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Financial Services Law Insights and Observations

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  • Brainard addresses FedNow and other payment issues

    Federal Issues

    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.”

    Federal Issues Federal Reserve Payments Digital Commerce Of Interest to Non-US Persons Nonbank Nonbank Supervision Virtual Currency Payment Systems Affiliated Business Relationship Fintech

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  • New York Fed analyzes potential impact of cyber attacks on payments network

    Privacy, Cyber Risk & Data Security

    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.”

    Privacy/Cyber Risk & Data Security Federal Reserve Bank of New York Payment Systems

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  • Federal Reserve Board Member Recognizes Blockchain Technology's Potential; Warns of Associated Risks

    Federal Issues

    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.”

    Federal Issues Payment Systems Federal Reserve Payments Blockchain Privacy/Cyber Risk & Data Security Distributed Ledger

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  • Federal Reserve Appoints Chicago Fed Official to Payments Security Post

    Fintech

    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.

    Payment Systems Federal Reserve

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  • Federal Reserve Appoints Faster Payments Strategy Leader

    Fintech

    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.

    Payment Systems Federal Reserve

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  • Federal Reserve Announces Members of Faster Payments and Secure Payments Task Force

    Fintech

    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.

    Payment Systems Federal Reserve Mobile Payment Systems Payment Processors

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  • CFPB Recommends Consumer Protection Principles for Faster Payment Networks

    Fintech

    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.

    CFPB Payment Systems Mobile Payment Systems

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  • Financial Action Task Force Issues Guidance Urging Risk-Based Approach to Virtual Currencies and Services

    Fintech

    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.

    Payment Systems Anti-Money Laundering Virtual Currency FATF Combating the Financing of Terrorism

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  • Fed Governor Discusses Payment Security

    Privacy, Cyber Risk & Data Security

    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.

    Payment Systems Federal Reserve Privacy/Cyber Risk & Data Security

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  • OCC Comptroller Discusses Emerging Payment Systems Technology and Cybersecurity, FFIEC Set to Release Cybersecurity Assessment Tool

    Privacy, Cyber Risk & Data Security

    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.

    Payment Systems Nonbank Supervision OCC FFIEC Mobile Payment Systems Privacy/Cyber Risk & Data Security

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