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Treasury seeks to advance CBDCs
On March 1, Treasury Undersecretary for Domestic Finance Nellie Liang announced that the Treasury Department will lead a new senior-level working group to advance work on a U.S. central bank digital currency (CBDC). As previously discussed in a Treasury report released last September on the future of money and payments (covered by InfoBytes here), Treasury was called to lead an interagency working group to complement work undertaken by the Federal Reserve Board to consider the implications of a U.S. CBDC. The working group will consist of leaders from Treasury, the Fed, and White House offices, including the Council of Economic Advisors, National Economic Council, National Security Council, and Office of Science and Technology Policy. In the coming months the working group “will begin to meet regularly to discuss a possible CBDC and other payments innovations,” Liang said during a workshop titled “Next Steps to the Future of Money and Payments.” The working group will focus on three main policy objectives: (i) how a U.S. CBDC would affect U.S. global financial leadership; (ii) potential national security risks posed by a CBDC; and (iii) the implications for privacy, illicit finance, and financial inclusion if a CBDC is created.
To support discussions on a possible CBDC and other payment innovations, Liang said the working group will develop an initial set of findings and recommendations. Those findings and recommendations may relate to whether a U.S. CBDC would help advance certain policy objectives, what features would be required for a U.S. CBDC to advance these objectives, choices for resolving CBDC design trade-offs, and areas where additional technological research and development might be useful.
Liang commented that the working group will also “engage with allies and partners to promote shared learning and responsible development of CBDCs.” She pointed out that CBDC efforts are already underway in jurisdictions around the world, with 11 countries already having fully launched CBDCs, “while central banks in other major jurisdictions are researching and experimenting with CBDCs, with some at a fairly advanced stage.” Liang stressed that regardless of whether a CBDC is adopted in the U.S., the country “has an interest in ensuring that CBDCs interact safely and efficiently with the existing financial infrastructure; that they support financial stability and the integrity of the international financial system; that global payment systems are efficient, innovative, competitive, secure, and resilient; and that global payments systems continue to reflect broader shared democratic values, like openness, privacy, accessibility, and accountability to the communities that rely upon them.”
Biden administration releases National Cybersecurity Strategy
On March 2, the Biden administration announced the release of its National Cybersecurity Strategy (Strategy) in a continued effort to provide a safe and secure digital ecosystem for Americans. The Strategy, which expands on other steps taken by the administration in this space (covered by InfoBytes here), focuses on several key pillars for building and enhancing collaboration, including:
- Defending critical infrastructure. The Strategy will expand the use of minimum cybersecurity requirements in critical sectors, harmonize regulations to reduce compliance burdens, ensure public-private collaboration is able to defend critical infrastructure and essential services, and defend and modernize federal networks and incident response policies.
- Disrupting and dismantling threat actors. Under the Strategy, tools will be strategically employed to disrupt adversaries, and the private sector will be used to disrupt activities. Ransomware threats will also be addressed through a comprehensive federal approach “in lockstep” with international partners.
- Shaping market forces to drive security and resilience. In an effort “to reduce risk and shift the consequences of poor cybersecurity away from the most vulnerable,” the Strategy proposes to (i) promote privacy and security of personal data; (ii) “[shift] liability for software products and services to promote secure development practices”; and (iii) ensure investments in new infrastructure are supported by federal grant programs.
- Investing in a resilient future. The Strategy promotes coordinated, collaborative actions for reducing systemic technical vulnerabilities across the digital ecosystem and improving resiliency against transnational digital repression. The Strategy also prioritizes cybersecurity research and development for emerging technologies, including postquantum encryption, digital identity solutions, and clean energy infrastructure, and stresses the importance of developing a diverse, robust national cyber workforce.
- Forging international partnerships to pursue shared goals. The Strategy intends to leverage international coalitions and partnerships to counter threats to the digital ecosystem through the use of joint preparedness, response, and cost imposition, which will enable partners to better defend themselves against cyber threats. The U.S. will also work with international partners to create secure, reliable global information and communications technology supply chains and operational technology products and services.
While “next-generation technologies are reaching maturity at an accelerating pace, creating new pathways for innovation while increasing digital interdependencies,” the announcement warned that state and non-state actors are developing and executing campaigns that threaten the digital ecosystem. The Biden administration’s Strategy aims to address those threats.
Illinois announces new consumer protections for digital assets, proposes new money transmitter licensing provisions
On February 21, the Illinois Department of Financial and Professional Regulation (IDFPR) announced several legislative initiatives to establish consumer protections for cryptocurrencies and other digital assets and provide regulatory oversight of the broader digital asset marketplace. The Fintech-Digital Asset Bill (see HB 3479) would create the Uniform Money Transmission Modernization Act and provide for the regulation of digital asset businesses and modernize regulations for money transmission in the state. Among other things, the Fintech-Digital Asset Bill would require digital asset exchanges and other digital asset businesses to obtain a license from IDFPR to operate in the state. The bill also establishes various requirements for businesses, including investment disclosures, customer asset safeguards, and customer service standards. Companies would also be required to implement cybersecurity measures, as well as procedures for addressing business continuity, fraud, and money laundering. Notably, the Fintech-Digital Asset Bill replaces and supersedes the Transmitters of Money Act (see 205 ILCS 657) with the Money Transmission Modernization Act, in order to harmonize the licensing, regulation, and supervision of money transmitters operating across state lines. Provisions also amend the Corporate Fiduciary Act to allow for the creation of trust companies for the special purpose of acting as a fiduciary to safeguard customers’ digital assets, the announcement noted.
The Consumer Financial Protection Bill (see HB 3483) would grant the IDFPR authority to enforce the Fintech-Digital Asset Bill and strengthen the department’s authority and resources for enforcing existing consumer financial protections. Modeled after the Dodd-Frank Act, the Consumer Financial Protection Bill empowers the IDFPR with the ability to target unfair, deceptive, and abusive acts and practices by unlicensed financial services providers. The bill creates the Consumer Financial Protection Law and the Financial Protection Fund, and establishes provisions related to supervision, registration requirements, consumer protection, cybersecurity, anti-fraud and anti-money laundering, enforcement, procedures, and rulemaking. The Consumer Financial Protection Bill also includes provisions concerning court orders, penalty of perjury, character and fitness of licensees, and consent orders and settlement agreements, and makes amendments to various application, license, and examination fees. The bill does so by amending the Collection Agency Act, Currency Exchange Act, Sales Finance Agency Act, Debt Management Service Act, Consumer Installment Loan Act, and Debt Settlement Consumer Protection Act.
Illinois Supreme Court says BIPA claims accrue with every transmission
On February 17, the Illinois Supreme Court issued a split decision holding that under the state’s Biometric Information Privacy Act (BIPA), claims accrue “with every scan or transmission of biometric identifiers or biometric information without prior informed consent.” The plaintiff filed a proposed class action alleging a defendant fast food chain violated BIPA sections 15(b) and (d) by unlawfully collecting her biometric data and disclosing the data to a third-party vendor without first obtaining her consent. According to the plaintiff, the defendant introduced a biometric-collection system that required employees to scan their fingerprints in order to access pay stubs and computers shortly after she began her employment in 2004. Under BIPA (which became effective in 2008), section 15(b) prohibits private entities from collecting, capturing, purchasing, receiving through trade, or otherwise obtaining “a person’s biometric data without first providing notice to and receiving consent from the person,” whereas Section 15(d) provides that private entities “may not ‘disclose, redisclose, or otherwise disseminate’ biometric data without consent.” While the plaintiff asserted that the defendant did not seek her consent until 2018, the defendant argued, among other things, that the action was untimely because the plaintiff’s claim accrued the first time defendant obtained her biometric data. In this case, defendant argued that plaintiff’s claim accrued in 2008 after BIPA’s effective date. Plaintiff challenged that “a new claim accrued each time she scanned her fingerprints” and her data was sent to a third-party authenticator, thus “rendering her action timely with respect to the unlawful scans and transmissions that occurred within the applicable limitations period.” The U.S. District Court for the Northern District of Illinois agreed with the plaintiff but certified its order for immediate interlocutory appeal after “finding that its decision involved a controlling question of law on which there is substantial ground for disagreement.”
The U.S. Court of Appeals for the Seventh Circuit ultimately found that the parties’ competing interpretations of claim accrual were reasonable under Illinois law, and agreed that “the novelty and uncertainty of the claim-accrual question” warranted certification to the Illinois Supreme Court. The question certified to the high court asked whether “section 15(b) and (d) claims accrue each time a private entity scans a person’s biometric identifier and each time a private entity transmits such a scan to a third party, respectively, or only upon the first scan and first transmission[.]”
The majority held that the plain language of the statute supports the plaintiff’s interpretation. “With the subsequent scans, the fingerprint is compared to the stored copy of the fingerprint. Defendant fails to explain how such a system could work without collecting or capturing the fingerprint every time the employee needs to access his or her computer or pay stub,” the high court said. The majority rejected the defendant’s argument that a BIPA claim is limited to the initial scan or transmission of biometric information since that is when the individual loses the right to control their biometric information “[b]ecause a person cannot keep information secret from another entity that already has it.” This interpretation, the majority wrote, wrongfully assumes that BIPA limits claims under section 15 to the first time a party’s biometric identifier or biometric information is scanned or transmitted. The Illinois Supreme Court further held that “[a]s the district court observed, this court has repeatedly held that, where statutory language is clear, it must be given effect, ‘even though the consequences may be harsh, unjust, absurd or unwise.’” However, the majority emphasized that BIPA does not contain language “suggesting legislative intent to authorize a damages award that would result in the financial destruction of a business,” adding that because “we continue to believe that policy-based concerns about potentially excessive damage awards under [BIPA] are best addressed by the legislature, . . . [w]e respectfully suggest that the legislature review these policy concerns and make clear its intent regarding the assessment of damages under [BIPA].”
The dissenting judges countered that “[i]mposing punitive, crippling liability on businesses could not have been a goal of [BIPA], nor did the legislature intend to impose damages wildly exceeding any remotely reasonable estimate of harm.” “Indeed, the statute’s provision of liquidated damages of between $1000 and $5000 is itself evidence that the legislature did not intend to impose ruinous liability on businesses,” the dissenting judges wrote, cautioning that plaintiffs may be incentivized to delay bringing claims for as long as possible in an effort to increase actionable violations. Under BIPA, individuals have five years to assert violations of section 15—the statute of limitations recently established by a ruling issued by the Illinois Supreme Court earlier this month (covered by InfoBytes here).
Treasury official highlights fintech, crypto assets, and cloud services challenges
On February 15, Treasury Assistant Secretary for Financial Institutions Graham Steele delivered remarks before the Exchequer Club of Washington, D.C., during which he discussed the U.S. Treasury Department’s financial institutions agenda on fintech, cryptocurrency, and cloud service providers. Stating that “significant potential exists to harness the underlying technology in fintech, digital assets, and cloud services adoption,” Steele cautioned that there exist common risks across these spaces related to inadequate oversight, excessive concentration, and consumer harms.
With respect to nonbanks and fintech, Steele noted that participation by nonbanks in financial services is a key priority for Treasury. He commented that while nonbanks add diversity and competition pressure to consumer finance markets, they “have largely not been subject to the kind of comprehensive regulation and supervision to which banks are subject,” which has created numerous “risks related to regulatory arbitrage, data privacy and security, bias and discrimination, and consumer protection, among others.” Steele highlighted recent Treasury recommendations primarily focused on using existing authorities held by the federal banking regulators and the CFPB as a way to coordinate supervision of bank-fintech partnerships and credit underwriting models. Another area of concern, Steele noted, are big technology firms—those that generally seek to enter the consumer finance market via relationships with banks and third-party fintech firms, and who avoid prudential regulation, supervision, and risk-management requirements that would apply if they offered banking services. “Big Tech firms may have incentives to leverage their existing commercial relationships, consumer data, and other resources to enter new markets, expand their networks and offerings, and scale rapidly to achieve capabilities that others—including depository institutions—do not have and cannot replicate,” Steele said.
Steele also touched on Treasury’s objectives for crypto assets, in which he referred to several studies examining “the potential financial stability implications of crypto-asset activities” and the risks and opportunities they might present to consumers, investors, and businesses. He also addressed concerns about misleading claims and representations in this space (for example, with respect to the availability of deposit insurance) and noted that there exist several gaps in existing authorities over crypto assets. Finally, Steele discussed a recent Treasury report, which examined potential benefits and challenges associated with the adoption of cloud services technology by financial services firms (covered by InfoBytes here).
NCUA approves final cyber incident reporting rule
On February 16, the NCUA approved a final rule that requires federally-insured credit unions (FICUs) to notify the agency as soon as possible (and no later than 72 hours) after a FICU “reasonably believes that a reportable cyber incident has occurred.” Specifically, the rule requires FICUs to report cyber incidents that lead “to a substantial loss of confidentiality, integrity, or availability of a network or member information system as a result of the exposure of sensitive data, disruption of vital member services, or that has a serious impact on the safety and resiliency of operational systems and processes.” Under the rule, FICUs must report any cyberattacks that disrupt their business operations, vital member services, or a member information system within 72 hours of the FICU’s “reasonable belief that it has experienced a cyberattack.” The NCUA explained that the 72-hour notification requirement provides an early alert to the agency but that the rule does not require the submission of a detailed incident assessment within this time frame. The final rule takes effect September 1. Additional reporting guidance will be provided prior to the effective date.
“Through these high-level early warning notifications, the NCUA will be able to work with other agencies and the private sector to respond to cyber threats before they become systemic and threaten the broader financial services sector,” NCUA Chairman Todd M. Harper said. Harper further explained that “[t]his final rule will also align the NCUA’s reporting requirements with those of the federal banking agencies and the Cyber Incident Reporting for Critical Infrastructure Act.”
EU says EU-US Data Privacy Framework lacks adequate protections
On February 14, the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs released a draft motion for a resolution concerning the adequacy of protections afforded under the EU-US Data Privacy Framework. As previously covered by InfoBytes, last October President Biden signed an Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities (E.O.) to address the facilitation of transatlantic data flows between the EU and the U.S. The E.O. also outlined bolstered commitments that the U.S. will take under the EU-U.S. Data Privacy Framework (a replacement for the EU-U.S. Privacy Shield). In 2020, the Court of Justice of the EU (CJEU) annulled the EU-U.S. Privacy Shield after determining that, because the requirements of U.S. national security, public interest, and law enforcement have “primacy” over the data protection principles of the EU-U.S. Privacy Shield, data transferred under the EU-U.S. Privacy Shield would not be subject to the same level of protections prescribed by the EU’s General Data Protection Regulation (GDPR).
In the draft resolution, the Committee urged the European Commission not to adopt any new adequacy decisions needed for the EU-U.S. Data Privacy Framework to officially take effect. According to the Committee, the framework “fails to create actual equivalence in the level of protection” provided to EU residents’ transferred data. Among other things, the Committee found that the government surveillance backstops outlined in the E.O. “are not in line” with “long-standing key elements of the EU data protection regime as related to principles of proportionality and necessity.” The Committee also expressed concerns that “these principles will be interpreted solely in light of [U.S.] law and legal traditions” and appear to take a “broad interpretation” to proportionality. The Committee also flagged concerns that the framework does not establish an obligation to notify EU residents that their personal data has been processed, “thereby undermining their right to access or rectify their data.” Additionally, “the proposed redress process does not provide for an avenue for appeal in a federal court,” thereby removing the possibility for EU residents to claim damages. Moreover, “remedies available for commercial matters” are “largely left to the discretion of companies, which can select alternative remedy avenues such as dispute resolution mechanisms or the use of companies’ privacy [programs],” the Committee said.
The Committee called on the Commission “to continue negotiations with its [U.S.] counterparts with the aim of creating a mechanism that would ensure such equivalence and which would provide the adequate level of protection required by Union data protection law and the Charter as interpreted by the CJEU,” and urged the Commission “not to adopt the adequacy finding.”
Bowman discusses bank and third-party cyber risk management expectations
On February 15, Federal Reserve Board Governor Michelle W. Bowman delivered remarks at the Midwest Cyber Workshop, during which she discussed topics related to third-party service provider reliance and regulatory expectations concerning cyber risk management. “While we expect banks to be in touch with us when an event happens, cyber events should not be the first time a cyber-risk conversation occurs between a bank and its regulator.” Community banks frequently cite cybersecurity as one of the top risks facing the banking industry, Bowman said, adding that bankers have mentioned difficulties in attracting and retaining the staff needed to mitigate cyber risk. She also noted that ransomware disproportionately impacts smaller banks that might not “have sufficient resources to protect against these attacks.”
Pointing out that banks are becoming increasingly reliant on third-party service providers, Bowman said regulators should “consider the appropriateness of shifting the regulatory burden from community banks to more efficiently focus directly on service providers.” Regulators have authority to do so under the Bank Service Company Act, Bowman said, adding that “[i]n a world where third parties are providing far more of these services, it seems to me that these providers should bear more responsibility to ensure the outsourced activities are performed in a safe and sound manner.” She also referenced a 2021 final rule that requires banks to timely notify their primary federal regulator in the event of a significant computer-security incident within 36 hours after the banking organization determines that a cyber incident has taken place (covered by InfoBytes here). The reporting process, Bowman said, is also intended to streamline small banks’ efforts to monitor service providers (which are required to notify a bank-designated point of contact at each affected customer bank when a computer-security incident has occurred).
“We look forward to working with you to assist in clarifying expectations, applying regulatory guidance or seeking feedback on cyber-risk management strategies,” Bowman said. “We encourage bank management teams to engage with regulatory points of contact whenever questions arise on cybersecurity matters just as with any other regulatory matter.”
Colorado releases privacy act updates
Last month, the Colorado attorney general released a third version of draft rules to implement and enforce the Colorado Privacy Act (CPA). A hearing on the proposed draft rules was held February 1. As previously covered by a Special Alert, the CPA was enacted in July 2021 to establish a framework for personal data privacy rights. The CPA, which is effective July 1, 2023 with certain opt-out provisions taking effect July 1, 2024, provides consumers with numerous rights, including the right to access their personal data, opt-out of certain uses of personal data, make corrections to personal data, request deletion of personal data, and obtain a copy of personal data in a portable format. Under the CPA, the attorney general has enforcement authority for the law, which does not have a private right of action. The attorney general also has authority to promulgate rules to carry out the requirements of the CPA and issue interpretive guidance and opinion letters, as well as the authority to develop technical specifications for at least one universal opt-out mechanism. The attorney general previously released two versions of the draft rules last year (covered by InfoBytes here and here).
The third set of draft rules seeks to address additional concerns raised through public comments and makes a number of changes, including:
- Clarifying definitions. The modifications add, delete, and amend several definitions, including those related to “bona fide loyalty program,” “information that a [c]ontroller has a reasonable basis to believe the [c]onsumer has lawfully made available to the general public,” “publicly available information,” “revealing,” and “sensitive data inference” or “sensitive data inferences.” Among other things, the definition of “publicly available information” has been narrowed by removing the exception to the definition that had excluded publicly available information that has been combined with non-publicly available information. Additionally, sensitive data inferences now refer to inferences which “are used to” indicate certain sensitive characteristics.
- Right to opt out and right to access. The modifications outline controller requirements for complying with opt-out requests, including when opt-out requests must be completed, as well as provisions for how privacy notice opt-out disclosures must be sent to consumers, and how consumers are to be provided mechanisms for opting-out of the processing of personal data for profiling that results in the provision or denial of financial or lending services or other opportunities. With respect to the right to access, controllers must implement and maintain reasonable data security measures when processing any documentation related to a consumer’s access request.
- Right to correct and right to delete. Among other changes, the modifications add language providing consumers with the right to correct inaccuracies and clarify that a controller “may decide not to act upon a [c]onsumer’s correction request if the [c]ontroller determines that the contested [p]ersonal [d]ata is more likely than not accurate” and has exhausted certain specific requirements. The modifications add requirements for when a controller determines that certain personal data is exempted from an opt-out request.
- Notice and choice of universal opt-out mechanisms. The modifications specify that disclosures provided to consumers do not need to be tailored to Colorado or refer to Colorado “or to any other specific provisions of these rules or the Colorado Privacy Act examples.” Additionally, a platform, developer, or provider that provides a universal opt-out mechanism may, but is not required to, authenticate that a user is a resident of the state.
- Controller obligations. Among other things, a controller may choose to honor an opt-out request received through a universal opt-out mechanism before July 1, 2024, may respond by choosing to opt a consumer out of all relevant opt-out rights should the universal opt-out mechanism be unclear, and may choose to authenticate that a user is a resident of Colorado but is not required to do so.
- Purpose specification. The modifications state that controllers “should not specify so many purposes for which [p]ersonal [d]ata could potentially be processed to cover potential future processing activities that the purpose becomes unclear or uninformative.” Controllers must modify disclosures and necessary documentation if the processing purpose has “evolved beyond the original express purpose such that it becomes a distinct purpose that is no longer reasonably necessary to or compatible with the original express purpose.”
- Consent. The modifications clarify that consent is not freely given when it “reflects acceptance of a general or broad terms of use or similar document that contains descriptions of [p]ersonal [d]ata [p]rocessing along with other, unrelated information.” Requirements are also provided for how a controller may proactively request consent to process personal data after a consumer has opted out.
- User interface design, choice architecture, and dark patterns. The modifications provide that a consumer’s “ability to exercise a more privacy-protective option shall not be unduly longer, more difficult, or time-consuming than the path to exercise a less privacy-protective option.” The modifications also specify principles that should be considered when designing a user interface or a choice architecture used to obtain consent, so that it “does not impose unequal weight or focus on one available choice over another such that a [c]onsumer’s ability to consent is impaired or subverted.”
Additional modifications have been made to personal data use limitations, technical specifications, public lists of universal opt-out mechanisms, privacy notice content, loyalty programs, duty of care, and data protection assessments. Except for provisions with specific delayed effective dates, the rules take effect July 1 if finalized.
On February 28, the attorney general announced that the revised rules were adopted on February 23, but are subject to a review by the attorney general and may require additional edits before they can be finalized and published in the Colorado Register.
SEC proposes revisions to Privacy Act
On February 14, the SEC issued a proposed rule to revise the Commission’s regulations under the Privacy Act of 1974, as amended. The Privacy Act governs the collection, maintenance, use, and dissemination of information about individuals that is maintained by the federal agencies. Under the Privacy Act, individuals are afforded a right of access to records pertaining to them and a right to have inaccurate records corrected. Among other things, the revisions would clarify, update, and streamline the language of several procedural provisions to codify current practices for processing public requests. The revisions would also clarify the SEC’s process for how individuals can access information pertaining to themselves. If adopted, the proposed rule would also revise procedural and fee provisions, eliminate unnecessary provisions, and allow for electronic methods to verify one’s identity and submit Privacy Act requests. Comments on the proposed rule are due April 17, or 30 days after publication in the Federal Register, whichever is later.