing “responsible innovation and international supervisory cooperation”; and (vi) anti-money laundering and countering the financing of terrorism (AML/CFT) issues, including “the potential for enhanced cooperation to combat money laundering and terrorist financing bilaterally and in the framework of [the Financial Action Task Force].” Participants also discussed possible responses to climate-related financial risks, as well as “the progress in their respective legislative and supervisory efforts to ensure a smooth transition away from LIBOR.”
Prudential regulators exploring how institutions use AI
On March 29, the FDIC, Fed, OCC, CFPB, and NCUA issued a request for information (RFI) seeking input on financial institutions’ use of artificial intelligence (AI), which may include AI-based tools and models used for (i) fraud prevention to identify unusual transactions for Bank Secrecy Act/anti-money laundering investigations; (ii) personalization of customer services; (iii) credit underwriting; (iv) risk management; (v) textual analysis; and (vi) cybersecurity. The RFI also solicits information on challenges financial institutions face in developing, adopting, and managing AI, as well as on appropriate governance, risk management, and controls over AI when providing services to customers. Additionally, the agencies seek input on whether it would be helpful to provide additional clarification on using AI in a safe and sound manner and in compliance with applicable laws and regulations. According to FDIC FIL-20-2021, while the agencies support responsible innovation by financial institutions and believe that new technologies, including AI, have “the potential to augment decision-making and enhance services available to consumers and businesses, . . . identifying and managing risks are key.” Comments on the RFI are due 60 days after publication in the Federal Register.
Virginia issues new guidance for electronic notaries
On March 11, the Virginia secretary of state will require every electronic notarial certificate to include: (i) county/city within Virginia where the electronic notary public was physically located at the time the notarization was performed; and (ii) whether the notarization was done in person or by remote notarization. The requirement follows the passage of HB2064, which amends and reenacts certain provisions of the Virginia Code, relating to electronic notary and remote notarization. HB2604 is effective March 11, 2021.
New York warns of “extreme risk” with cryptocurrency trading
On March 1, the New York attorney general issued two alerts warning investors about the “extreme risk” facing New Yorkers investing in virtual or “crypto” currency. The first investor alert directs investors to take caution when investing in virtual currencies because, among other reasons, virtual currency trading platforms provide limited protection from fraud as “[m]ost platforms are subject to little or no oversight.” The second industry alert is directed towards broker-dealers, salespersons, and investment advisors, and provides a reminder that “people and entities dealing in virtual or ‘crypto’ currencies that are commodities or securities in the state of New York, and who do not qualify for an exemption, must register with the Office of the Attorney General,” and that failing to do so will expose them to both civil and criminal liability. The alerts follow an agreement entered last month (covered by InfoBytes here) between the AG and the operators of a virtual currency trading platform and a “tether” virtual currency issuer, along with their affiliated entities, which resolved allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds.
New York reaches $18.5 million settlement with virtual currency operators
On February 23, the New York attorney general announced a $18.5 million settlement with the operators of a virtual currency trading platform and the “tether” virtual currency issuer, along with their affiliated entities, to resolve allegations that the companies deceived clients by overstating available reserves and hiding $850 million in co-mingled client and corporate funds. According to the AG, one of the companies operated an online trading platform for exchanging and trading virtual currency, which allowed users to store virtual or fiat currency, convert virtual currency into fiat currency, and withdraw funds, while the “tether” virtual currency issuer represented that the “stablecoin” it issued was backed one-to-one by U.S. dollars in reserve. However, an AG investigation found, among other things, that the companies made false statements about the backing of the stablecoin and moved hundreds of millions of dollars between the two companies in an attempt to conceal massive losses, and that the stablecoins were, in fact, no longer backed one-to-one by U.S. dollars in reserve, contrary to the company’s representations. The AG also noted that a national bank, which acted as the correspondent bank for the companies and was used to fill orders for U.S. dollars, elected to stop processing U.S. dollar wire transfers from the companies, forcing the companies to find alternative banking arrangements and ultimately leading to a liquidity crisis. Further, the AG stated that the companies failed to disclose these issues to the public. In 2019, a court order enjoined the companies from engaging in activities that may have defrauded investors trading in cryptocurrency (covered by InfoBytes here).
Under the terms of the settlement agreement, the companies and related entities must, among other things, (i) discontinue any further trading activity in the state; (ii) pay $18.5 million in monetary relief; and (iii) take steps to increase transparency, including maintaining internal controls and procedures designed to ensure that their products and services are not used by New York persons and entities, providing compliance reports to the AG, and providing a list of utilized payment processors.
CSBS announces new nonbank cybersecurity exam tool
On February 24, during the Nationwide Multistate Licensing System Annual Conference, the Conference of State Bank Supervisors (CSBS) released an updated cybersecurity examination tool designed for nonbank financial company supervision. The tool is intended for state regulators to use during examinations, and CSBS encourages companies to use it monitor cybersecurity health between examinations. The tool is the newest addition to state regulators’ ongoing efforts to help nonbank companies—including fintech and payment companies, money transmitters, and mortgage companies—protect, mitigate, and respond to cyber threats. While the current tool is “considered a baseline assessment for less complex and lower risk institutions,” CSBS notes that an additional tool is currently under development for release in Q2 2021 for more complex institutions.
FDIC announces first-ever chief innovation officer
On February 16, the FDIC announced the appointment of Sultan Meghji as the agency’s first Chief Innovation Officer. Prior to the FDIC, Meghji was the co-founder of a financial technology firm that provides, “secure, cloud-native, artificial intelligence-based software for community banks and credit unions.” Additionally, Mr. Meghji served as an advisor to the U.S. Treasury, the Group of Seven (G7), the OCC, and the FBI in the areas of cybersecurity, quantum computing, and artificial intelligence. In accepting the position, Meghji stated that his mission “is to engage both public and private sector partners to ensure the financial system of the future is innovative, resilient, and equitable.”
Yellen addresses “digital divide”
On February 9 and 10, the U.S. Treasury Department hosted its U.S. Financial Sector Innovation Policy Roundtable, which convened public and private sector experts “to exchange views for collaborating on policy issues and innovative technologies that support global financial integrity, while fostering economic recovery, competitiveness, and financial inclusion.” Treasury Secretary Yellen delivered the opening remarks touching on the enactment of the Anti-Money Laundering Act, which was included in the National Defense Authorization Act (NDAA) for Fiscal Year 2021 (covered by InfoBytes here), noting that the law is timely as “we’re living amidst an explosion of risk related to fraud, money laundering, terrorist financing, and data privacy.” Moreover, due to the Covid-19 pandemic, the world has seen “more sophisticated” cyberattacks. Yellen asserts that the pandemic has highlighted the “digital divide” in the country and that “millions of people remain disconnected from the financial system.” Similar to broadband deserts, there are “financial services deserts,” as shown the Paycheck Protection Program’s issues with reaching small businesses in communities of color. Yellen concluded that “just as much as we need responsible innovation, we also need equitable innovation; tools that can help bring the benefits of the financial system and modern IT to more people.”
California Department of Real Estate reissues FAQs regarding licensing process
On February 10, the California Department of Real Estate reissued FAQs regarding licensing and examination processes of the department during Covid-19. The FAQs respond to questions regarding, among other things, capacity limitations at exam centers, how to reschedule a cancelled exam, the best way to complete a renewal of an expiring real estate license, completing continuing education requirements, how the shelter in place orders affect the fingerprinting process, and whether the DRE will accept electronic signatures on licensing documents.
OCC conditionally approves conversion of cryptocurrency trust company
On February 5, the OCC announced that it conditionally approved a Washington state-chartered trust company’s application to convert to a national trust bank. According to the OCC, the trust company—which will provide cryptocurrency custody services for clients in a fiduciary capacity—“is currently in the organizational phase of development and will have up to 18 months to meet the terms of its conditional approval before it converts to a national trust bank and begins to operate.” By receiving a national trust bank charter, the trust company will be allowed to provide nationwide services to customers through offices in Seattle, Boston, and New York, and over the internet. The trust company also intends to expand its custody services to support additional types of digital assets beyond cryptocurrencies, including certain tokens and stable coins, and plans to eventually offer, among other things, client-to-client trading and lending platforms. The OCC notes that approval of the conversion is subject to several conditions, including that the trust company “not engage in activities that would cause it to be a ‘bank’ as defined in section 2(c) of the Bank Holding Company Act.”