InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
U.S.-UK partnership exchanges views on crypto, digital assets
On July 1, the U.S. Treasury Department issued a joint statement providing an overview of recent meetings of the U.S.-UK Financial Innovation Partnership (FIP) where Regulatory and Commercial Pillar participants exchanged views “on topics of mutual interest in the U.S. and UK regarding crypto and digital asset ecosystems.” Participants also discussed options for deepening ties between U.S. and UK financial authorities on financial innovation. As previously covered by InfoBytes, the FIP was created in 2019 as a way to expand bilateral financial services collaborative efforts, study emerging fintech innovation trends, and share information and expertise on regulatory practices. The first meeting of the FIP took place in August 2020 (covered by InfoBytes here). Topics discussed in the most recent meeting included, among other things, crypto-asset regulation and market developments, including recent developments related to stablecoins and the exploration of central bank digital currencies, and other recent market developments on digital assets. Participants acknowledged “the continued importance of the ongoing partnership on global financial innovation as an integral component of U.S.-UK financial services cooperation.”
CFPB discusses expanding electronic payments access
On June 28, CFPB Deputy Director Zixta Martinez spoke before the FDIC Meeting of the Advisory Committee on Economic Inclusion to discuss expanding access to affordable payments, credit, and other financial products and services. In her remarks, Martinez first discussed electronic payments, which she considers to be “quickly supplanting cash and are now an essential part of the economy.” She then discussed the role of banks, noting that they have an “obligatory and leading role” in expanding electronic payments. Martinez stated that with “their obligations to increase banking access and reduce banking and financial inequities, banks can play a key role, for example, in reducing the persistent and growing homeownership gap between Black and white families and closing the economic gap between the banked and the under- and un-banked.” She also stated that having access to electronic payments will “low[er] monthly fees and further reduc[e] the cost of overdraft and non-sufficient fund fees” and will service banking deserts in rural areas and within communities of color. Martinez further discussed actions to build out banking access and described a recent proposal to update the Community Reinvestment Act’s (CRA) regulatory framework (covered by InfoBytes here). Martinez stated that the proposal will; (i) take steps to address problems with grade inflation on CRA exams (i.e., meaning that “almost every bank” passes”); (ii) “rely upon small business lending data, which will allow for a more in-depth understanding of small business lending issues,” race, and ethnicity; (iii) “increase incentives for banks to finance community development projects in areas experiencing persistent poverty”; and (vi) “recognize banks that assist low- and moderate-income communities with clean energy transition and climate resiliency.” Additionally, Martinez noted that the Bureau “is working to ensure that banking access and access to credit is not unfairly affected by algorithmic models.” In conclusion, she said the Bureau’s recently released guidance “confirm[s] that it is unlawful to use black box models that do not allow for clear understanding of adverse actions, such as denial of credit.” (Covered by InfoBytes here.)
FAFT restricts Russia’s membership privileges, takes action against corruption and virtual asset misuse
On June 17, the U.S. Treasury Department announced that the Financial Action Task Force (FATF) concluded another plenary meeting, in which it, among other things, took steps to restrict Russia’s FATF membership privileges. During the meeting, FATF again criticized Russia’s war against Ukraine and issued a statement, stressing that “Russian actions run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system. They also represent a gross violation of the commitment to international cooperation and mutual respect upon which FATF Members have agreed to implement and support the FATF standards.” Treasury Secretary Janet Yellen also stated that she “welcome[s] the serious steps the FATF took to restrict Russia’s presence in its community.” FATF members agreed that Russia can no longer hold any leadership or advisory roles, nor take part in decision making on any standard-setting, peer-review processes, governance, or membership matters. Russia is also prohibited from providing assessors, reviewers, or other experts for FATF peer-review processes. FATF stated it “will monitor the situation and consider at each of its Plenary meetings whether grounds exist for modifying these restrictions.”
FATF also produced policy recommendations for combatting corruption and countering corrupt actors or illicit funds. FATF stated it will continue to fight the abuse of shell companies, trusts, or other legal arrangements employed by bad actors, and intends to seek input on guidance to implement recommendations related to the collection and verification of beneficial ownership information for companies or other legal entities. FATF members will release a white paper for public consultation on important issues concerning “the misuse of trusts and other legal arrangements to facilitate illicit finance,” and will published guidance on ways governments and firms can mitigate money laundering risks within the real estate sector.
Additionally, FATF adopted a report on virtual assets during the meeting, calling “for accelerated compliance by the public and private sectors with the FATF standards, particularly the ‘travel rule,’ for virtual assets and virtual asset service providers.” The travel rule requires virtual asset service providers to collect or send information on the identities of the originator and beneficiary of virtual asset transfers. However, FATF noted that, despite some progress, not all countries have introduced the travel rule, creating significant vulnerabilities for criminal misuse and underscoring the need for universal implementation and enforcement of the travel rule. FATF also approved a new project related to ransomware finance and related money laundering, with an objective of raising global awareness and understanding of how payments for ransomware are made and how these proceeds are often laundered.
California appeals court says lender cannot move bitcoin loan suit to Delaware
On June 14, the California Court of Appeal for the Second Appellate District reversed a trial court’s decision staying a suit against a lender and its loan payment processor (collectively, “defendants”) and enforcing a Delaware forum selection clause. The appeals court held that the plaintiff borrower’s unwaivable right to a jury trial under California law could be violated if the case proceeded in Delaware. According to the opinion, the plaintiff obtained $2.275 million in loans secured by bitcoin from the lender (a Delaware LLC that is licensed and regulated by California’s Department of Financial Protection and Innovation). When the value of bitcoin dropped, the lender sold the plaintiff’s bitcoin under the terms of the governing loan agreements. The plaintiff sued, “seeking, among other things, damages, return of his bitcoin, and cancellation of the loan agreements.” The defendants moved to stay the case because the Delaware forum selection clause required the case to be litigated in Delaware. The plaintiff countered that transferring the case to Delaware would “substantially diminish” his unwaivable rights under California law. The trial court eventually concluded that transferring the case to Delaware would not diminish the plaintiff’s rights and granted the stay pending litigation in Delaware. The trial court also stayed a second suit brought by the plaintiff alleging violations of California’s Unfair Competition Law and False Advertising Law, holding that the second suit involved the same primary rights as the first suit.
In reviewing the consolidated cases, the appeals court determined, among other things, that the Delaware forum selection clause in this case contains a predispute jury waiver. “Because California has a fundamental policy against such a waiver, Defendants carry the burden of proving that Delaware would not diminish this important right,” the appeals court wrote, adding that under Delaware law “contractual provisions that waive the contracting parties’ right to trial by jury have been upheld, and relevant case law provides insufficient assurance that Delaware courts will apply California’s important public policy to this dispute.” Additionally, the appeals court concluded that the defendants’ proposed “offer to stipulate that the Delaware court should apply California law” provides “little assurance that a Delaware court would enforce such a stipulation under the facts present here.”
CFTC Commissioner Romero discusses crypto regulation
On June 14, CFTC Commissioner Christy Goldsmith Romero discussed cryptocurrency regulation in an interview. According to sources, Romero rejected suggestions that the agency would be laissez-faire on cryptocurrency regulation, saying that the CFTC is positioned to protect consumers if provided with more authority. Throughout the interview, Romero noted some similarities between the present market and the 2008 market, stating that there is a “pretty sizeable market that’s largely unregulated.” Noting that a “regulatory gap” exists because the CFTC does not have any regulatory authority over the cash spot market, Romero said that Congress should close that gap. She mentioned her support for a bill similar to the Responsible Financial Innovation Act that she expects will give the CFTC more authority and will be introduced by Senators Stabenow and Bozeman. When asked about the possibility of regulation slowing the crypto market, Romero responded that “companies can’t scale up the way they need to without a lot of the financial institutions investments,” and that “regulation is needed.” She further noted that “bringing credibility [and] bring[ing] customer protections [] are going to be really important for scaling up.” She also referred to the case-by-case philosophy of CFTC enforcement actions, explaining that the agency looks at “where the evidence lies" and that part of this approach is "send[ing] a message to deter future violations of the law.” She further expanded on that point by saying that “since the CFTC doesn’t have regulatory authority, it has to rely on victims and whistleblowers," among other things.
Romero also mentioned that a difference between now and 2008 is that there are not a lot of financial institutions invested in cryptocurrency, as many are “waiting for a regulatory framework" and more regulation. As more financial institutions become invested in cryptocurrency, she said that she expects there to be “more interconnections” and more customer protections. She also noted that her biggest concern is that “if regulation fails to keep pace with technology, the most vulnerable people are going to be hurt.” In terms of areas needing more customer protections, Romero identified the need for segregation of accounts, settlement, custody, and reducing cybersecurity risk. She also expressed her support for customer education, calling it “very important.”
CFTC requests feedback on climate-related financial risk
On June 8, the CFTC published a request for information (RFI) in the Federal Register seeking public responses on climate-related financial risks related to the derivatives markets and underlying commodities markets. Among other things, the Commission is seeking input on the types of data that could help the CFTC evaluate climate-related financial risk exposures, scenario analysis and stress testing, risk management, disclosures, product innovation, digital assets, financially vulnerable communities, mechanisms for public-private partnerships/engagement, and coordination with other regulatory bodies. The CFTC emphasized that the responses “will help to inform the Commission’s next steps in furtherance of its purpose to, among other things, promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act, and avoid systemic risk.” Additionally, the Commission noted that it “may use this information to inform potential future actions including, but not limited to, issuing new or amended guidance, interpretations, policy statements, regulations or other potential commission action within its authority under the Commodity Exchange Act, as well as its participation in any domestic or international fora.”
Comments on the RFI are due August 8.
DFPI requests comments on oversight of crypto asset-related financial products and services
On June 1, the California Department of Financial Protection and Innovation (DFPI) issued a request for public comments from stakeholders on developing guidance related to the oversight of crypto asset-related financial products and services. DFPI will proceed with rulemaking under the authority of the California Consumer Financial Protection Law (CCFPL). The request is in accordance with an executive order issued by the California governor last month, which called on the state to create a transparent and consistent framework for companies operating in blockchain, cryptocurrency, and related financial technologies. (Covered by InfoBytes here.) DFPI’s request outlines various topics and questions concerning regulatory priorities, CCFPL regulation and supervision, and marketing monitoring functions, but notes that stakeholders “may comment on any potential area for rulemaking relating to crypto asset-related financial products and services,” including under other statutes administered or enforced by DFPI such as the Corporate Securities Law, Escrow Law, California Financing Law, or Money Transmission Act. The deadline to submit comments is August 5.
Brainard discusses central bank digital currency at House hearing
On May 25, Fed Governor Lael Brainard spoke before the U.S. House Financial Services Committee in a virtual hearing titled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” According to the Committee’s memorandum regarding the hearing, the Fed defines a central bank digital currency (CBDC) as a “digital liability of a central bank that is widely available to the general public,” and though definitions vary, “understanding what distinguishes cryptocurrency from fiat government-issued currency is fundamental.” The memorandum also discussed the Fed’s publication of a discussion paper in January, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. CBDC (covered by InfoBytes here). In Brainard’s prepared statement, she noted that the “rapid ongoing evolution” of digital assets “should lead us to frame the question not as to whether there is a need for a central bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.” Brainard also stated that “there are risks of not acting, just as there are risks of acting.” While there has not been a decision on creating a U.S. CBDC, Brainard stated that “it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.” Additionally, Brainard pointed to recent pressure on two widely used stablecoins and resulting market turmoil that “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.” Brainard further stated that a U.S. CBDC could be a potential “way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.”
Hsu is self-described “crypto skeptic”
On May 24, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the 2022 DC Blockchain Summit focusing on the vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins. In his remarks, Hsu described that he has “been a crypto skeptic,” and that it has become clear to him that the crypto economy depends on “hype” to “generate the interest and investment that are key to creating the ‘flywheel’ of growth that crypto projects seem to need to get off the ground.” In his speech, he discussed his three high level observations surrounding recent events from the perspective of a bank regulator. First, Hsu described “deep vulnerabilities in the crypto system,” noting that “[c]rypto is highly fragmented and prone to hacks,” and that “[c]ontagion risks are real.” He also argued that ownership rights are underdeveloped for the size, scope, and ambitions of the industry, explaining that “[f]or a technology and industry so focused on promoting an ‘ownership society,’ the lack of clarity on ownership rights, modes of ownership, and custody of digital assets seems like a fundamental problem that needs to be solved.” Second, Hsu observed that “recent events have shown the value of the OCC’s ‘careful and cautious’ approach to banks seeking to engage in crypto activities.” Hsu explained that there has been no contagion from cryptocurrencies to traditional banking and finance, stating that “[n]o banks are under stress or even rumored to be under stress due to crypto exposure.” Lastly, he warned “that hype is not harmless.” Hsu noted that a hype-driven economy has challenges for individuals interested in truly productive innovation and in protecting consumers. He recognized the possibility “for positive and transformative change with digital assets,” but warned that “the hype and the associated vulnerabilities noted above make the crypto space very dangerous for investors of modest means.” Hsu stated that while he remains a “a crypto skeptic,” he sees “its potential and understand[s] why there is excitement around it.” He also stated that the agency “will continue to take a careful and cautious approach to crypto in order to ensure that the national banking system is safe, sound, and fair.”
CFPB’s new innovation office to focus on competition instead of fintech sandboxes
On May 24, the CFPB launched the Office of Competition and Innovation, which will focus on competition and explore ways to “create market conditions where consumers have choices, the best products win, and large incumbents cannot stifle competition by exploiting their network effects or market power.” The new office will be housed under the Bureau’s Research, Markets and Regulation division, providing “greater access to resources to look at market-structure problems that create obstacles to innovation.” It replaces the Bureau’s existing Office of Innovation, which was established in 2018 and focused on allowing companies to apply for no-action letters and regulatory sandboxes in order to test specific product offerings. According to the Bureau, the agency will no longer offer these programs after a review established that the initiatives “proved to be ineffective and that some firms participating in these programs made public statements indicating that the Bureau had conferred benefits upon them that the Bureau expressly did not.”
The new office will focus on competition and explore ways to stop large banks and fintech lenders from “squeezing out smaller players” in the consumer finance market. It will also explore ways to ensure that consumers have their “walking rights” and can easily switch service providers. Additionally, the new office will research “structural problems” that create obstacles to innovation, examine dynamics between large and small players related to competition, identify ways to address commonplace obstacles such as access to capital and talent, examine financial data-sharing to ensure large financial institutions are not hoarding large volumes of digital data, and host events that explore barriers to entry and other obstacles, the Bureau said.