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:

Federal Activities

State Activities

Federal Activities:

  • On November 18, U.S. Assistant Secretary of the Department of the Treasury (Treasury) Elizabeth Rosenberg provided remarks at the Crypto Council for Innovation. She spoke on a report published by the Treasury, an “Action Plan to Mitigate the Illicit Finance Risks of Digital Assets,” which identifies seven priority actions, including improving global anti-money laundering/countering the financing of terrorism (AML/CFT) regulation and enforcement, strengthening U.S. supervision of the virtual asset service providers sector, and engaging with the private sector. For more information, click here.
  • On November 17, Financial Stability Board Working Group for Crypto Assets Chair Steven Maijoor addressed the need for a globally consistent digital asset regulatory framework and suggested that the current structural vulnerabilities of the market may “soon reach a point where they represent a threat to the stability of the global financial system.” For more information, click here.
  • On November 17, S. Deputy Secretary of the Treasury Wally Adeyemo continued a series of roundtable discussions to gather insight on IRS modernization efforts that will improve accessibility and service equity as part of implementing the Inflation Reduction Act. Adeyemo convened a roundtable discussion with national advocates representing underserved communities to identify ways the agency can improve accessibility and responsiveness to all taxpayers. For more information, click here.
  • On November 17, the Consumer Financial Protection Bureau (CFPB) announced it is seeking public comment on its proposal to develop a new data set to better monitor the auto loan market. According to the CFPB, greater visibility into market trends would allow lenders and investors to spot emerging opportunities, improve risk management practices, and ultimately expand access to credit and refinancing. The CFPB will be accepting comments on its proposal until December 19. For more information, click here.
  • On November 17, CFPB Director Rohit Chopra issued prepare remarks at the Financial Literacy and Education Commission, where he spoke about consumer complaints related to crypto assets. For more information, click here.
  • On November 16, the Federal Trade Commission (FTC) released a bulletin addressing “recovery services” scams, in which a fraudster may attempt to persuade a consumer, who has lost money on cryptocurrency exchange, to pay the fraudster a fee to recover the lost funds. For more information, click here.
  • On November 16, U.S. Treasury Secretary Janet Yellen released a statement discussing the recent collapse of FTX and urging Congress “to move quickly to fill the regulatory gaps” identified in various reports issued under President Biden’s Executive Order on Digital Assets. For more information, click here.
  • On November 16, while presenting remarks before the House Committee on Financial Services, Federal Reserve Board Vice Chair of Supervision Michael Barr discussed the digital assets market and emphasized that stablecoins can be subject to destabilizing runs and that legislative action would help promote responsible innovation and protect the financial system. For more information, click here.
  • On November 14, the U.S. Supreme Court denied YouTube influencer and BitConnect recruiter Glenn Arcaro’s petition to review the Eleventh Circuit’s assessment of the scope of statutory seller liability under Section 12(a)(1) of the Securities Act of 1933. In Parks v. BitConnect Ltd., et al., No. 20-11675, a class-action lawsuit in which Arcaro was a named defendant, the Eleventh Circuit determined that a direct solicitation to a prospective buyer is not necessary to satisfy statutory seller liability. Therefore, the Eleventh Circuit reasoned that the lawsuit’s allegations of Arcaro’s extensive online video promotion to the public of BitConnect, a cryptocurrency exchange, and BitConnect Coin, the native cryptocurrency of BitConnect, was sufficient to state a claim under Section 12(a)(1) of the Securities Act of 1933. On February 25, 2022, the U.S. Department of Justice indicted Satish Kumbhani, founder of BitConnect, on multiple charges, including conspiracy to commit commodity price manipulation, as BitConnect operated as a Ponzi scheme that misappropriated approximately $2.4 billion from investors. For more information concerning the Eleventh Circuit’s opinion in Parks, click here. For more information concerning the U.S. Supreme Court’s denial of certiorari, click here.
  • On November 16, the CFPB released a new Supervisory Highlightsreport, focusing on the auto servicing industry, consumer reporting, mortgage servicing, and COVID-19 relief funds. The report highlights the CFPB’s continued focus on so-called junk fees and inaccurate credit reporting. This edition of Supervisory Highlights was notable for the announcement that the CFPB had created a “Repeat Offender Unit” within supervision, the focus of which will be to “enhance the detection of repeat offenses, develop a process for rapid review and response designed to address the root cause of violations, and recommend corrective actions designed to stop recidivist behavior. This will include closer scrutiny of corporate compliance with orders to ensure that requirements are being met and any issues are addressed in a timely manner.” For more information, click here.
  • On November 15, the FTC announced that it is extending by six months the deadline for companies to comply with some of the changes the agency implemented to strengthen the data security safeguards financial institutions must put in place to protect their customers’ personal information. The deadline for complying with some of the updated requirements of the Safeguards Rule is now June 9, 2023. For more information, click here.
  • On November 15, the CFPB filed a petition for a writ of certiorarito the U.S. Supreme Court, requesting expedited review of the Fifth Circuit’s decision finding its funding structure unconstitutional. On October 19, a three-judge panel of the Fifth Circuit Court of Appeals held that the CFPB funding mechanism violates the appropriations clause because the CFPB does not receive its funding from annual congressional appropriations like most executive agencies, but instead receives funding directly from the Federal Reserve based on a request by the CFPB’s director. For more information, click here.
  • On November 15, the CFPB issued two reports on the tenant background check industry. The reports describe how errors in these background checks contribute to higher costs and barriers to quality rental housing. Too often, these background checks — which purport to contain valuable tenant background information — are filled with largely unvalidated information of uncertain accuracy or predictive value. While renters bear the costs of errors and false information in these reports, they have few avenues to allow tenant screening companies to fix their sloppy procedures. The CFPB’s analysis of more than 24,000 complaints highlighted the renter challenges associated with the industry’s failures to remove wrong, old, or misleading information, and to provide adequate investigations of disputed information. For more information, click here.
  • On November 14, the Financial Industry Regulatory Authority (FINRA) announced that it will begin conducting targeted exams of brokerage firm marketing practices relating to crypto assets. The assessment will require brokerage firms to provide all retail communication concerning crypto assets distributed between July 1 and September 30 of this year. For more information, click here.
  • On November 14, Office of the Comptroller of the Currency (OCC) Senior Deputy Comptroller for Bank Supervision Policy Grovetta Gardineer delivered keynote remarks at the 2022 CRA & Fair Lending Colloquiumwhere she discussed the OCC’s commitment to “elevating fairness” and ongoing efforts to ensure that its regulated institutions comply with the federal fair lending laws. In her comments, Gardineer explained how the OCC will strategically execute on its commitment to fair lending through the agency’s focus on three strategic goals for 2023-2027: (1) agility and learning; (2) credibility and trust; and (3) leadership in supervision. For more information, click here.
  • On November 14, the FTC announced that it is sending payments totaling more than $9.8 million to consumers who were harmed by Illinois-based auto dealership’s junk fees and discriminatory practices. The FTC and the State of Illinois sued in March 2022, alleging that employees were sneaking illegal junk fees for unwanted “add-ons” onto vehicle purchases and discriminating against Black consumers. According to the joint complaint, eight of the company’s dealerships illegally tacked on junk fees for unwanted “add-on” products such as payment insurance and paint protection, costing consumers hundreds or even thousands of dollars. The complaint also alleged that the company discriminated against Black consumers by charging them more for add-ons and financing. For more information, click here.
  • On November 11, the U.S. District Court of Wyoming ruled that Custodia Bank plausibly alleged that the Federal Reserve Bank of Kansas City (FRBKC) has unreasonably delayed decisioning Custodia’s request for master account access, since the “Master Account Agreement,” which Custodia submitted to the FRBKC notes that applications are generally processed in five to seven business days, and Custodia’s application has been pending since October 29, 2020. For more information, click here.
  • On November 9, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), pursuant to Executive Order 14059 (EO 14059), designated three individuals for supplying illicit fentanyl, synthetic stimulants, cannabinoids, and opioids to U.S. markets. OFAC also included various Bitcoin, Bitcoin Cash, and Ethereum addresses as identifiers of the three designated individuals on the Specially Designated Nationals list. This action marks the first time EO 14059 has been used to designate activities related to the sale of illicit drugs via darknet marketplaces. For more information, click here.
  • On November 4, the Federal Reserve Board invited public comment on a proposal to publish a periodic list of depository institutions that have access to Federal Reserve accounts — often referred to as “master accounts” — and payment services. For more information, click here.

State Activities:

  • On November 16, the California Department of Financial Protection and Innovation (DFPI) issued a notice to suspend SALT Lending LLC’s California Financing Law license for 30 days pending the DFPI’s investigation into SALT’s recent announcement to pause client withdrawals on its platform. Although the extent of the impact has yet to be determined, SALT, a crypto-lending platform, was affected by the recent collapse of cryptocurrency exchange FTX. For more information, click here.
  • On November 15, the city council of Toledo, Ohio (Council) and the county commissioners for Lucas County (Commissioners), where Toledo is located, combined forces to put $1.6 million toward purchasing residents’ medical debt. The Council decided to use $800,000 of the $180 million it received from the federal government as part of the American Rescue Plain Act. The Commissioners agreed to match the city’s funding. The ordinance that will enable the Council and the Commissioners to carry out this plan of eliminating up to $200 million in past due medical expenses for Toledo residents is expected to be the first attempt by government at any level, to aid residents in managing unpaid medical debt. The individuals seeking to have their debt forgiven must earn less than four times the federal poverty level or have unpaid medical debts that exceed 5% of their annual income. For more information, click here.
  • On November 15, New York Department of Financial Services Superintendent Adrienne Harris keynoted a Brookings Institute event, titled “Digital Asset Regulation: The State Perspective.” During her speech, Harris called on Congress to develop a federal digital asset regulatory framework that resembles New York’s state regulatory regime. For more information, click here.
  • On November 15, the Federal Reserve Bank of New York’s Innovation Center announced that it will launch a 12-week pilot program for a central bank digital currency (CBDC) to “explore the feasibility of an ‘interoperable network of central bank wholesale digital money and commercial bank digital money operating on a shared multi-entity distributed ledger.'” This pilot program follows the initial phase of the CBDC trial, which examined foreign exchange spot trades to determine whether a blockchain solution could enhance the speed, cost, and access to cross-border wholesale payments. Notable banking institutions and financial services providers will be participating in the pilot project. Although federal regulators have not agreed on whether to launch a digital dollar in the country, several agencies and individuals in the private sector have been experimenting with the possibility. For more information, click here.
  • On November 11, the California DFPI issued notice of its intent to suspend a cryptocurrency lender’s license for 30 days while DFPI investigates the lender’s recent announcement that it will limit some of its platform activity. The lender made the announcement on its social media page, acknowledging that is unable to “operate business as usual” due to lack of clarity regarding the status of several crypto asset platforms. The cryptocurrency lender has reportedly terminated its loan offerings in California and has asked its clients not to make deposits to its platform. For more information, click here.

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:

Federal Activities

State Activities

Federal Activities:

  • On November 4, the Federal Reserve Board invited public comment of a proposed rule to publish a periodic list of depository institutions that have access to Federal Reserve accounts, also known as “master accounts.” For more information, click here.
  • On November 2, the Consumer Financial Protection Bureau (CFPB) released a blog post, exploring the potential impact of student loan payment reinstatement. The CFPB found that student loan borrowers are increasingly likely to struggle once their monthly student loan payments are reinstated. However, the CFPB also found that student debt cancellation may substantially reduce the number of borrowers at risk when the payment suspension ends. Overall, the CFPB found that “despite worsening credit outcomes … the cancellation of some student loan debt means that fewer student loan borrowers are likely to be at risk of payment difficulties when federal student loan payments resume in January 2023 than they otherwise would be.” For more information, click here.
  • On November 2, CFPB Director Rohit Chopra delivered remarks at the Consumer Advisory Board meeting, which included a discussion on the fast-growing buy now, pay later market. For more information, click here.
  • On November 1, Deputy Secretary of the Treasury Wally Adeyemo delivered remarks at the semi-annual joint session of the Financial and Banking Information Infrastructure Committee and Financial Services Sector Coordinating Council where he discussed Treasury’s efforts to bolster public-private relationships to protect the department and financial sector from cyber threats. These include modernizing Treasury’s IT systems with an elevated cybersecurity threat focus, as well as ramping up partnerships with the financial and regulatory sectors. For more information, click here.
  • On October 31, the Financial Crimes Enforcement Network (FinCEN) informed U.S. financial institutions that the Financial Action Task Force (FATF), an intergovernmental body that establishes international standards for anti-money laundering, countering the financing of terrorism, and countering the financing of proliferation of weapons of mass destruction (AML/CFT/CPF), issued public statements, updating its lists of jurisdictions with strategic AML/CFT/CPF deficiencies following its plenary meeting this month. U.S. financial institutions should consider the FATF’s stance toward these jurisdictions when reviewing their obligations and risk-based policies, procedures, and practices. For more information, click here.
  • On October 31, the U.S. Department of Education released final regulations that streamline and improve the rules for major targeted debt relief programs. The regulations expand eligibility, remove barriers to relief, and encourage automatic discharges for borrowers who are eligible for loan relief because their school closed, they have a total and permanent disability, or their loan was falsely certified. The rules also establish a fairer process for borrowers to raise a defense to repayment, while preserving the borrowers’ day in court by preventing institutions of higher education (institutions) from forcing students to sign away their legal rights using mandatory arbitration agreements and class-action waivers. For more information, click here.
  • On October 31, the CFPB announced that it will re-open the public comment period for 30 days and add additional questions for six large technology and peer-to-peer platforms that operate payment services to provide information about their business practices, including their data collection and use, their policies for removing individuals or businesses from their platforms, and their policies and practices for adhering to key consumer protections like addressing disputes and errors. For more information, click here.
  • On October 31, the Federal Trade Commission announced that it is taking action against an education technology provider for its lax data security practices that exposed sensitive information about millions of its customers and employees, including Social Security numbers, email addresses, and passwords. The provider allegedly failed to fix problems with its data security despite experiencing four security breaches since 2017. The FTC’s proposed order requires the company to bolster its data security, limit the data the company can collect and retain, offer users multifactor authentication to secure their accounts, and allow users to access and delete their data. For more information, click here.
  • On October 27, the American Bankers Association expressed concern regarding a proposal currently being considered by the CFPB that would shift liability from consumers to banks for scams involving peer-to-peer (P2P) payments. This would include requiring banks to reimburse consumers for P2P payments made but later identified by consumers as payments to a scammer. For more information, click here.
  • On October 27, the Office of the Comptroller of the Currency (OCC) announced it will establish an Office of Financial Technology early next year to bolster the agency’s expertise and ability to adapt to a rapidly changing banking landscape. The Office of Financial Technology will build on and incorporate the Office of Innovation, which the OCC established in 2016 to coordinate agency efforts to support responsible financial innovation. For more information, click here.
  • On October 27, the Federal Financial Institutions Examination Council announced an update to its 2018 Cybersecurity Resource Guide for Financial Institutions. The guide includes updated references and now includes ransomware-specific resources. The FDIC is amplifying this resource in recognition of Cybersecurity Awareness Month, which highlights the importance of safeguarding our nation’s critical infrastructure from malicious cyber activity and protecting citizens and businesses from ransomware and other cyberattacks. For more information, click here.
  • On October 26, FinCEN announced the renewal and expansion of its Geographic Targeting Orders (GTOs) that require U.S. title insurance companies to identify the natural persons behind shell companies used in non-financed purchases of residential real estate. FinCEN renewed the GTOs that cover certain counties within the following major U.S. metropolitan areas: Boston, Chicago, Dallas-Fort Worth, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, Seattle, the District of Columbia, Northern Virginia, and Maryland (DMV) area, as well as the city and county of Baltimore, the county of Fairfield, CT, and the Hawaiian islands of Honolulu, Maui, Hawaii, and Kauai. For more information, click here.
  • On October 26, the Congressional Research Service issued a report, discussing the ongoing development of AML/CFT policy since the release of President Biden’s Executive Order 14067 (Ensuring Responsible Development of Digital Assets). The report mainly addressed the Biden administration’s next steps for addressing illicit finance concerns related to digital assets:
    • Evaluating potential legislative proposals to amend the Bank Secrecy Act and laws related to unlicensed money transmitters;
    • Authorizing the DOJ to prosecute digital asset crimes in any jurisdiction where a victim of those crimes is located;
    • Conducting illicit finance risks assessment of decentralized finance (by the end of February 2023) and of non-fungible tokens (by July 2023);
    • Increasing dialogue with private sector on the illicit financing risks associated with digital assets and compliance with AML/CFT obligations;
    • Continuing to hold misusers of digital assets accountable for their actions through law enforcement action and node analysis.

      For more information, click here.
  • On October 25, Rep. Alma Adams introduced a bill in the U.S. House of Representatives, seeking to protect a greater portion of consumers’ disposable income from garnishment. If enacted, the Protecting Wages of Essential Workers Act of 2022 (H.R. 9224) would amend the Consumer Credit Protection Act to raise the amount of a consumer’s disposable income protected from garnishment to $1,000 or 75%, whichever is greater. The current limit is $217.50, which is tied to the federal minimum wage. The protected amount would also adjust annually based on the Consumer Price Index. For more information, click here.

State Activities:

  • On November 4, the Federal Reserve Bank of New York (New York Fed) issued a report on the Phase 1 results of Project Cedar, a multiphase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) issued by the Federal Reserve. A wCBDC is designed primarily for the settlement of interbank payments and would be available only to those parties with master account access at a central bank. Phase 1 of Project Cedar involved cross-border settlement of FX spot trades, which generally take at least two days to settle. By leveraging a permissioned blockchain network, the New York Fed substantially reduced the historical settlement time of FX spot trades since the results of Phase 1 of Project Cedar revealed blockchain-enabled payments systems settle transactions in fewer than 10 seconds. For more information, click here.
  • On November 3, the Massachusetts Division of Banks issued a cease-and-desist order to a debt collector believed to have been operating within the state for more than six years without the requisite state licensure. The debt collector originally obtained licensing in 2010, but its license expired in 2012 and was terminated less than six months later. The order requires the collector to cease all collection activities within the state until properly licensed, provide a record of the funds it collected from consumers in the state from January 2019 through November 3, 2022, and provide an itemization of the accounts of consumers from whom it is currently attempting to collect. For more information, click here.
  • On November 3, Pennsylvania Attorney General Josh Shapiro announced that his office filed a lawsuit against New York-based Fluent, Inc. — a company that connects advertisers to potential new customers through the consumers’ personal data — for its and its subsidiaries’ role in allegedly causing hundreds of thousands of unwanted robocalls to be placed to Pennsylvania consumers. Fluent and its subsidiaries Fluent LLC, CAC, American Prize Center LLC, Deliver Technology LLC, Rewardzone USA LLC, and Samples & Savings USA LLC, collected personal information, including telephone numbers, then sold them to telemarketing companies. This included the personal information of thousands of consumers on Pennsylvania’s Do Not Call List. For more information, click here.
  • On October 31, Connecticut state regulators levied a $4.5 million fine against a utility company accused of trying to garnish customers’ wages during the COVID-19 pandemic without complying with state law. Specifically, the utility company failed to adhere to a pandemic-related plan implemented by the state’s Public Utilities Regulatory Authority, which required companies to offer a payment program option to customers seeking financial assistance or whenever a customer missed his or her first payment. The state regulators’ eight-month investigation unearthed evidence that the utility company filed more than 200 applications for wage garnishments against customers who did not pay their bills during the pandemic. Additionally, the utility company allegedly engaged a collection agency with knowledge that the agency reported customer information to consumer reporting agencies without first notifying the customers, as required by state law. State regulators are seeking the maximum fine of $10,000 per violation against the utility company. For more information, click here.
  • On October 27, the California Department of Financial Protection and Innovation (DFPI) announced that it intends to begin issuing conditional licenses to companies that have applied under the state’s debt collection licensing law. Additionally, the agency will end the safe harbor provision, which currently permits companies that have applied for a license to continue collecting debt within the state. These changes are being implemented as a means of offsetting anticipated delays in the licensing process as DFPI continues to develop a system for performing background checks and collecting fingerprints that meets the standards set forth by the Federal Bureau of Investigation. So far, the agency has received approximately 1300 applications. For more information, click here.

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:

Federal Activities

State Activities

Federal Activities:

  • On October 4, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) issued a press release documenting its collaborative central bank digital currency (CBDC) cross-border payment pilot project with Capgemini, which accomplished facilitating real-time gross settlement CBDC-to-CBDC transactions between different distributed ledger networks run on Quorum and Corda. For more information, click here.
  • On October 4, the Consumer Financial Protection Bureau (Bureau) filed an enforcement action against Choice Money Transfer for allegedly violating the Remittance Transfer Rule and the Electronic Fund Transfer Act (EFTA) by failing to accurately disclose important prepayment information to remittance senders and maintaining deficient recordkeeping practices, which made it difficult for consumers to dispute erroneous transactions and receive a refund of certain fees. For more information, click here.
  • On October 4, the Federal Housing Administration (FHA) issued a request for information (RFI) on how it can increase access to small balance mortgages through its single-family mortgage insurance programs, which generally apply to mortgages with an original principal obligation of $70,000 or less. In conjunction with the RFI, the U.S. Department of Housing and Urban Development (HUD) released a report titled Financing Lower-Priced Homes: Small Mortgage Loans, which highlighted the challenges faced by borrowers who need loans to purchase lower-priced homes. For more information about the RFI, click here. For more information about the HUD report, click here.
  • On October 3, the Federal Reserve finalized updates to Regulation II (Final Rule), which establishes standards for assessing whether a debit card interchange fee received by a debit card issuer for an electronic debit transaction is reasonable and proportional to the costs incurred by the issuer with respect to the transaction. Like the proposed rule issued in 2021, the final rule requires debit issuers to enable unaffiliated payment card networks across all transaction types, including but not limited to online (card-not-present) transactions. For more information, click here.
  • On October 3, the U.S. Financial Stability Oversight Council (FSOC) released its Report on Digital Asset Financial Stability Risks and Regulation, which was issued in response to President Biden’s Executive Order 14067, Ensuring Responsible Development of Digital Assets. The report identified three gaps in the regulation of crypto-asset activity in the United States: (1) the spot markets for crypto-assets that are not securities are subject to limited direct federal regulation; (2) crypto-asset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage; and (3) a number of crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries such as broker-dealers or futures commission merchants. For more information, click here.
  • On October 3, the Consumer Bankers Association, American Bankers Association, Bank Policy Institute, and The Clearing House expressed their collective disagreement with a report by Sen. Elizabeth Warren (D-MA) regarding the prevalence of fraud on Zelle, the popular peer-to-peer (P2P) payment service. In the statement, the banking groups stated “Today’s report from Sen. Warren fails to acknowledge that 99.9% of the 5 billion transactions processed on the Zelle network in the past 5 years were sent without any report of fraud or scams. Zelle has soared in popularity with bank customers because it’s fast, free and easy to use. Customers also take comfort in knowing that Zelle transactions are provided by and through their trusted bank.” For more information, click here
  • On September 30, the Federal Deposit Insurance Corporation (FDIC) released a list of orders of administrative enforcement actions taken against banks and individuals in August 2022. For more information, click here.
  • On September 30, the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury released guidance entitled Sanctions Compliance Guidance for Instant Payments, which suggested financial institutions should implement risk-based approaches to manage sanction risks and, to the extent possible, deploy innovative sanctions compliance technologies to eliminate such sanction risks. For more information, click here.
  • On September 30, OFAC entered a settlement with Tango Card, Inc., a gift card distributor, in the amount of $116,048.60 for potential civil liability arising from Tango’s alleged transmission of 27,720 gift cards (an economic benefit totaling $386,828) to individuals with IP addresses associated with Cuba, Iran, Syria, Ukraine, and North Korea, which are sanctioned jurisdictions. For more information, click here.

State Activities:

  • On October 4, New York Attorney General Letitia James provided $2 million to Erie County to strengthen consumer protection laws in western New York. James secured the funds in an action against several companies accused of engaging in predatory debt collection practices nationwide. A portion of the funds will be used to hire a full-time, in-house counsel in the Erie County Consumer Protection Office. The county thanked James, stating that it “will now be able to better investigate consumer complaints and improve [its] ability to educate [its] residents about predatory and unlawful businesses.” For more information, click here.
  • On October 3, Florida Attorney General Ashley Moody issued a consumer fraud alert to Florida residents regarding the potential for disaster scams, price gouging, and fraud in the wake of Hurricane Ian. Moody warned residents that qualified contractors are generally in “high demand,” leaving room for out-of-state scammers to prey upon Floridians in need of expert services. Moody gave residents a list of tips for avoiding a scam, including, for example, researching the company’s reputation and making sure the company is bonded and verified with a bonding agency. Additionally, on October 5, Moody announced she will send consumer protection investigators to parts of Florida to assist with protecting vulnerable consumers. For more information, click here.
  • On October 1, amendments to the Maryland Personal Information Protection Act took effect. Some of the changes include (1) expanding the scope of the statute to include businesses that maintain personal information of Maryland residents, as opposed to only those that own or license such information; (2) requiring specific information that must be disclosed in a company’s notice to the Maryland Attorney General of a security breach; (3) shortening the period of time a business that maintains personal information on behalf of a data owner has to notify the owner of a security breach from 45 days to 10 days; and (4) expanding the nature of information that will be considered protected genetic information under the statute. For more information, click here.
  • On September 28, California Gov. Gavin Newsom approved Senate Bill 786, which requires vital records offices in the state to allow for the use of blockchain technology and verifiable credentials. The change will allow Californians to receive PDFs of birth, death, and marriage records immediately, as opposed to a standard 10-day postal delivery. The senator responsible for introducing the bill, Sen. Robert Hertzberg, argued that blockchain technology is a “faster, cheaper, more efficient delivery method” for Californians that is “more secure” because it “is nearly impossible to hack.” For more information, click here.

On August 29, the Federal Reserve Board (Fed) announced that its real-time payments system, FedNow, will launch sometime between May and July of 2023. FedNow will provide a platform on which banks can build their products. Products enabled by FedNow will allow a common consumer or business to send and receive payments instantly, instead of the government’s current system that is closed on weekends and holidays and can sometimes take days to process transfers. What differentiates FedNow from other instant payment services is that FedNow will service all federal reserve banks, which provides payment services to thousands of financial institutions. More than 120 banks and payment processors currently participate in the FedNow pilot program.

“The FedNow Service will transform the way everyday payments are made throughout the economy, bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently. Immediate availability of funds could be especially important for households managing their finances paycheck to paycheck or small businesses with cash flow constraints,” according to Vice Chair Lael Brainard in a speech at a FedNow Early Adopter Workshop.

Vice Chair Brainard also urged financial institutions and software providers to update their systems in anticipation of the summer launch. “The time is now for all key stakeholders — financial institutions, core service providers, software companies, and application developers — to devote the resources necessary to support instant payments. This means upgrading back-office processes, evaluating account procedures to accommodate a seven-business-day week, arranging liquidity providers, deploying a new customer-facing application, and promoting instant payments for key use cases to customers.”

Some of the expected benefits of the FedNow system include:

  • Making instant payment technology more accessible to smaller community banks;
  • Reducing the payment processing costs for banks and other financial institutions; and
  • Providing consumers with instant access to payments and other electronic fund transfers.

Some say the launch of the FedNow service will provide an alternative to the creation of a central bank digital currency (CBDC). As we discussed previously, in January 2022, the Fed issued a report titled, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” The report was widely viewed as “the first step in a public discussion” regarding the creation of a CBDC — legal tender just like a paper bill, but in digital format, which would be “a digital liability of a central bank that is widely available to the general public.” Some maintain that the instant payment capability of FedNow could negate the need for a CBDC.

Troutman Pepper will continue to monitor important developments involving the FedNow system and will provide further updates as they become available.

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:

Federal Activities

State Activities

Privacy and Cybersecurity Activities

Federal Activities:

  • On July 13, the Federal Trade Commission (FTC) published its proposed Motor Vehicle Dealers Trade Regulation Rule in the Federal Register. The proposed rule would create a host of new compliance challenges for motor vehicle dealers, including a new national standard for price advertising, trigger disclosures for payments, added paperwork for the sale of add-on products, a prohibition on “no benefit” add-on products, and additional recordkeeping requirements. The deadline to submit comments is September 12. For more information, click here.

  • On July 13, the Bank for International Settlements (BIS) and the International Organization of Securities Commissions published their guidance on the application of financial market infrastructure rules to stablecoins. For more information, click here.

  • On July 11, the BIS Committee on Payments and Market Infrastructures, the BIS Innovation Hub, the International Monetary Fund, and the World Bank release a joint report titled, “Options for access to and interoperability of CBDCs for cross-border payments.” For more information, click here.

  • On July 8, the U.S. Patent and Trademark Office (USPTO) and the Copyright Office indicated they would conduct a joint study on the current and potential future applications of non-fungible token (NFT) and various NFT challenges. In June, Senator Thom Tillis and Senator Patrick Leahy requested that the USPTO and the Copyright Office undertake a joint study to address a number of IP legal issues around NFTs. If accepted, the senators requested the agencies to complete study by July 2023. For more information click here.

  • On July 8, the U.S. Department of the Treasury published a request for comment (RFC), seeking input on U.S. digital assets development. The Biden administration published the RFC in its March 9 executive order “Ensuring Responsible Development of Digital Assets,” which requires numerous federal agencies to submit reports and evaluations on digital assets regulation and administration. For more information, click here.

  • The Consumer Financial Protection Bureau (CFPB) agreed to a March 31, 2023 deadline to issue a final rule under Section 1071 of Dodd-Frank. Section 1071 amended the Equal Credit Opportunity Act to impose significant data collection requirements on small business creditors. The CFPB accepted the deadline as part of a previously agreed litigation settlement on alleged delays in the rulemaking process. For more information, click here.

State Activities:

  • On July 8, Connecticut Attorney General William Tong issued a press release, seeking a formal hearing to explore health insurance rate hike requests. According to the statement, there were “13 rate filings from nine health insurers seeking average rate hikes of 20.4 percent for the individual market and 14.8 percent for small groups.” Attorney General Tong stated, “Healthcare costs and insurance premiums are already unaffordable for many Connecticut families, businesses and individuals, and these double-digit rate hikes demand rigorous scrutiny. The Department of Insurance has previously agreed to hold public rate hearings on any rate increase exceeding 10 percent, and that transparency is certainly needed now.” For more information, click here.

  • On July 5, Georgia Attorney General Chris Carr recognized Military Consumer Protection Month and shared information to help active-duty servicemembers, veterans, and their families avoid scams and predatory business practices. The Georgia Office of the Attorney General Consumer Protection Division offers the Georgia Military Consumer Protection Guide to help active and former servicemembers better understand their rights as consumers and how to protect themselves from common scams. “Our servicemen and women dedicate their lives to defending our nation, and they deserve our commitment to helping them secure their personal and financial information,” said Carr. For more information, click here.

  • On June 20, the Louisiana Office for Financial Institutions (OFI) proposed a rule on licensure, registration, and regulation of persons engaging in, or planning to engage in, virtual currency business activity in Louisiana. The rule follows the mandate set by Louisiana’s Virtual Currency Business Act (VCBA), effective August 1, 2020, requiring virtual currency businesses to hold a license in Louisiana and granting administrative and enforcement authority to OFI. Specifically, the rule details requirements on the registration, maintenance, and regulation of licenses of virtual currency businesses operating in Louisiana, including the application for a license, approval of control person and change of control, renewal of a license or notice of registration, determination of net worth, examination, recordkeeping, and other policies and procedures that must be adopted by virtual currency businesses. For more information, click here.

Privacy and Cybersecurity Activities:

  • On July 11, the FTC committed to fully enforcing the law against illegal use and sharing of highly sensitive data. The FTC referenced the FTC Act Section 5, which prohibits unfair and deceptive trade practices; the Safeguards Rule; the Health Breach Notification Rule; and the Children’s Online Privacy Protection Rule. The blog post stated that “[t]he Commission is committed to using the full scope of its legal authorities to protect consumers’ privacy. We will vigorously enforce the law if we uncover illegal conduct that exploits Americans’ location, health, or other sensitive data. The FTC’s past enforcement actions provide a roadmap for firms seeking to comply with the law.” To read the full blog post, click here.

  • On July 13, U.S. Representative Anna G. Eshoo (D-CA) and Senator Ron Wyden (D-OR) urged FTC Chair Lina Khan to address abusive and deceptive data practices by hundreds of companies providing virtual privacy network (VPN) services for individuals. The letter states: “The consumer VPN industry is extremely opaque, and many VPN providers exploit, mislead, and take advantage of unwitting consumers.” The letter arrives as “people seeking abortion are increasingly told that installing a VPN is an important step for protecting themselves when seeking information on abortion in states that have outlawed and criminalized abortion. This advice has also been applied to general privacy-related concerns and has brought VPNs into the mainstream among American internet users and resulted in a significant market boom.” To view the full letter, click here.

Like most industries today, Consumer Finance Services businesses continue to be significantly impacted by COVID-19. To help you keep abreast of relevant activities, below find a breakdown of some of the biggest legislative and regulatory events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Privacy and Cybersecurity Activities

Federal Activities:

  • On June 26, the Bank for International Settlements released its Annual Economic Report 2022, arguing that global monetary systems should be built upon central bank digital currencies (CBDCs), not cryptocurrencies. For more information, click here.

  • On June 23, the Federal Trade Commission (FTC) proposed a new and historic federal regulation specific to car dealers to address concerns of consumer deception in the sales process. The proposed Motor Vehicle Trade Regulation Rule would:

    • Require price advertising to be based on a standard formula for presenting the “Offering Price” for a vehicle;

    • Require new paperwork in the sales process to confirm that any optional “add-on” products included in a sale are purchased voluntarily with the “Express, Informed Consent” of the consumer; and

    • Prohibit a laundry list of specific kinds of misrepresentations in the sales process.

The commissioners approved the proposal in a 4-1 vote, garnering the support of three Democratic appointees and one Republican appointee, which bodes well for the rule’s final adoption. The FTC seeks comments on the proposed rule within 60 days of the rule’s official publication in the Federal Register. For more information, click here.

  • On June 24, the Consumer Financial Protection Bureau (CFPB or Bureau) announced that it will amend Regulation V, which implements the Fair Credit Reporting Act (FCRA), to address recent legislation that assists consumers who are victims of trafficking. This final rule establishes a method for victims of trafficking to submit documentation to consumer reporting agencies, including information identifying any adverse item of information about the consumer that resulted from certain types of human trafficking, while also prohibiting consumer reporting agencies from furnishing a consumer report containing the adverse item(s) of information. As mandated by the National Defense Authorization Act for Fiscal Year 2022, the Bureau is taking this action to assist consumers who are victims of trafficking in building or rebuilding financial stability and personal independence. For more information, click here.

  • On June 23, the Federal Reserve Board released the results of its annual bank stress test, which showed that banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession. All banks tested remained above their minimum capital requirements, despite total projected losses of $612 billion. Under stress, the aggregate common equity capital ratio — which provides a cushion against losses — is projected to decline by 2.7% to a minimum of 9.7%, which is still more than double the minimum requirement. For more information, click here.

  • On June 22, the CFPB took “the first step toward addressing credit card company penalty policies costing consumers $12 billion each year, starting by looking at excessive late fees.” In an Advance Notice of Proposed Rulemaking, the CFPB asks for information on the Federal Reserve Board of Governors’ 2010 immunity provision for excessive late fees that allows credit card companies to escape enforcement scrutiny. The CFPB seeks data about credit card late fees and late payments, assessing whether those fees are “reasonable and proportional.” It is also requesting data about card issuers’ revenue and expenses, the potential deterrent effect of late fees, and the role late fees play in credit card companies’ profitability. For more information, click here.

  • On June 22, the Office of Information and Regulatory Affairs released the Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions. The report, which includes contributions related to the Securities and Exchange Commission, lists short- and long-term regulatory actions that administrative agencies plan to take. For more information, click here.

  • On June 21, the Department of Justice (DOJ) filed a lawsuit and a settlement framework with Meta Platforms, Inc. (previously known as Facebook) to resolve allegations that Meta’s advertising placement algorithms discriminate against Facebook users based on their race, color, religion, sex, disability, familial status, and national origin in violation of the Fair Housing Act. The DOJ action stemmed directly from the discrimination charge filed by HUD against Facebook in 2019. For more information, click here.

  • On June 21, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking, applicable to all insured depository institutions, to increase initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023. The FDIC concurrently adopted an amended restoration plan, which incorporates the increase in initial base assessment rates to raise the reserve ratio to the minimum threshold of 1.35% by the September 30, 2028 statutory deadline. The proposed assessment rate schedules would remain in effect unless and until the reserve ratio meets or exceeds 2% to support growth in the deposit insurance fund in progressing toward the FDIC’s long-term goal of a 2% designated reserve ratio. For more information, click here.

  • On June 17, the CFPB Director Rohit Chopra announced that the CFPB intends to “move away from highly complicated rules” in favor of “simpler and clearer rules.” As part of this effort, the CFPB will “dramatically [increase] the amount of guidance it [provides] to the marketplace,” while intending such guidance to be simple and straight forward. For more information, click here.

  • On June 15, in a keynote address at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Deputy Director Zixta Martinez squarely took aim at “rent-a-bank schemes” in some of the first (if not the first) such comments by a senior CFPB official. Historically, the CFPB confines itself to “true lender” litigation against participants in high-rate programs involving Native American tribal parties (and not banks) already challenged by state enforcement authorities. We view Deputy Director Martinez’s comments as potentially signaling more widespread pursuit of this theory by the CFPB. For more information, click here.

State Activities:

  • On June 22, Pennsylvania Attorney General Josh Shapiro announced, as part of a coalition of 46 attorneys general, a $1.25 million multistate settlement with Florida-based Carnival Cruise Line (Carnival), stemming from a 2019 data breach involving the personal information of 180,000 Carnival employees and consumers nationwide. While Carnival publicly reported the breach in March 2020, notifications sent to attorneys general offices stated that Carnival first became aware of suspicious email activity in May 2019 — 10 months before Carnival reported the breach. “When personal data is exposed to bad actors, it’s essential that consumers are notified as quickly as possible,” said AG Shapiro. “Added delays increase the possibility of that personal data being used for nefarious purposes.” For more information, click here.

  • On June 21, Connecticut Attorney General William Tong and Department of Consumer Protection Commissioner Michelle Seagull advised homeowners interested in residential solar panels to do careful research and be wary of misleading marketing and high-pressure sales tactics by solar companies. Attorney General Tong and Commissioner Seagull “warned consumers to pay particular attention to: whether their home gets adequate sun exposure to justify the solar panel investment, whether their current roof will need replacement during the projected life of the solar panels, how tax credits and refunds work, the effect solar panels may have on their home’s value, and how selling their home would be affected if leasing solar panels.” For more information, click here.

  • On June 8, the New York State Department of Financial Services (NYDFS) issued new guidance on issuing U.S. dollar-backed stablecoins, establishing first-of-its-kind state standards for USD-backed stablecoins issued by entities subject to NYDFS regulation. Informal policies have been in place since 2018, but NYDFS Superintendent Adrienne A. Harris believes this new guidance “creates clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York.” For more information, click here.

Privacy and Cybersecurity Activities:

  • On June 23, the House Subcommittee on Consumer Protection and Commerce unanimously passed an amended draft of the American Data Privacy and Protection Act (ADPPA). This legislation would create a comprehensive federal privacy regime and would preempt most existing state privacy laws. The ADPPA now moves to the House Committee on Energy and Commerce, which will consider this legislation next month. If passed by the House, this legislation may face significant challenges in the Senate where key leadership members have indicated that the legislation’s current version would not advance. For more information, click here.

  • On June 21, President Biden signed the State and Local Government Cybersecurity Act of 2021 (S.2520), which updates the Homeland Security Act and directs the Department of Homeland Security to improve information sharing and coordination with state, local, and tribal governments. This legislation encourages federal cybersecurity experts to share information regarding cybersecurity threats, vulnerabilities, and breaches, as well as resources to prevent and recover from cyberattacks. The law also builds on previous efforts by the Multi-State Information Sharing and Analysis Center (MS-ISAC) to prevent, protect, and respond to future cybersecurity incidents. For more information, click here.

On May 19, the Department of Commerce’s International Trade Administration issued a Request for Comment (RFC), seeking public input on the development of a framework for driving economic competitiveness and leadership in, and leveraging of, digital asset technologies as part of reinforcing U.S. leadership in the global financial system. This RFC is in response to President Biden’s March 9 Executive Order , “Ensuring Responsible Development of Digital Assets,” which outlines the first U.S. comprehensive federal digital asset strategy, and tasked Commerce to work “across the U.S. Government” to establish this framework.

In its RFC, Commerce invites input on any matter relevant to its development of the framework, and it seeks comments on 17 specific questions about the global competitiveness of U.S. digital asset businesses, comparisons to traditional financial services and financial inclusion considerations, as well as technological considerations. Some of the specific questions include:

  • What are the features of U.S.-based digital asset businesses (e.g., administrators, operators, validators, and other key stakeholder roles in the function of digital assets, as well as the exchanges, brokers, and custodians used to trade and store them) that currently underpin their competitiveness in a global market?
  • What obstacles do U.S. digital asset businesses face when competing globally?
  • How does the current U.S. regulatory landscape affect U.S. digital asset businesses’ global competitiveness?
  • What, if any, is the future role of digital assets mining in the U.S. digital assets sector?
  • What impact, if any, will global deployment of central bank digital currencies (CBDC) have on the U.S. digital assets sector?
  • What factors and conditions, if any, that have driven and sustained the global leadership of U.S.-based legacy financial institutions will foster the same leadership for U.S. digital asset businesses?
  • Can digital assets improve international payments (including trade and remittances) and improve trade finance access?
  • How do digital assets compare to other initiatives in payments, such as the Federal Reserve’s FedNow?
  • What role can the federal government and the digital assets sector play to ensure that underserved Americans can benefit from the increased commercial availability of digital assets?
  • To what extent do new standards for digital assets and their underlying technologies need to be maintained or developed, for instance those related to custody, identity, security, privacy, and interoperability?

Written comments must be received by July 5, 2022.

Like most industries today, Consumer Finance Services businesses continue to be significantly impacted by COVID-19. To help you keep abreast of relevant activities, below find a breakdown of some of the biggest legislative and regulatory events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Privacy and Cybersecurity Activities

Federal Activities:

  • On May 12 and May 10, the House Financial Services and Senate Banking Committees, respectively, held hearings with Financial Stability Oversight Council (FSOC) Chairwoman Secretary Yellen to discuss FSOC’s annual report to Congress. Digital assets were front and center, particularly the need for a federal regulatory framework for stablecoins. For more information, click here.
  • On May 11, the U.S. Senate voted 51-50 to confirm Alvaro Bedoya as a member of the Federal Trade Commission, requiring Vice President Kamala Harris to cast the tie-breaking vote. Bedoya gives Democrats a 3-2 majority at the consumer protection agency. For more information, click here.
  • On May 9, the Consumer Financial Protection Bureau (CFPB) published an advisory opinion to affirm that the Equal Credit Opportunity Act bars lenders from discriminating against customers after they have received a loan, not just during the application process. For more information, click here.
  • On May 9, the Board of Governors of the Federal Reserve System issued its May 2022 Financial Stability Report, which included emphasizing that stablecoins are an area of risk in the current financial system and discussing central bank digital currencies (CDBC), noting the “Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from the Congress, ideally in the form of a specific authorizing law.” For more information, click here.
  • On May 6, the CFPB released its Fair Lending Report for 2021. As in 2020’s report, published last year, the CFPB shows that its focus remains on what it characterizes as “financial inclusion, racial and economic equity, and fair competition.” The 2021 report also makes several prominent mentions of the use of artificial intelligence and machine learning. For more information, click here.
  • On May 3, the Federal Housing Finance Agency announced that enterprises Fannie Mae and Freddie Mac will require lenders to use the Supplemental Consumer Information Form (SCIF) as part of the application process for loans that will be sold to the enterprises. The SCIF intends to collect information about the borrower’s language preference, if any, and on any homebuyer education or housing counseling the borrower received, so lenders can better understand borrower needs during the home buying process. For more information, click here.

State Activities:

  • On May 13, Arizona Attorney General Mark Brnovich announced a consent judgment against the owner and manager of a group of debt collection businesses. The judgment permanently bars the owner “from participating in any debt collection activities,” requires him to “pay more than $1.6 million for consumer restitution,” and “includes up to $900,000 in civil penalties.” The attorney general’s office alleged the businesses “called consumers and made false claims and threats, convincing people to pay debts they had no authority to collect.” The businesses allegedly impersonated law enforcement officers, government officials, process servers, and law firm personnel to scare or intimidate consumers into paying alleged debts. For more information, click here.
  • On May 13, New York Attorney General Letitia James issued a consumer alert providing “guidance to protect the privacy of individuals seeking abortion care and prevent unwanted digital tracking and data sharing.” The alert indicates that “online platforms and consumer apps, like those widely used to track fertility and menstrual cycles, have been collecting and sharing consumers’ personal information,” and this “information may then be used against individuals seeking abortion care or those who help them without their awareness.” State Senator Liz Krueger states, “I am working with Attorney General James and my colleagues on legislation to enhance privacy protections, and commend the attorney general for taking this proactive step and providing patients with valuable information about how to better secure their personal information.” For more information, click here.
  • On May 12, California Attorney General Rob Bonta issued a statement on the Los Angeles Superior Court’s decision to uphold the constitutionality of Senate Bill 10 (SB 10), which “allows local governments to rezone transit-rich areas or urban infill sites for denser housing, irrespective of existing zoning restrictions.” Attorney General Bonta stated, “Laws like SB 10 are essential to address California’s housing shortage and affordability crisis, providing local governments with an important tool to increase housing supply in their communities.” Attorney General Bonta went on to refer homeowners and tenants to his Housing Strike Force and Housing Portal — created last November. For more information, click here.
  • On May 12, the Maryland Commissioner of Financial Regulation issued a notice titled, “Industry Advisory Regulatory Guidance,” that interprets a federal appellate court decision and directs lenders and servicers to review their practices in charging consumer borrowers loan payment fees. In the notice, the commissioner warns that affected regulated entities should consider whether refunds may be warranted under the new interpretation. For more information, click here.
  • On May 3, the New York State Senate passed S5473D, which will apply immediately in all actions “in which a final judgment of foreclosure and sale has not been enforced.” (See S5473D at Section 10.) This means that the new law applies retroactively, affecting future foreclosure actions and existing foreclosures, including those in which a judgment of foreclosure and sale has been entered, but the auction has not yet occurred. Essentially, the bill seeks to overturn the New York Court of Appeals’ well-reasoned decision in Freedom Mtge. v. Engel, 37 N.Y.3d 1 (2021), and it retroactively annuls lenders’ longstanding right to revoke their option to accelerate mortgage loans after default. The bill — which we anticipate Governor Hochul to sign as passed — sets out to accomplish this by amending several statutes that govern foreclosures under New York law. For more information, click here.

Privacy and Cybersecurity Activities:

  • On May 10, Connecticut Governor Ned Lamont signed an act concerning personal data privacy and online monitoring, making Connecticut the fifth state in the country to enact a comprehensive privacy regime. This legislation closely resembles the comprehensive laws adopted in Virginia and Colorado and will take effect on July 1, 2023. The Connecticut law does not include a private right of action and provides a temporary 60-day right to cure that sunsets on December 31, 2024. For more information click here.
  • On May 11, the Promoting Digital Privacy Technologies Act (H.R. 847) passed the U.S. House of Representatives by a vote of 401-19. The act seeks “to support research on privacy enhancing technologies and promote responsible data use.” Notably, this legislation would require the National Institute of Standards and Technology (NIST) director to work with private, public, and academic stakeholders to develop “privacy enhancing technologies” and “voluntary, consensus-based technical standards, guidelines, methodologies, procedures, and processes” aimed at increasing the “integration of privacy enhancing technologies in data collection, sharing, and analytics performed by the public and private sectors.” H.R. 847 will now head to the U.S. Senate Committee on Commerce, Science, and Transportation. For more information, click here.

Several recent releases of draft legislation, reports, and speeches highlight the federal government’s efforts in the first quarter of 2022 to address the rapidly developing digital asset marketplace and its regulatory landscape.

Congressional Legislative Activity

On February 15, Representative Warren Davidson (R-OH) introduced the “Keep Your Coins Act,” which is intended “[t]o prohibit Federal agencies from restricting the use of convertible virtual currency by a person to purchase goods or services for the person’s own use, and for other purposes.” That same day, Congressman Josh Gottheimer (D-NJ) also announced a discussion draft of the “Stablecoin Innovation and Protection Act,” which is intended to define “qualified stablecoins” to differentiate them from “more volatile cryptocurrencies.”

On March 17, Senators Elizabeth Warren (D-MA), Jack Reed (D-RI), Mark Warner (D-VA), and Jon Tester (D-MT) introduced the Digital Asset Sanctions Compliance Enhancement Act in an attempt to ensure blacklisted Russian individuals and businesses do not use cryptocurrency to evade economic sanctions. The bill does not come without controversy, however, as it “would place sweeping restrictions on persons who build, operate and use cryptocurrency networks even if they have no knowledge or intent to help anyone evade sanctions,” according to policy group Coin Center.

On March 28, Representative Stephen Lynch (D-MA), along with co-sponsors Jesús G. García (D-IL), Rashida Tlaib (D-MI), Ayanna Pressley (D-MA), and Alma Adams (D-NC), introduced H.R. 7231, the Electronic Currency and Secure Hardware Act (ECASH Act), which would direct the secretary of the U.S. Department of the Treasury (not the Federal Reserve) to develop and issue a digital analogue to the U.S. dollar, or “e-cash,” which is intended to “replicate and preserve the privacy, anonymity-respecting, and minimal transactional data-generating properties of physical currency instruments such as coins and notes to the greatest extent technically and practically possible,” all without requiring a bank account. E-cash would be legal tender, payable to the bearer and functionally identical to physical U.S. coins and notes, “capable of instantaneous, final, direct, peer-to-peer, offline transactions using secured hardware devices that do not involve or require subsequent or final settlement on or via a common or distributed ledger, or any other additional approval or validation by the United States Government or any other third party payments processing intermediary,” including fully anonymous transactions, and “interoperable with all existing financial institutions and payment systems and generally accepted payments standards and network protocols, as well as other public payments programs.”

On April 6, Senator Pat Toomey (R-PA) released a draft of his Stablecoin Transparency of Reserves and Uniform Safe Transactions Act, or Stablecoin TRUST Act. The draft bill contemplates a “payment stablecoin,” which is convertible directly to fiat currency by the issuer. Only an insured depositary institution, a money transmitting business (authorized by its respective state authority) or a new “national limited payment stablecoin issuer” would be eligible to issue payment stablecoins. Additionally, payment stablecoins would be exempt from the federal securities requirements, including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.

Separately, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) recently announced they will introduce bipartisan legislation in the near future covering a broad range of digital assets topics to establish the first comprehensive federal digital asset strategy for the U.S., privacy, safety and soundness, consumer protection, and the taxation of digital assets, including cryptocurrencies.

Regulatory Activities and Statements

In late January, the Federal Reserve (Fed) released a report titled, “Money and Payments: the U.S. Dollar in the Age of Digital Transformation,” which focused on the feasibility of a retail Central Bank Digital Currency (CBDC) to be used by the general public, as opposed to a wholesale CBDC that would be used by financial institutions for back-end settlement. The Fed identifies several characteristics of its potential CBDC:

  • Privacy-protected: Consumer privacy in the digital marketplace is a primary concern, particularly given the global reach of digital assets.
  • Intermediated: The Fed suggests that a CBDC would be best implemented through the private sector, which could offer digital wallets for transfers, payments, receipt, and holding of CBDCs. This structure is viewed as the most optimal because it would not change the current framework of the Fed, which does not open private accounts, while simultaneously relying on the expertise of the private sector for security and innovation.
  • Widely transferable: To be effective, the Fed emphasizes that any CBDC must be easily transferrable to maintain the free flow of currency within the market.
  • Identity-verified: Although consumer privacy is a paramount concern, the Fed notes that a balance must be struck between privacy and “the transparency necessary to deter criminal activity,” including anti-money laundering and countering the financing of terrorism.

The timetable for a Fed-backed CBDC is still uncertain, and the report does not commit the Fed to any particular action. The Fed is now soliciting input on the benefits, risks, policy considerations, and design for a CBDC through May 20. The report also emphasizes that the Fed will not act alone, making clear that it will look for guidance from the President and Congress before moving forward.

Shortly thereafter, on March 9, President Biden signed an executive order (Order) to establish the first comprehensive federal digital asset strategy for the U.S., which would promote digital asset innovation, while balancing benefits and associated risks. The Order directs the Justice Department, U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, and many other federal agencies to study the legal and economic implications of creating a U.S. CBDC.

The Order sets forth six main objectives:

  1. Consumer and investor protection;
  2. Financial stability;
  3. Mitigation of illicit finance and national security risks;
  4. S. leadership in the global financial system and economic competitiveness;
  5. Financial inclusion; and
  6. Responsible innovation.

The Order “encourage[s]” the chairman of the Board of Governors of the Federal Reserve System “to continue to research and report on the extent to which CBDCs could improve the efficiency and reduce the costs of existing and future payments systems, to continue to assess the optimal form of a United States CBDC,” and to develop a plan for the potential implementation of a CBDC.

Within 120 days of the date of the Order, Secretary Yellen must “establish a framework for interagency international engagement with foreign counterparts … to … enhance adoption of global principles and standards for how digital assets are used and transacted, and to promote development of digital asset and CBDC technologies consistent with our values and legal requirements.” The Order also calls for the establishment of a framework for enhancing U.S. economic competitiveness in, and leveraging of, digital asset technologies and a report on strengthening cooperation of international law enforcement for criminal activity related to digital assets.

Speaking at an American University event on April 7, Secretary Yellen delivered her first speech on digital assets in which she claimed that a digital dollar could become a “trusted money comparable to physical cash.” Secretary Yellen referenced the Order several times throughout her remarks, stressing that Treasury will work with the White House and other federal agencies to provide reports and recommendations related to the Order’s objectives. In discussing the opportunities and challenged posed by nascent digital asset technologies, Secretary Yellen offered five lessons “relate[d] to the nature of responsible innovation, the structure of appropriate guardrails, the fundamentals of the financial system, our role in the global economy, and the value of collaboration,” as follows:

  1. The U.S. financial system benefits from responsible innovation;
  2. Vulnerable people suffer great harm when regulation fails to keep pace with innovation;
  3. Regulation should be technology-agnostic and focus on risks and activities;
  4. Sovereign money is the core of a well-functioning financial system, and the U.S. benefits from the central role the dollar and U.S. financial institutions play in global finance; and
  5. Digital asset innovation should result from public-private dialogue and development.

Secretary Yellen’s speech comes on the heels of SEC Commissioner Gary Gensler’s April 4 remarks at the virtual Penn Law Capital Markets Association Annual Conference in which he highlighted three areas related to the SEC’s work in overseeing the capital markets, protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets:

  1. Platforms. Chairman Gensler noted that the SEC plans to register and regulate crypto trading and lending platforms much like traditional regulated exchanges. In recognizing that some crypto platforms combine the trading of securities and non-securities (g., crypto commodity tokens), Chairman Gensler asked the SEC staff to work with the Commodity Futures Trading Commission on how to jointly address such platforms. On crypto custody, Chairman Gensler asked staff to work with crypto platforms on registration and regulation. Chairman Gensler also noted that the SEC staff is considering whether rules should be put in place to segregate out market-making functions as it relates to crypto trading platforms.
  2. Stablecoins. Chairman Gensler stressed his concerns regarding the potential misuse of stablecoins for illegal purposes. Because stablecoins “primarily are used for crypto-to-crypto transactions … the use of stablecoins on platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like.” Chairman Gensler further noted that stablecoins are also often owned by crypto platforms, creating potential “conflicts of interest and market integrity questions that would benefit from more oversight.”
  3. Tokens. Chairman Gensler noted that “most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits — the hallmark of an investment contract or a security under our jurisdiction.” Reiterating former Chairman Jay Clayton’s comments, Chairman Gensler again emphasized that most crypto token are investment contracts under the Howey test, and it is “important” to the SEC that crypto tokens be registered as securities and comply with the SEC’s disclosure requirements.

On the banking front, on April 7, the Federal Deposit Insurance Corporation (FDIC) released a letter, requiring all FDIC-supervised institutions that intend to engage in, or that are currently engaged in, crypto-related activities to notify its FDIC Regional Director. The FDIC also encouraged institutions to notify their state regulator. The FDIC raised concerns around safety and soundness, financial stability, and consumer protection risks presented by crypto-related activities, all of which echo those laid out in the Order.

The FDIC’s letter builds on the increasing attention of U.S. banking regulators to crypto-related activities of their regulated institutions. Prior to this letter, neither the FDIC nor the Federal Reserve had spoken definitively on such activities. However, the Office of the Comptroller of the Currency (OCC) published a letter in November 2021, requiring OCC-regulated institutions to provide written notification of proposed crypto-related activities. At this time, the Federal Reserve continues to remain silent on any similar notification requirements. Although, given the quickly growing interest in this issue, we would not expect the Federal Reserve to maintain its silence for much longer.

Acting Comptroller of the Currency Michael Hsu addressed several crypto-related issues in two recent prepared remarks. Speaking at the ABA Risk 2022 program in late March, Acting Comptroller Hsu warned banks against overlooking the tail risks of trading crypto derivatives. Hsu noted several risks banks should consider, including limited or unreliable price histories of crypto-assets, crypto positions being netted in the risk aggregation process for risk reporting, regulatory capital, and risk management purposes, and the potential for “classic” wrong-way risk (i.e., for counterparties that are structurally long crypto-assets and use derivatives for further leverage, the amount owed by that counterparty to the dealer bank would increase at the same time that the counterparty would be experiencing financial stress).

At a Georgetown University Law Center event on March 8, Hsu turned his attention to stablecoins, broadly cautioning against permitting stablecoin issuers to pick from a range of licensing options, as some lawmakers have suggested (e.g., letting issuers choose between different federal and state regulatory frameworks). Hsu also suggested that banks may need to conduct stablecoin-related activities in a standalone bank-chartered entity, separate from other insured depositary institution affiliates, to properly manage crypto liquidity and blockchain-specific risks.

Our Take

In the wake of the President’s Order, we expect federal regulatory agencies to continue issuing policy releases and prepared remarks outlining differing (and sometimes competing) perspectives on the federal government’s role in digital asset development and regulation. While the executive branch is unlikely to look for guidance and potential legislation from Congress before substantially moving forward, like all things on the Hill, it remains to be seen whether partisan politics will prevent digital asset legislation from progressing this year. Additionally, while the President’s “whole of government” approach includes more than two dozen federal agencies, it conspicuously omits addressing what role, if any, state regulators will play in overseeing digital assets. Nonetheless, state lawmakers and regulators have pressed forward in crafting state-level digital asset legislation and regulation, as more than 150 pieces of legislation relating to cryptocurrencies have been proposed in 40 states. Virginia, as one example, recently enacted new legislation to permit state-chartered banks to provide virtual currency custody services, which is modeled on the Texas Department of Banking notice in June 2021 affirming that state-chartered banks in Texas are permitted to provide virtual currency custody services.

On April 7, in front of American University’s Kogod School of Business Center for Innovation, Secretary of the Treasury Janet Yellen addressed the Biden administration’s forthcoming legislative approach to digital assets, as we discussed here, as well as the digitization of the American economy, which Yellen assessed through the lens of five lessons she suggests are often implicated by emerging technologies generally: (1) responsible innovation; (2) appropriate guardrails; (3) monetary sovereignty; (4) technological neutrality; and (5) interagency and international collaboration.

  1. Responsible Innovation. Yellen noted that financial innovation is not novel, and when it presents itself, may be accompanied by unattended consequences. “Innovation that improves our lives while appropriately managing risks should be embraced. But we must also be mindful that ‘financial innovation’ of the past has too often not benefited working families, and has sometimes exacerbated inequality, given rise to illicit finance risks, and increased systemic financial risk.” Today, many working-class Americans remain dependent upon intermediaries, such as check cashers and payday lenders, to obtain swift access to their paychecks in exchange for large processing fees to avoid the up to two-day processing time of banks. Instead of using these intermediaries, consumers may overdraft their accounts to obtain access to funds, incurring bank charges. Yellen stated these fees and services equate to approximately $15 billion spent by Americans annually. Will digital assets catalyze efficiency? Although Yellen believes “it’s too early to tell,” she briefly discussed the Federal Reserve’s plan to launch its proprietary program, FedNow, in 2023. FedNow will enable individuals and businesses to send instant, real-time payments through their depository institution accounts, as we discussed here.
  2. Appropriate Guardrails. Drawing from parallels of subprime mortgage-backed securities involved in the 2008 financial crisis, Yellen advanced that the Biden administration must “ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts to vulnerable communities.” Retail investors often trade stablecoins, a category of digital assets that can be pegged to the U.S. dollar, to escape the volatility associated with the broader digital asset market. But as Yellen stated, today, there is no way to confirm whether stablecoin issuers back “their coins with traditional assets that are safe and liquid.”
  3. Technological Neutrality. According to Yellen, “Wherever possible, regulation should be ‘tech neutral.'” Regulations should curb the risks associated with the services that the technology underlying digital assets provide to consumers and the broader economy; the technology should not be overregulated simply due to its obscurity. For example, Yellen explained that “consumers, investors, and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger.” Additionally, Yellen concluded that the principle of technological neutrality likewise applies to illegal actions, such as money laundering, tax evasion, and counterterrorism, and the Treasury will “continue to take action when appropriate.”
  4. Monetary Sovereignty and the US’ Role in the Global Economy. Yellen believes that “monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability.” Many proponents of digital assets have conveyed interest in the Federal Reserve designing and developing a central bank digital currency (CBDC) as the next iteration of the U.S. dollar. Furthermore, President Biden’s most recent executive order asserted the administration is placing “the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” Yellen notes that the creation of a CBDC presents major challenges that will require years of development. Nevertheless, issuance of a U.S. CBDC will likely hinge on the President’s Working Group devising a solution that enables the dollar to remain internationally prominent, while simultaneously mitigating consumer harm and systemic risk and upholding financial stability.
  5. Value of Collaboration. Due to the internet, the digital asset space is a global financial market. Not only will cooperation between U.S. federal agencies be necessary to foster growth and stability, but the U.S. will also have to work closely with its international partners to effectuate consistent regulations across jurisdictions. Yellen stated that the Treasury has “been working with [its] international counterparts to strengthen AML/CFT programs abroad to better protect against exploitation by illegal actors.”

Our Take. Although Yellen did not provide any explicit insight into how the Treasury will shape digital asset regulation moving forward, she made clear that these technologies will be embraced with keen focus on solutions that mitigate the potential financial instability and illicit activities risks these technologies pose, but do not stifle innovation. As Yellen said, “Digital assets may be new, but many of the issues they present are not. We have enjoyed the benefits of innovation in the past, and we have also confronted some of the unintended consequences.”