To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:
- On December 23, the Federal Trade Commission (FTC) issued a proposed consent order, requiring Mastercard to end a practice that allegedly forced merchants to route debit card payments through Mastercard’s payment network in violation of the Durbin Amendment to the Dodd-Frank Act and Regulation II. The advent of e-wallet applications like Apple Pay has enabled consumers to process payment transactions directly from a cellular phone. The FTC alleged that Mastercard blocked merchants from routing e-wallet Mastercard debit transactions to competing payment card networks that may charge lower transaction fees than Mastercard. Mastercard effectuated this practice through a process called “tokenization.” A “token” is a converted code representation of the cardholder’s primary account number. When a consumer makes a purchase using an e-wallet application, the merchant receives a token from the cardholder’s device and sends the token to the merchant’s bank, which in turn, sends the token to a payment card network for processing. To settle the transaction, however, the payment card network that receives the token from the merchant’s bank must be able to convert the token to the cardholder’s primary account number. The FTC alleged Mastercard refused to provide token conversion services to competing networks for remote e-wallet transactions, which made it impossible for merchants to route their e-wallet transactions on a network other than Mastercard. For more information, click here.
- On December 21, the FTC announced it extended the public comment period on whether it should explore a rule on the harms caused by so called “junk fees” until February 8, 2023. For more information, click here.
- On December 21, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-PA) introduced the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022” bill. On April 6, Toomey released a draft version of this bill, which we discussed here. However, the introduced version of the bill contains a few notable amendments:
- Joint Supervision: If a payment issuer has been authorized by the appropriate federal banking agency, which the bill designates as the Office of Comptroller of Currency (OCC) and the applicable state banking supervisor to issue payment stablecoins, the payment stablecoin issuer will be jointly supervised by the federal banking agency and state banking supervisor.
- Master Account Access: Upon application from a national limited payment stablecoin issuer (an entity with an OCC license and OCC approval to issue payment stablecoins) or a payment stablecoin issuer (which includes money transmitter businesses, non-depository trust companies, or any other entity authorized by a state banking supervisor to issue payment stablecoins), the bill requires the Federal Reserve to establish and maintain master accounts for those entities.
- Insolvency of Payment Stablecoin Issuer and Priority of Competing Claims: The bill states that in any insolvency proceeding, including bankruptcy and any insolvency proceedings brought by a federal or state banking regulator, a claim of a person holding payment stablecoins issued by the payment stablecoin issuer will have priority over all other claims against the payment stablecoin issuer.
- Asset-Backed Stablecoins Only: Although the bill does not specifically reference payment stablecoins, the bill seems to indirectly prohibit the issuance of algorithmic stablecoins through exclusion since the bill requires payment stablecoins to be backed 1-to-1 by level 1 high-liquid assets denominated in United States dollars. Notably, the bill includes deposits maintained at an insured depository institution as a permissible asset for stablecoin reserves.
For more information, click here.
- On December 21, the Securities and Exchange Commission (SEC) filed a civil enforcement action against Thor Technologies, Inc. and Thor co-founders David Chin and Matthew Moravec for conducting an unregistered offering of securities through an initial coin offering. According to the SEC’s complaint, Thor claimed it would use the $2.6 million it raised through sales of “Thor” tokens to develop a software platform for “gig economy” companies and workers, but the platform was never completed. Further, the SEC alleged that during the 2018 initial coin offering of “Thor” tokens, the tokens had no practical use, and the tokens themselves were marketed as an investment vehicle that might rise in value based on Thor’s and the co-founders managerial and entrepreneurial efforts in developing the gig economy software platform. Therefore, the SEC alleged that Thor sold unregistered “investment contracts” — a type of investment vehicle that can become a security if certain criteria are met. For more information, click here.
- On December 21, the SEC filed a civil enforcement action against Alameda Research ex-CEO Caroline Ellison and ex-CTO Gary Wang. In its complaint, the SEC alleged that Ellison and Wang knowingly assisted Sam Bankman-Fried divert FTX customer crypto deposits from the FTX exchange platform by requiring FTX customers to deposit fiat currency into bank accounts controlled by Alameda. Critically, the SEC asserted that FTT, the native token of the FTX exchange platform, “was offered and sold as an investment contract” at the time of its 2019 offering and was therefore a security. For more information, click here.
- On December 20, the U.S. District Court for the Northern District of California issued an order, confirming that the Commodity Futures Trading Commission (CFTC) properly served the Ooki DAO with process. Initially, the CFTC attempted to serve Ooki DAO online by submitting its summons and complaint through Ooki DAO’s online chat help box and discussion forum. In response, several crypto stakeholders filed amicus briefs, arguing the CFTC is not capable of serving the Ooki DAO because (1) it is a technology and not an entity that has the capacity to be sued, and (2) service of process through an online chat help box does not constitute sufficient service under applicable federal or state law. In its order, the court examined federal law (FRCP 17(b)) and state law (California Civil Procedure Code Section 369.5(a)) and determined that the CFTC sufficiently alleged that Ooki DAO constitutes an unincorporated association, and therefore, Ooki DAO has the capacity to be sued. When an unincorporated association does not have a mailing address, California law permits the court in which the action is pending to direct the summons be served in a manner that is reasonably calculated to give actual notice to the party to be served and proof of such service be made as prescribed by the court. Here, the court concluded that Ooki DAO received actual and constitutionally sufficient notice of the CFTC’s lawsuit through its online chat box and discussion forum for two reasons: (1) posting service of process on the Ooki DAO’s online discussion forum, which was dedicated to conversation about the Ooki DAO, was reasonably likely to inform the Ooki DAO of the CFTC’s lawsuit, and (2) at least some of the token holders of OOKI, the native token of Ooki DAO, acknowledged service of process by instituting a governance proposal and taking “snapshot” votes of potential plans of action to the CFTC’s complaint. Previously on December 12, the U.S. District Court for the Northern District of California ordered the CFTC to personally serve Ooki DAO founders as individually identifiable holders of BZRX tokens, which was the native token of Ooki DAO’s predecessor bZx DAO. For more information related to our previous discussion of the bZx DAO lawsuit, click here. For more information related to the court’s order, click here.
- On December 16, the Financial Stability Oversight Council (FSOC) unanimously approved its 2022 Annual Report in which FSOC focused on four key priorities to address risks and emerging threats to the stability of the U.S. financial system:
- Nonbank Financial Intermediation: FSOC continues to monitor data-retention vulnerabilities posed by three types of nonbank financial institutions: open-end mutual funds, hedge funds, and money market funds.
- Digital Assets: FSOC recommended that federal regulatory agencies continue to enforce existing laws applicable to crypto-asset activities, including actions related to unregistered offers and sales of crypto-asset securities, episodes of fraud and market manipulation, and false and misleading statements concerning the availability of federal deposit insurance for crypto-assets. Additionally, FSOC discussed three gaps in the current U.S. regulatory framework of crypto-assets: (1) lack of direct federal regulation of the spot markets for crypto-assets that are not securities; (2) regulatory arbitrage; and (3) offering retail customers direct access to markets through vertical integration. Notably, regarding the spot market issue, FSOC recommended that Congress pass legislation that provides for explicit rulemaking, enforcement, and examination authority for federal financial regulators over the spot market for crypto-assets that are not securities.
- Climate-Related Financial Risk: In October 2021, FSOC published a report on climate-related financial risk, which recommended the formation of two committees: a staff-level Climate-Related Financial Risk Committee (CFRC) and an external advisory committee, the Climate-Related Financial Risk Advisory Committee (CFRAC). The CFRC began meeting in February 2022 and assists with translating climate data into potential financial impacts. On the other hand, the CFRAC assists FSOC in receiving information and analysis on climate-related financial risks from a broad array of stakeholders, including but not limited to, the financial services industry, nongovernmental research institutions, and academia.
- Treasury Market Resilience: In the face of increased uncertainty and volatility caused by a rapid increase in the 2022 federal funds rate, FSOC reported that the Treasury market has shown resilience. This resilience is attributable to coordinated policymaking through the Inter-Agency Working Group for Treasury Market Surveillance, which pursued specific principles to fortify the Treasury market, including: (1) bolstering the resilience of market intermediation; (2) improving data quality and availability; (3) evaluating expanded central clearing; and (4) enhancing trading venue transparency and oversight.
For more information, click here.
- On December 16, Consumer Financial Protection Bureau Director Rohit Chopra issued a statement, outlining the key financial stability risks discussed in FSOC’s 2022 Annual Report:
- Big Tech Cloud Providers: Director Chopra noted that financial services providers continue to rely upon Big Tech cloud providers to house data, and the operational resilience of these cloud companies could eventually lead to financial stability risks. Additionally, Director Chopra proposed that FSOC evaluate whether these cloud companies may be subject to oversight through the Dodd-Frank Act’s systemically important financial market utility authority.
- Digital Assets: Director Chopra considered how the separation of digital assets from traditional financial markets has contributed to the preservation of financial stability in 2022. Notably, Director Chopra asserted that “state money transmitter laws were not designed to ensure the long-term stability of [crypto-related entities].” Therefore, he proposed that FSOC consider whether to proceed with a designation process under FSOC’s Dodd-Frank Act Title VIII for entities that engage in crypto-related activities, including stablecoin issuance.
- Major Fund Strategies: Director Chopra took issue with the lack of direct supervision of major fund strategies. Furthermore, he noted that unlike traditional hedge funds, these entities generally face “no leverage limits or direct supervision,” and their ties to global systemically important banks can potentially undermine the efficacy of U.S. financial markets.
For more information, click here.
- On December 16, the Basel Committee on Banking Supervision issued its Prudential Treatment of Cryptoasset Exposures publication, which outlines the finalized crypto-asset categorization standard that Basel Committee member banks must implement by January 1, 2025. In part, the publication defines “Group 2 crypto-assets” as “all unbacked crypto-assets.” The publication suggests that “Group 2 crypto-assets” pose higher risks to financial stability. Therefore, under the finalized standard, a bank’s total exposure to Group 2 crypto-assets generally should not be higher than 1% and must not exceed 2% of the bank’s Tier 1 capital. For more information, click here.
- On December 22, New York Governor Kathy Hochul signed A.2666A/S.145B into law, which will require businesses to warn consumers of potential scams when selling gift cards. The legislation amends existing general business law to require retailers to post a notice, warning customers of gift card scams and providing information about how to respond appropriately if consumers believe they are victims of a scam. Hochul said in a statement that “consumers deserve to be protected from scams that target their hard-earned money.” For more information, click here.
- On December 21, the California Department of Financial Protection and Innovation (DFPI) issued a desist-and-refrain order to CONST LLC (doing business as “MyConstant”) regarding the company’s alleged violations of the California Securities Law and the California Consumer Financial Protection Law. According to DFPI, MyConstant operated an online platform, offering several crypto-asset-related and interest-bearing services and products. The company thereby allegedly engaged in unlicensed peer-to-peer loan brokering and the unregistered sale of securities. DFPI’s desist-and-refrain order will “remain in full force and effect until further order of the Commissioner.” For more information, click here.
- On December 21, the New York State Department of Financial Services (DFS) Superintendent Adrienne Harris announced new proposed guidance for New York State-regulated banking and mortgage institutions. The proposed guidance intends to help these institutions manage safety and soundness risks associated with climate change and seeks to support their efforts to identify, measure, monitor, and control their banking and financial risks. The guidance centers around several components of prudent risk management, including: (1) corporate governance, (2) internal control framework, (3) risk management process, (4) data aggregation and reporting, and (5) scenario analysis. DFS will host a webinar to provide an overview of the proposed guidance on January 11, 2023 at 10:30 a.m. EST. For more information, click here.
- On December 19, DFPI announced that it moved to revoke BlockFi Lending LLC’s (BlockFi) California Financing Law license. If BlockFi does not request a hearing by December 30, 2022, DFPI Commissioner Clothilde Hewett may issue an order revoking BlockFi’s license. For more information, click here.