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  • Hawaii amends money transmitter provisions

    On July 3, the Hawaii governor signed HB 1027 (the “Act”) into law, amending several provisions relating to the Money Transmitters Modernization Act. The Act adds and amends several definitions. Changes include defining “money,” “receiving money or monetary value for transmission,” and “tangible net worth.” The definition of “money transmission” has also been amended to clarify its connection to business done in Hawaii, and “stored value” has been amended to mean monetary value “that represents a claim against the issuer evidenced by an electronic or digital record and that is intended and accepted for use as a means of redemption for money or monetary value, or payment for goods or services.” Stored value does not include “a payment instrument or closed loop stored value, or stored value not sold to the public but issued and distributed as part of a loyalty, rewards, or promotional program.”

    Among the various exemptions, the Act also provides for an exemption for an agent of the payee to collect and process a payment from a payor to the payee for goods or services, other than money transmission services, provided certain criteria is met. Additional exemptions include certain persons acting as intermediaries, persons expressly appointed as third-party service providers to an exempt entity, and registered futures commission merchants and securities broker-dealers, among others. Anyone claiming to be exempt from licensing may be required to provide information and documentation demonstrating their qualification for the claimed exemption.

    The amendments outline numerous licensing application and renewal procedures, including largely adopting the net worth, surety bond, and permissible investment requirements set forth in the Money Transmission Modernization Act. Several other states have also recently enacted provisions relating to the licensing and regulation of money transmitters (see InfoBytes coverage here and here).

    The Act took effect July 1.

    Licensing State Issues Digital Assets Fintech State Legislation Hawaii Money Service / Money Transmitters

  • District Court orders crypto platform and its CEO to disgorge and pay penalty in SEC case

    Courts

    On July 5, the U.S. District Court for the Southern District of New York ordered a crypto platform and its CEO to each pay a civil money penalty of $141,410, as well as to jointly pay disgorgement in the same amount, in a case brought by the SEC. The SEC filed a complaint in February 2021 alleging that the defendants violated the registration provisions of the Securities Act of 1933 in connection with their offer and sale of digital asset securities. According to the SEC, the defendants sold digital asset securities to hundreds of investors, including investors based in the United States, but failed to file a registration statement for the offering. The complaint further charged the defendants with denying prospective investors the material information required for such an offering to the public. The SEC alleged that the defendants raised at least $141,410 through their offering.

    Neither defendant responded to the complaint, and the court accordingly entered an order of default against the defendants, permanently enjoining the defendants from violating the registration provisions of the Securities Act. The court also referred the case to a magistrate judge to make a recommendation regarding disgorgement and penalties. The magistrate judge concluded—and the court agreed—that there were sufficient facts supporting the SEC’s allegations against the defendants and that disgorgement and civil monetary penalties were appropriate remedies. In addition to the civil monetary penalty of $141,410 per defendant, the court held the defendants jointly and severally liable for disgorgement of $141,410 plus pre-judgment interest.

    Courts Securities Digital Assets Fintech Cryptocurrency SEC Securities Act

  • Connecticut establishes rules for virtual currency kiosks

    State Issues

    On June 27, the Connecticut governor signed HB 6752 (the “Act”) to establish certain requirements for owners or operators of virtual currency kiosks in the state. Among other things, the commissioner has the authority to establish regulations, forms, and orders that govern the use of digital assets, such as virtual currencies and stablecoins, by regulated entities and individuals. When adopting, amending, or rescinding any such regulation, form, or order, the commissioner may consult with federal financial services regulators, regulators from other states, as well as other stakeholders and industry professionals to promote the consistent treatment and handling of digital assets. Definitions for “virtual currency address,” “virtual currency kiosk,” and “virtual currency wallet” have also been added.

    The Act further provides that prior to engaging in an initial virtual currency transaction with a customer, the owner or operator of a virtual currency kiosk is required to provide clear and conspicuous written disclosures in English regarding the material risks associated with virtual currency. These disclosures should cover several key points, including a prominent and bold warning acknowledging that losses resulting from fraudulent or accidental transactions may not be recoverable, transactions in virtual currency are irreversible, and that the nature of virtual currency may lead to an increased risk of fraud or cyber-attack. Disclosures must also address a customer’s liability for unauthorized virtual currency transactions, a customer’s right to stop payment for a preauthorized virtual currency transfer (along with the process to initiate a stop-payment order), and circumstances in which the owner or operator will disclose information regarding the customer’s account to third parties, unless required by a court or government order. Additionally, customers must be provided upfront information relating to the amount of the transaction, any fees, expenses, and charges, and any applicable warnings. It is the responsibility of the owner or operator of a virtual currency kiosk to ensure that every customer acknowledges the receipt of all disclosures mandated by the Act, and to provide receipts upon completion of any virtual currency transaction. The Act is effective October 1.

    State Issues Digital Assets Fintech Virtual Currency State Legislation Connecticut

  • DFPI orders crypto platform to halt operations

    State Issues

    On June 27, the California Department of Financial Protection and Innovation (DFPI) issued a desist and refrain order against a digital asset trading platform and two of its promoters for allegedly selling unqualified securities and making material misrepresentations and omissions to investors, a violation of California securities laws.

    DFPI alleges that the platform leveraged a “multi-level marketing scheme” to award its promoters who sold unqualified securities to investors in the form of investment contracts and received cash investments ranging from $5,000-$20,000. Allegations also include that the platform “purported” to provide educational classes designed to empower the Latino community with respect to crypto asset trading. The order details that through these efforts to garner more investors, “misrepresentations of material fact [were made] to investors and potential investors, namely that investors would receive a return on their initial investment every three months.” Investors have allegedly not received any return on their initial investment. The commissioner found that the platform “fail[ed] to provide the promised returns on their purported investments” and that “[d]espite multiple requests, investors have not had their funds returned.”

    The order requires the platform to desist and refrain from the offer and sale of securities and stop making misrepresentations about returns in California.

    State Issues Securities Fintech DFPI Cryptocurrency Enforcement Digital Assets California

  • Waters asks Treasury, SEC to comment on crypto framework

    Federal Issues

    On June 23, Representative Maxine Waters solicited viewpoints, analysis, and recommendations in letters sent to the Department of Treasury and the SEC regarding a recently introduced discussion draft of cryptocurrency framework. In her letters, Waters requested insight on how the proposed legislation would impact the federal regulators’ ability to conduct oversight, among other things. Waters specifically asked the SEC for recommended amendments to existing law, outside of the bill, to further protect investors in the digital assets space. In her letter to the Treasury, she asked for insight on how the bill would address or conflict with its policy recommendations, and if the bill or specific provisions of it are needed. Waters requested that both regulators provide a written response by June 30 and be prepared to brief the House Financial Services Committee.

    Introduced on June 2, the discussion draft to which Waters referred would impact the jurisdiction of the CFTC over digital commodities and the SEC’s authority over digital assets. Committee Chairman Patrick McHenry is a co-author of the discussion draft and also the primary sponsor of newly proposed bills regarding financial statement requirements of emerging growth companies that if passed, will indirectly impact regulators’ oversight in the crypto space. HR 2608 would limit the financial information an emerging growth company would be required to submit to the SEC, among other things. Specifically, “an emerging growth company is not required to present a financial statement for any period prior to the earliest audited period of the emerging growth company in connection with its initial public offering, such as a statement for an acquired company.” Additionally, HR 2610 would amend the Securities Exchange Act of 1934, so emerging growth companies would only need to submit the last 2 years of their profit and loss statements (previously 3 years). Among other things, the bill allows an issuer of securities to submit a draft registration statement to the SEC for confidential review prior to a public filing. Both bills have passed the House. 

    Federal Issues Digital Assets Fintech Federal Legislation CFTC Cryptocurrency Department of Treasury SEC U.S. House

  • Texas has new licensing requirements for digital-asset platforms

    In June, the Texas governor signed HB 1666 (the “Act”) to add practice restrictions to digital asset service providers, defined as electronic platforms that facilitate the trading of digital assets on behalf of a digital asset customer and maintain custody of the customer’s digital assets. The Act applies to a digital asset service provider conducting business in Texas that holds a money transmission license and either services more than 500 digital asset customer in the state or has at least $10 million in customer funds. Digital asset service providers are required to comply with certain provisions in order to obtain and maintain a money transmission license including provisions relating to the commingling of funds, customer access to funds, accounting requirements, annual reporting requirements. The Texas Department of Banking has the authority to suspend and revoke a license if these requirements are not met and may impose a penalty for violations of the Act. The commissioner also has examination authority and may promulgate rules to administer and enforce the Act’s provisions. The Act is effective September 1. Certain financial institutions and entities not required to hold a money transmission license are exempt. 

    Licensing State Issues Digital Assets Fintech State Legislation Texas Money Service / Money Transmitters

  • Louisiana amends virtual currency licensing

    On June 13, the Louisiana governor signed SB 185 (the “Act”), which amends provisions relating to the regulation and licensure of virtual currency businesses and is effective immediately. The Act adds and amends several definitions, including “acting in concert,” “affiliate,” “blockchain,” “mining,” “non-fungible token,” “responsible individual,” “unsafe or unsound act or practice” “virtual currency business activity,” and “virtual currency network.” With respect to licensure, the Act now requires applicants to provide a copy of their business plan, detailing, among other things, the anticipated volume of virtual currency business activities in the state, the expected number of virtual currency locations (including kiosks) in the state, and information on surety bonds and tangible net worth. Applicants must also provide audited financial statements and certificates of coverage for each liability, casualty, business interruption, and cybersecurity insurance policies (applicable policies for affiliates, agents, and control persons are required as well) with respect to an applicant’s virtual currency business activities. The Act also adds numerous licensing conditions and includes new requirements relating to background checks/criminal records/character fitness and fees and costs. Applicants will now be required to provide their financial services-related regulatory history, including information concerning money transmission, securities, banking, insurance, and mortgage-related industries. The Act extended the time that the state’s office of financial institutions has after the completion of an application to notify an applicant of its decision from 30 days to 60 days. If the office denies a license application, an advanced change of control notice, or an advanced change of responsible individual notice, an applicant has 30 days to appeal. Information on submitting annual licensing renewal applications, as well as guidance on providing appropriate disclosures is also included.

    Furthermore, the Act outlines provisions to protect residents’ assets, including prohibitions on selling, transferring, and assigning virtual currency and commingling assets belonging to a resident with assets belonging to a licensee. Also stipulated within the Act are authorities granted to the commission relating to examinations, investigations, and enforcement activity, as well as the authority to coordinate and share information and conduct joint examinations with other state regulators of virtual currency business activities.

    Licensing State Issues Digital Assets Fintech Virtual Currency State Legislation Louisiana

  • Unregistered crypto platform to pay $1.8 million to New York

    State Issues

    On June 15, the New York attorney general announced a settlement with a Hong Kong-based cryptocurrency platform to resolve allegations that the company failed to register as a securities and commodities broker-dealer and falsely represented itself as a crypto exchange. The respondent’s platform enables investors to buy and sell cryptocurrency. An investigator was able to create an account on the platform using a New York-based IP address to buy and sell tokens even though the respondent was not registered with the state. (Under New York law, securities and commodities brokers are required to be registered.) The respondent is ordered to refund more than one million dollars to investors and pay more than $600,000 to the state. According to the settlement, investors will receive their refunds in the form of cryptocurrency within 90 days. Additionally, the respondent must cease operating in the U.S., and implement geoblocking to prevent New York IP addresses from accessing its platform. The platform is also banned from offering, selling, or purchasing securities and commodities in New York, and must send weekly emails to its investors in New York, advising them to withdraw their funds from their accounts, or their funds will be transferred to the AG’s office. “Unregistered crypto platforms pose a risk to investors, consumers, and the broader economy,” the AG said, further warning of the serious consequences to other crypto platforms that do not follow New York law. This settlement follows other crypto-related legislation and suits from the New York AG (covered by InfoBytes here).

    State Issues Digital Assets Fintech State Attorney General Cryptocurrency Enforcement New York

  • Hsu tells banks to approach AI cautiously

    On June 16, Acting Comptroller of the Currency Michael J. Hsu warned that the unpredictability of artificial intelligence (AI) can pose significant risks to the financial system. During remarks presented at the American Bankers Association’s Risk and Compliance Conference, Hsu cautioned that banks must manage risks when adopting technologies such as tokenization and AI. Although Hsu reiterated his skepticism of cryptocurrency (covered by InfoBytes here), he acknowledged that AI and blockchain technology (where most tokenization efforts are currently focused) have the potential to present “significant” benefits to the financial system. He explained that trusted blockchains may improve settlement efficiency through tokenization of real-world assets and liabilities by minimizing lags and thereby reducing related frictions, costs, and risks. However, he warned that legal frameworks and risk and compliance capabilities for tokenizing real-world assets and liabilities at scale require further development, especially considering cross-jurisdictional situations and ownership and property rights.

    With respect to banks’ adoption of AI, Hsu flagged AI’s “potential to reduce costs and increase efficiencies; improve products, services and performance; strengthen risk management and controls; and expand access to credit and other bank services.” But there are significant challenges, Hsu said, including bias and discrimination challenges in consumer lending, fraud, and risks created from the use of “generative” AI. Alignment is also the core challenge, Hsu said, explaining that because AI systems are built to learn and may not do what they are programed to do, governance and accountability challenges may become an issue. “Who can and should be held accountable for misaligned, unexpected, and harmful outcomes?” Hsu asked, pointing to banks’ use of third parties to develop and support their AI systems as an area of concern.

    Hsu advised banks to approach innovation “responsibly and purposefully” and to proceed cautiously while keeping in mind three principles for managing risks: (i) innovate in stages, expand only when ready, and monitor, adjust and repeat; (ii) “build the brakes while building the engine” and ensure risk and compliance professionals are part of the innovation process; and (iii) engage with regulators early and often during the process and ask for permission, not forgiveness.

    Bank Regulatory Federal Issues Fintech OCC Artificial Intelligence Tokens Compliance Risk Management Blockchain

  • CFPB finds issues in servicemember use of payment apps

    Federal Issues

    On June 20, the CFPB released its Office of Servicemember Affairs Annual Report, highlighting financial threats associated with military families’ use of digital payment apps. The report analyzed complaints submitted by military families, veterans, and servicemembers (totaling 66,400 complaints in 2022 alone, a 55 percent increase from 2021). Notably, servicemembers’ complaints exceeded the percentage filed by all consumers for topics including debt collection, credit cards, mortgages, and more.

    Top complaints are linked to: (i) fraud and scams when using digital payment apps; (ii) identity theft and unauthorized account access; and (iii) failure of digital payment app providers to provide timely solutions to servicemember complaints. The Bureau explained that servicemembers can be exposed to greater risks of fraud and scams when using a digital payment app—“[o]ften during a permanent change of duty station, servicemembers face the need to secure housing, a new automobile, or daycare during a short window, which often requires them to conduct more online transactions using digital payment apps.” The Bureau also found that servicemembers are prime targets for identity theft, noting that servicemembers complained that digital payment service providers give insufficient support in response to their complaints.

    To address the emerging risks, the Bureau recommended that digital payment app providers invest in privacy and security technology for their apps to combat fraudulent activity. The Bureau also suggested providers improve their responsiveness, especially in the case of military families who may be on a tight timeline during a permanent change of station or deployment. The Bureau also recommended that providers implement tailored policies on fraud losses and automatic fraud detection in recognition of the unique circumstances military families face. 

    Federal Issues Fintech CFPB Consumer Finance Payments Servicemembers

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