Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”
In January, the Federal Reserve Bank of New York (New York Fed) released a staff report that analyzes how a cyber attack transmitted through a payment network could be amplified throughout the U.S. financial system. According to the report, Cyber Risk and the U.S. Financial System: a Pre-Mortem Analysis, cyber attacks that impair the most active U.S. banks’ ability to send payments “would likely be amplified to affect the liquidity of many other banks in the system,” including smaller or mid-sized banks that are connected through a shared service provider. The New York Fed notes, however, that the report’s primary focus is on a cyber attack’s impact within a single day, and cautions that should a cyber attack compromise the integrity of the banking system, “the reconciliation and repercussion process would be an unprecedented task.” Among other things, the report (i) establishes a framework for estimating “cyber vulnerability” and understanding the impairments of a cyber attack on a bank’s payment activities; (ii) creates a baseline scenario to study the five largest institutions within the wholesale payment network and the high concentration of payments between large institutions, as well as the resulting imbalance in liquidity that occurs if even a single large institution is unable to remit payments to its counterparties; and (iii) conducts a reverse stress test exercise, in which it analyzes “how many smaller institutions it would take to impair any of the most active ones,” in order to highlight “how the impairment of many smaller institutions also presents a systemic risk.”
Federal Reserve Board Member Recognizes Blockchain Technology's Potential; Warns of Associated Risks
On October 7, at the Institute of International Finance Annual Meeting Panel on Blockchain, Federal Reserve Board member Lael Brainard delivered a speech titled “Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement.” Brainard acknowledged blockchain technology as possibly the “most significant development in many years in payments, clearing, and settlement” and outlined its potential “to transform the way financial market participants transfer, store, and maintain ownership records of digitized assets.” Brainard highlighted payment technology changes as a particular regulatory focus and emphasized the Federal Reserve’s “responsibilities for promoting the safety and efficiency of the payments and settlements systems; supervising financial institutions engaged in payments, clearing and settlement; and safeguarding financial stability.” The following potential benefits of blockchain technology are among those discussed in Brainard’s speech: (i) faster processing and reduced costs in cross-border payments and trade finance; (ii) transparency, reduced costs, and faster settlements within securities markets; and (iii) cryptography as a secure way of transmitting and storing data. Brainard cautioned that, notwithstanding the technology’s promise, certain risks associated with financial technological developments and innovation remain, particularly in the areas of settlement, operations, cybersecurity, money laundering, and terrorist financing. Brainard concluded by highlighting the Federal Reserve’s commitment to industry engagement as blockchain technology evolves, noting that stakeholders “will work together to foster socially beneficial innovation, while insisting that risks are thoroughly understood, managed, and controlled.”
On September 10, the Federal Reserve announced the appointment of Federal Reserve Bank of Chicago Senior Vice President Todd Aadland as its Payments Security Strategy Leader. Aadland will also continue to serve as a Senior Vice President and Chief Information Officer within the Federal Reserve Bank of Chicago’s Customer Relations and Support Office. In his new role, Aadland will lead the Federal Reserve System’s initiatives to address fraud risk, and promote the safety and security of the U.S. payment system. In addition, Aadland will serve as chairman of the Secure Payments Task Force, a group comprised of more than 170 payments stakeholders representing academia, government, and industry. Aadland’s appointment follows a Federal Reserve announcement naming a Faster Payments Strategy Leader tasked with improving the speed and efficiency of current and emerging payment systems.
On July 30, the Federal Reserve announced the appointment of Sean Rodriguez as its Faster Payments Strategy Leader. Rodriguez serves as a Senior Vice President at the Chicago Federal Reserve Bank. In his new role, Rodriguez will lead the Federal Reserve’s Faster Payments Task Force focusing on improving the speed and efficiency of various current and emerging payment systems. More information related to the Federal Reserve’s efforts to improve the U.S. payment system is available at fedpaymentsimprovement.org.
On July 21, the Federal Reserve Board of Governors announced the members of the Faster Payments and Secure Payments Task Force as described in the Strategies for Improving the U.S. Payment System white paper released earlier this year. The committees will advise the Federal Reserve task force chair on meeting agendas, and help prioritize various task force activities, among other payments initiatives. The members include various interest groups representing industry, tech, and government, among others. More information about the task forces and the Fed’s payments improvement initiatives can be found at fedpaymentsimprovement.org.
On July 9, the CFPB issued a set of guiding principles aimed to help private industry better protect consumers as new, faster electronic payment systems continue to emerge. “While American consumers benefit from and make use of these payment systems, there remain opportunities to improve efficiency, reduce transaction costs for consumers, and reduce credit and fraud risks,” the CFPB’s announcements stated. Accordingly, the principles advocate for more secure, transparent, accessible, and affordable networks for consumers, and recommend proposals concerning funds availability, fraud and error resolution, and privacy concerns. The Bureau’s announcement comes as the Federal Reserve is currently engaged in an initiative to improve the U.S. payment systems network.
Financial Action Task Force Issues Guidance Urging Risk-Based Approach to Virtual Currencies and Services
On June 29, the Financial Action Task Force (FATF) issued a report, Guidance for a Risk-Based Approach to Virtual Currencies,part of a staged approach focusing on the points of intersection that provide gateways to the regulated financial system, in particular, convertible virtual currency exchangers. The Guidance explains the application of the risk-based approach to AML/CFT measures in the virtual currency context, identify the entities involved in virtual currency payment products and services (VCPPS), and clarify the application of the relevant FATF Recommendations to convertible virtual currency exchangers. The guidance provides, among other things, recommendations and encourages member nations to adopt regulations and guidelines similar to those applicable to traditional financial institutions to reduce risk exposure to the banking system.
On June 25, Federal Reserve Governor Jerome Powell delivered remarks at a payments conference hosted by the Federal Reserve Bank of Kansas to discuss improvements to the U.S. payments system. Specifically, Powell advised that payment system participants must work together to improve the payment system, stating “[A]t a minimum, banks, merchants, and other institutions that process or store sensitive financial information need to keep their hardware and software current to the latest industry standards.” He noted that the Federal Reserve has established two task forces regarding the U.S. payment system, one geared towards faster payments and the other geared towards payment security. Powell cited the use of EMV chip cards and tokenization technology as examples of effective payment security measures. In addition, Powell discussed the importance of proactive efforts to implement preventative measures to prepare for potential cyber-attacks or data breaches.
OCC Comptroller Discusses Emerging Payment Systems Technology and Cybersecurity, FFIEC Set to Release Cybersecurity Assessment Tool
On June 3, in prepared remarks delivered at the BITS Emerging Payments Forum, OCC Comptroller Thomas Curry advised that as financial institutions continue to develop payment systems, banks need better preparation for potential cyber-risks. Curry warned that “[c]yber criminals will also probe emerging payment systems for vulnerabilities that they can exploit to engage in money laundering[.]” In addition, Curry advocated for more regulatory oversight of digital currencies and non-bank mobile payment providers, such as ApplePay and Google Wallet. Addressing cybersecurity concerns, Curry called for increased information-sharing to promote best practices and strengthen cybersecurity readiness among the banking industry. In particular, he urged financial institutions – of all sizes – to participate in the Financial Services Information Sharing and Analysis Center, or FS-ISAC, a non-profit founded by the banking industry to facilitate the sharing and dissemination of cybersecurity threat information. Moreover, Curry confirmed that the FFIEC will soon be releasing a Cybersecurity Assessment Tool for financial institutions to use when evaluating their cybersecurity risks and risk management capabilities, observing that the tool will be particularly helpful to community banks as cybersecurity threats continue to increase.
- Amanda R. Lawrence and Sherry-Maria Safchuk to discuss "California privacy rule" on an NAFCU webinar
- Sasha Leonhardt to discuss "The Servicemembers Civil Relief Act and the Military Lending Act: Common pitfalls and emerging issues" at a NAFCU webinar
- Michelle L. Rogers to discuss "BigLaw" at the Women in Business Law Leadership Conference
- Buckley Webcast: NYDFS mortgage servicing rules: Untangling federal and state servicing requirements
- H Joshua Kotin and Jessica M. Shannon to discuss "TILA/RESPA mortgage servicing and origination" at the NAFCU Regulatory Compliance School
- Michelle L. Rogers to discuss "Developing a risk-based response when the whistle blows" at the Whistleblower Program & Investigations Roundtable
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS International AML & Financial Crime Conference
- Benjamin W. Hutten to discuss "Understanding OFAC sanctions" at a NAFCU webinar
- Brandy A. Hood to discuss "RESPA 8 (TRID applied compliance)" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- John P. Kromer to discuss "Navigating the multi-state fintech regulatory regime" at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Jonice Gray Tucker to discuss "Leveraging big data responsibly" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Hank Asbill to discuss "Critique of direct examination; Questions and answers" at the American Bar Association Section of Litigation Anatomy of a Trial: Murder Trial of Ziang Sung Wan
- Hank Asbill to discuss "What judges want from trial lawyers" at the American Bar Association Section of Litigation Anatomy of a Trial: Murder Trial of Ziang Sung Wan
- Steven R. vonBerg to speak at the "Conference super session" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference