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  • District Court recognizes CFTC authority to regulate virtual currency as commodities


    On March 6, the U.S. District Court for the Eastern District of New York granted the CFTC’s request for preliminary injunction against defendants alleged to have misappropriated investor money through a cryptocurrency trading scam, holding that the CFTC has the authority to regulate virtual currency as commodities. The decision additionally defined virtual currency as a “commodity” within the meaning of the Commodity Exchange Act (CEA) and gave the CFTC jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. However, the court noted that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” Under the terms of the order, the defendants are restrained and enjoined until further order of the court from participating in fraudulent behavior related to the swap or sale of any commodity, and must, among other things, provide the CFTC with access to business records and a written account of financial documents.

    Find continuing InfoBytes coverage on virtual currency oversight here.

    Fintech Virtual Currency Courts CFTC Cryptocurrency Commodity Exchange Act

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  • Basel Committee on Banking Supervision publishes final guidance examining the implications of fintech on the banking industry


    On February 19, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, released its final report, “Sound Practices: Implications of fintech developments for banks and bank supervisors.” The report—issued after BCBS’ consideration of comments received in response to its August 2017 consultative document of the same name (see previous InfoBytes coverage on the August consultative document here)—provides BCBS’ current assessment of how fintech may shape the banking industry in the near term. The report summarizes BCBS’ analysis of historical research, data compiled from surveys of BCBS members’ frameworks and practices, and other industry feedback, and provides several key considerations for banks and bank supervisors in this space.

    The report identifies a common theme across various scenarios: the emergence of fintech may make it increasingly difficult for banks to maintain their existing operating models due to changes in technology and customer expectations. The BCBS stressed that as a result of the “rapidly changing” nature of banks’ risks and activities due to fintech developments, the rules governing these risks may need to evolve. Accordingly, the BCBS recognized that “it should first contribute to a common understanding of risks and opportunities associated with fintech in the banking sector by describing observed practices before engaging in the determination of the need for any defined requirements or technical recommendations.” It further acknowledged that “fintech-related issues cut across various sectors with jurisdiction-specific institutional and supervisory arrangements that remain outside the scope of its bank-specific mandate.”

    Additionally, the current report identifies five forward-looking scenarios describing the potential impact of fintech on banks:

    • “The better bank: modernisation and digitisation of incumbent players”;
    • “The new bank: replacement of incumbents by challenger banks”;
    • “The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks”;
    • “The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries”; and
    • “The disintermediated bank: banks have become irrelevant as customers interact directly with individual financial service providers.”

    With this issuance, revised to reflect the feedback BCBS received on its August consultative paper, BCBS has provided several “sound practices” for banks and bank supervisors to consider, along with its final ten key implications of fintech, as well as ten key considerations. Some notable considerations include:

    • Banks should have appropriate, effective governance structures and risk management processes to address key risks that may arise due to fintech developments, which may include staff development processes to ensure bank personnel are appropriately trained to manage fintech risks, as well as the development of risk management processes compliant with portions of the BCBS’s Principles for sound management of operational risk that relate to fintech developments.
    • Banks should implement effective IT and other risk management processes to address the risks and implications of using new enabling technologies. Bank supervisors should also “enhance safety and soundness by ensuring that banks adopt such risk management processes and control environments.”
    • Bank supervisors should understand the implications of the growing use of third parties, via outsourcing and/or partnerships, and maintain appropriate due diligence processes, which should “set out the responsibilities of each party, agreed service levels and audit rights” when contracting with third-party service providers.
    • Bank supervisors should communicate and coordinate with public authorities responsible for the oversight of fintech-related regulatory functions that are outside the purview of prudential supervision, including safeguarding data privacy, cybersecurity, consumer protection, and complying with anti-money laundering requirements. The recommendation removes the phrase “whether or not the service is provided by a bank or fintech firms,” which was contained in the August consultative document.
    • Bank supervisors should coordinate global cooperation between banking supervisors when fintech firms expand cross-border operations to enhance global safety and soundness by engaging in appropriate supervisory coordination and information-sharing. Recently, on February 19, the U.S. Commodity and Futures Trading Commission and the United Kingdom’s Financial Conduct Authority signed an agreement outlining a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. (See previous InfoBytes coverage here.)
    • The report stresses the importance of collaboration between bank regulators, specifically in jurisdictions where non-bank unregulated firms are providing services previously conducted by banks. The BCBS further notes that bank supervisors should review existing supervisory frameworks to consider whether potential new innovative business models can evolve in a manner that has appropriate banking oversight but does not unduly hamper innovation.

    Fintech Basel Committee U.K. CFTC

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  • CFTC announces collaboration agreement with U.K. fintech team


    On February 19, the U.S. Commodity and Futures Trading Commission (CFTC) and the United Kingdom’s Financial Conduct Authority (FCA) released the Cooperation Arrangement on Financial Technology Innovation (Agreement). The Agreement outlines a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. The Agreement specifies how program officials with LabCFTC in the U.S. and FCA Innovate in the U.K. will collaborate to share information, provide regulatory support to fintech businesses, and refer fintech businesses that wish to operate in the other jurisdiction to each other. In the announcement for the Agreement, CFTC Chairman J. Christopher Giancarlo stated, “we believe that by collaborating with the best-in-class FCA FinTech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.”

    Fintech CFTC UK

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  • CFTC offers large reward to “pump-and-dump” scheme whistleblowers


    On February 15, the Commodity Futures Trading Commission (CFTC) issued a Consumer Protection Advisory on virtual currency “pump-and-dump” schemes, which offers eligible whistleblowers between 10 and 30 percent of enforcement actions of $1 million or more, which result from the shared information. The notice cautions consumers against falling for the fraudulent “pump-and-dump” schemes, which capitalize on consumers’ fear of missing the potentially lucrative—yet volatile—cryptocurrency market. The advisory warns consumers that many of the perpetrators of these schemes use social media to promote false news reports and create fake urgency for consumers to buy the cryptocurrency immediately. Then, after the price reaches a certain level, the schemers sell their virtual currency and the price begins to fall.

    Fintech Virtual Currency CFTC Bitcoin Cryptocurrency Whistleblower Enforcement

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  • President Trump releases 2019 budget proposal; key areas of reform include appropriation shifts, cybersecurity, and financial crimes

    Federal Issues

    On February 12, the White House released its fiscal 2019 budget request, Efficient, Effective, Accountable, an American Budget (2019 budget proposal), along with Major Savings and Reforms (MSR) and an Appendix. The mission of the President’s budget sets forth priorities, including imposing fiscal responsibility, reducing wasteful spending, and prioritizing effective programs. However, the 2019 budget proposal has little chance of being enacted as written and does not take into account a two-year budget agreement Congress passed that the President signed into law on February 9. Notable takeaways of the 2019 budget are as follows:

    CFPB. Under the MSR’s “Restructure the Consumer Financial Protection Bureau” section, Congress and the current administration would implement a broad restructuring of the Bureau to “prevent actions that unduly burden the financial industry” by restricting its enforcement authority over federal consumer law. Among other things, the proposed budget would cap the Federal Reserve’s (Fed) transfers this year at $485 million (an amount equivalent to its 2015 budget) and eliminate all transfers by 2020, at which point the Bureau’s appropriations process would shift to Congress.

    Commodity Futures Trading Commission (CFTC). As stipulated in the Appendix, the budget proposes legislation, which would authorize the CFTC to collect $31.5 million in user fees to fund certain activities and would bring the Commission’s budget to $281.5 million for 2019. According to the administration, if the authorizing legislation is enacted, it would be “in line with nearly all other Federal financial and banking regulators.”

    Cybersecurity. The 2019 budget proposal requests funding for the Department of Homeland Security (DHS) and the Department of Defense (DOD) to execute efforts to counter cybercrime. The DOD funds would go towards efforts to sustain the Cyber Command’s 133 Cyber Mission Force Teams, which “are on track to be fully operational by the end of 2018.” Furthermore, the administration states it “will improve its ability to identify and combat cybersecurity risks to agencies’ data, systems, and networks.”

    Financial Stability Oversight Council (FSOC). Currently FSOC (which is comprised of the heads of the financial regulatory agencies and monitors risk to the U.S. financial system) and the Office of Financial Research (OFR) (FSOC’s independent research arm) receive funding through fees assessed on certain bank holding companies with assets of at least $50 billion as well as nonbanks supervised by the Fed. However, the 2019 budget proposal would require FSOC and OFR to receive their funding through the normal congressional appropriations process. 

    Flood Insurance. Outlined in the MSR is a budget request that would reduce appropriations for the National Flood Insurance Program's flood hazard mapping program by $78 million. The funding reduction is designed to “preserve resources for [DHS]’s core missions”; however, the administration plans to work to “improve efficiency in the flood mapping program, including incentivizing increased State and local government investments in updating flood maps to inform land use decisions and reduce risk.” Additionally, contained within the Appendix is a proposal for a “means-tested affordability program” that would determine assistance for flood insurance premium payments based on a policyholder's income or ability to repay, rather than a home's location or date of construction.

    Government Sponsored Enterprises. Noted within the MSR, the budget proposes doubling the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators from 0.10 to 0.20 percentage points from 2019 through 2021. The proposal is designed to help “level the playing field for private lenders seeking to compete with the GSEs” and would “generate approximately $26 billion over the 10-year Budget window.” 

    HUD. The 2019 budget proposal eliminates funding for the following: (i) the CHOICE Neighborhoods program (a savings of $138 million),  on the basis that state and local governments should fund strategies for neighborhood revitalization; (ii) the Community Development Block Grant (a savings of $3 billion), over claims that it “has not demonstrated a measurable impact on communities”; (iii) the HOME Investment Partnerships Program (a savings of $950 million); and (iv) the Self-Help and Assisted Homeownership Opportunity Program Account (a savings of $54 million). The budget also proposes reductions to grants provided to the Native American Housing Block Grant and plans to reduce costs across HUD’s rental assistance programs through legislative reforms. Rental assistance programs generally comprise about 80 percent of HUD’s total funding.

    SEC. As stipulated in the MSR, the budget proposes eliminating the SEC’s mandatory reserve fund and would require the SEC to request additional funds through the congressional appropriations process starting in 2020. According to the Appendix, the reserve fund is currently funded by collected registration fees and is not subject to appropriation or apportionment. Under the proposed budget, the registration fees would be deposited in the Treasury’s general fund.

    SIGTARP. As proposed under MSR, the 2019 budget would reduce funding for the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) “commensurate with the wind-down of TARP programs.” According to the proposal, “Congress aligned the sunset of SIGTARP with the length of time that TARP funds or commitments are outstanding,” which, Treasury estimates, will be in 2023. This will mark the final time payments are expected to be made under the Home Affordable Modification Program (HAMP). As previously covered in InfoBytes, SIGTARP delivered a report to Congress last month, which identified unlawful conduct by certain of the 130 financial institutions in TARP’s Making Home Affordable Program as the top threat to TARP and, thus, the agency’s top investigative priority.

    Student Loan Reform. Under the 2019 budget proposal, a single income-driven repayment plan (IDR) would be created that caps monthly payments at 12.5 percent of discretionary income. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the Public Service Loan Forgiveness program and subsidized loans will be eliminated, and reforms will be established to “guarantee that all borrowers in IDR pay an equitable share of their income.” These proposals will only apply to loans originated on or after July 1, 2019, with the exception of loans provided to borrowers in order to finish their “current course of study.”

    Treasury Department. Under the 2019 budget proposal, safeguarding markets and protecting financial data are a top priority for the administration, and $159 million has been requested for Treasury’s Office of Terrorism and Financial Intelligence to “continue its critical work safeguarding the financial system from abuse and combatting other national security threats using non-kinetic economic tools. These additional resources would be used to economically isolate North Korea, complete the Terrorist Financing Targeting Center in Saudi Arabia, and increase sanctions pressure on Iran, including through the implementation of the Countering America’s Adversaries Through Sanctions Act.” The budget also requests a $3 million increase from 2017 to be applied to the Financial Crimes Enforcement Network’s authority to administer the Bank Secrecy Act and its work to prevent the financing of terrorism, money laundering, and other financial crimes.  

    Federal Issues Budget Trump CFPB CFTC FSOC Privacy/Cyber Risk & Data Security Flood Insurance HUD SEC Student Lending Department of Treasury

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  • Market regulators discuss cryptocurrency oversight gaps during Senate Banking Committee hearing


    On February 6, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission” to discuss the need for unified measures to close regulatory gaps in the cryptocurrency space. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by briefly discussing the rise in interest in virtual currencies among Americans, as well as investor education and enforcement efforts undertaken by the SEC and the CFTC. Crapo commented that he was interested in learning how regulators plan to safeguard investors. Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, spoke about the importance of pursuing “the unique enforcement of regulatory demands posed by virtual currencies.”

    SEC Chairman Jay Clayton commented in prepared remarks that the SEC does not want to “undermine the fostering of innovation through our capital markets,” but cautioned that there are significant risks for investors when they participate in an entity’s initial coin offering (a method used to raise capital through decentralized autonomous organizations or other forms of distributed ledgers or blockchain technology) or buy and sell cryptocurrency with firms that are not compliant with securities laws. Speaking before the Committee, Clayton stated that the SEC has some oversight power in this space but supported collaborating with Congress and states on new regulations for cryptocurrency firms. “We should all come together, the federal banking regulators, CFTC, the SEC—there are states involved as well—and have a coordinated plan for dealing with the virtual currency trading market,” Clayton stressed.

    In prepared remarks, CFTC Chairman Chris Giancarlo discussed different approaches to regulating distributed ledger technologies and virtual currencies. “‘Do no harm’ was unquestionably the right approach to development of the internet. Similarly, I believe that ‘do no harm’ is the right overarching approach for distributed ledger technology,” Giancarlo said. “Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.” 

    Giancarlo referenced a joint op-ed in which the two chairmen discussed whether the “historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets,” and offered support for “policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.” The chairmen also agreed that the lack of a clear definition for what cryptocurrencies are has contributed to regulatory challenges, but stressed that their agencies would continue to bring enforcement actions against fraudsters. Both the SEC and CFTC have joined a virtual currency working group formed by the Treasury Department—which also includes the Federal Reserve and the Financial Crimes Enforcement Network—to discuss cryptocurrency jurisdiction among the agencies and understand where the gaps exist.

    See here for additional InfoBytes coverage on initial coin offerings and virtual currency.

    Fintech Virtual Currency Cryptocurrency Distributed Ledger SEC CFTC Senate Banking Committee

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  • Review procedures need enhancing according to GAO’s Regulatory Flexibility Act compliance report

    Federal Issues

    On January 30, the Government Accountability Office (GAO) released its annual report on federal financial regulators’ compliance with the Regulatory Flexibility Act (RFA).  Specifically, the report assessed whether certain regulators adhered to the RFA when drafting and implementing regulations that may affect small entities. Such regulators include the Federal Reserve, Commodity Futures Trading Commission, CFPB, FDIC, OCC, and SEC (collectively, the "agencies"). Under the RFA, the agencies must either (i) certify that a rule would not have a significant economic impact on a substantial number of small entities, or (ii) perform a regulatory flexibility analysis to assess the rule’s impact on small entities and “consider alternatives that may minimize any significant economic impact of the rule.” The report disclosed issues related to certifications. Examples included (i) providing incomplete disclosures of data sources or methodologies of economic analysis and impact; (ii) failing to provide definitions for criteria used to determine a “substantial number” or a “significant economic impact”; and (iii) relying on alternative and potentially outdated definitions of small entities. Additionally, GAO noted that many regulators were unable to provide supporting documentation for their analyses. GAO presented 10 recommendations for enhancing compliance procedures, and stressed that regulators should “develop and implement specific policies and procedures for consistently complying with RFA requirements and related guidance for conducting RFA analyses.” Specific recommendations for each agency are located here.

    Federal Issues GAO Compliance Federal Reserve CFTC CFPB FDIC OCC SEC

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  • CFTC reaches spoofing settlements with banks; joint investigation with DOJ leads to civil and criminal charges against traders


    On January 29, three global banks agreed to pay a combined $46.6 million fine to settle civil allegations by the Commodity Futures Trading Commission (CFTC) that their traders engaged in a practice known as spoofing to manipulate futures markets, which involves placing bids or offers with the intent to cancel before execution. While neither admitting nor denying any wrongdoing in connection with the settlements, the banks agreed, among other things, to pay the fines, maintain controls in order to detect and prevent spoofing among traders, and implement new training programs. As part of a larger investigation conducted by the CFTC and the criminal divisions at the DOJ and FBI, the CFTC stated within the same announcement that civil enforcement actions were filed against six individuals for alleged spoofing violations. Additionally, according to a press release issued the same day, the DOJ announced criminal charges against eight individuals who allegedly participated in various deceptive trading practices, including the six traders named in the CFTC’s civil complaints. The DOJ alleged the defendants’ spoofing trades were designed to defraud individuals and entities by artificially depressing or inflating the prices of futures contracts traded on several exchanges.

    Securities DOJ CFTC Enforcement Fraud Settlement

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  • SEC and CFTC issue joint statement on virtual currency enforcement actions; CFTC files lawsuits alleging cryptocurrency fraud


    On January 19, the SEC and the Commodity Futures Trading Commission (CFTC) issued a joint statement to reiterate the agencies’ positions on virtual currency enforcement and stress that they “will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.” As previously discussed in InfoBytes last year (see here and here), the SEC determined that federal securities laws apply to anyone who offers and sells securities in the United States, regardless of the manner of distribution or whether dollars or virtual currencies are used to purchase the securities, while the CFTC announced that virtual currencies are commodities. Additionally, both agencies filed enforcement actions in 2017 against firms based upon fraud allegations (coverage available here and here).

    Separately, on January 18, the CFTC filed lawsuits in the U.S. District Court for the Eastern District of New York against two individuals and their companies, alleging commodities law violations and fraud in the cryptocurrency market. In the first complaint, the CFTC alleged that a UK-registered company and its owner solicited cryptocurrency investments from members of the public for a commodity pool, but misrepresented the company’s trading expertise, misappropriated over $1 million of the pool’s funds, and failed to engage in the proposed investments with the pooled funds. In the second complaint, the CFTC alleged that a New York-based company and its owner operated a deceptive and fraudulent scheme in which they solicited cryptocurrency transfers in exchange for virtual currency investment advice and trading guidance, but never actually provided such advice. The CFTC further claimed the company concealed its scheme after collecting customer funds by removing its internet presence and ceasing communications with those customers. The suits seek, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.

    Fintech Virtual Currency CFTC SEC Enforcement Cryptocurrency

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  • Chair Giancarlo outlines CFTC approach to virtual currency regulation


    On January 4, the Chair of the CFTC, J. Christopher Giancarlo, issued a statement emphasizing the CFTC’s commitment to effectively regulating virtual currency and reiterated the CFTC’s view that virtual currency is a “commodity,” as defined by the Commodity Exchange Act (CEA), and thus is subject to CFTC regulation. Giancarlo noted that it would be irresponsible to ignore virtual currency and that the CFTC is following steps to effectively and responsibly regulate the risks, specifically, “consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators.” Giancarlo’s statement also noted an upcoming meeting of the CFTC Technology Advisory Committee to discuss virtual currencies on January 23.

    The CFTC also published a backgrounder on the oversight of the virtual currency futures market, which describes the “heightened review” for the self-certification process as applied to virtual currency futures products, and explains the extent to which the CFTC “not only has clear legal authority, but now also will have the means to police certain underlying spot markets for fraud and manipulation.”

    Fintech Virtual Currency CFTC Bitcoin

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