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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.”

On March 8, the U.S. Federal Reserve Banks launched the FedNow Service Provider Showcase (Showcase) to show financial institutions and users the various services to assist them in implementing the FedNow Service (Service).

The FedNow Service is an instant payment service to provide all depository institutions in the United States with access to instant payment services in near real time every day of the year, including weekends and holidays. Currently, the Fed expects to release the FedNow Service in 2023, although in phases. Security features will ensure payment integrity and data security. A liquidity management tool will facilitate the transfer of funds between financial institutions and businesses to support liquidity needs related to payment activity within the Service. The FedNow Service will also include optional features, such as fraud prevention tools, the ability to join as a receive-only participant, request for payment capability, and tools to support participants in their handling of payment inquiries.

The Service Provider Showcase includes more than 70 service providers that can connect with financial institutions and businesses to help them innovate and implement instant payment products using the FedNow Service. The Showcase includes a variety of different solution types, including business-to business (B2B) platforms and networks, bill pay and presentment, payroll processors, digital wallets, and payments platforms and gateways. There are also various use cases that include account-to-account (A2A), B2B, business-to-consumer (B2C), consumer-to-business (C2B), and person-to-person (P2P).

Notably, as of the Showcase’s launch date, Cypherium is the only blockchain company featured. New York-based Cypherium focuses on instant payment solutions, blockchain interoperability, and central bank digital currencies (CBDC). Part of Cypherium’s offering will be consumers’ ability to use Cypherium’s digital wallet or blockchain technology as part of the FedNow Service.

On March 9, President Biden signed an Executive Order (the 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 (CFPB), and many other federal agencies to study the legal and economic implications of creating a U.S. Central Bank Digital Currency (CBDC).

President Biden’s order sets deadlines for a series of reports on “the future of money,” the role that cryptocurrencies will play in a global economy, and information on a possible CBDC.

The objectives of the Order are as follows:

  • Protecting consumers, investors, and businesses from financial risks by implementing sufficient oversight and standards;
  • Mitigating systematic risk by regulating digital asset issuers, exchanges, trading platforms, and intermediaries;
  • Reducing illicit financial and national security risks posed by misuse of digital assets;
  • Reinforcing U.S. leadership in the global financial system and in technological and economic competitiveness;
  • Promoting access to safe and affordable financial services; and
  • Ensuring that digital asset technologies and payments are implemented in a responsible manner with requisite privacy and security measures that defend against illegal activities, and reduce negative climate impacts and environmental pollution, as may result from some cryptocurrency mining.

Within 180 days, Secretary of the Treasury Janet Yellen, in consultation with the heads of other agencies, must “submit to the President a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.”

Within 210 days of the Order, Secretary Yellen and the Financial Stability Oversight Council (FSOC), must provide a report detailing “specific financial stability risks and regulatory gaps” from the use of digital currencies, in addition to any recommendations to mitigate those risks. Secretary Yellen also issued (but then removed) a press release stating that President Biden’s “approach will support responsible innovation that could result in substantial benefits for the nation, consumers, and businesses. It will also address risks related to illicit finance, protecting consumers and investors, and preventing threats to the financial system and broader economy. Under the executive order, Treasury will partner with interagency colleagues to produce a report on the future of money and payment systems … And, because the questions raised by digital assets often have important cross-border dimensions, we’ll work with our international partners to promote robust standards and a level playing field.”

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.

The Attorney General is required to submit a report within 180 days on whether legislative changes would be necessary to create a CBDC. President Biden also tasked the Attorney General with preparing “a report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets.”

The Order also calls for research into the technology necessary to introduce a CBDC. Research must also be conducted on the impact of digital assets and technologies on the environment.

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.

Within 90 days of submission to Congress of the National Strategy for Combating Terrorist and Other Illicit Financing, a variety of groups may submit reports detailing the potential for illicit financial risks with digital assets.

In response to the Order, CFPB Director Rohit Chopra commented that “[t]oday’s Executive Order recognizes that the dramatic growth in digital asset markets has created profound implications for financial stability, consumer protection, national security, and energy demand. The Consumer Financial Protection Bureau is committed to working to promote competition and innovation, while also reducing the risks that digital assets could pose to our safety and security. We must make sure Americans in all financial markets are protected against errors, theft, or fraud.”

Our Take. President Biden is showing interest in creating a CBDC and is requesting reports regarding the varying potential implications of doing so. With the U.S. as a leader in digital payments, President Biden is requesting information on the possible risks inherent to digital assets, along with ways in which the U.S. can coordinate with other countries to assimilate legal requirements. The SEC has been active in bringing enforcement actions involving cryptocurrencies and tokens. Monitoring developments under this executive order will be important to ascertaining if they will result in restraints on the SEC in this area. The Order is a significant step in acknowledging that cryptocurrencies are not merely a topic of the future and are instead here to stay.

Several recent events highlight the expanding effort by the federal government to address the growing digital currency marketplace and the government’s role in it.

According to recent reporting, the Biden administration is preparing an executive order that will outline a comprehensive strategy for cryptocurrencies and ask federal agencies to assess the potential risks and opportunities. The executive order, expected as soon as next month, is slated to put the White House in a central position to oversee policy and regulatory efforts regarding digital assets. The order is expected to take a “whole-of-government” approach that will reach beyond the nature of transactions, touching issues like energy consumption related to cryptocurrency mining.

The administration’s move comes on the heels of recent guidance, statements, and rule-making efforts by the Office of the Comptroller of Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission. These efforts also coincide with other federal regulators opening the door to the expanding consumer marketplace for digital assets, such as the National Credit Union Administration’s announcement that credit unions may partner with third parties to allow members to buy, sell, and hold digital assets.

The news of the forthcoming executive order also follows the release of the Federal Reserve’s report titled, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.”

The Fed’s report is “the first step in a public discussion” regarding the creation of a central bank digital currency (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.”

The Fed’s report focuses on a retail 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 CBDC would be issued to the public by third parties, and not directly from the Fed. This runs contrary to a wholesale CBDC that many other countries are considering, including Canada and the European Union.

The Fed has identified several characteristics of a 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 Fed’s report identifies numerous potential benefits that a CBDC presents, which largely mirror the benefits that digital assets have brought to the marketplace already. For example, the Fed recognizes the growing demand for digital currency, and it opines that a CBDC would be a safe and reliable way to meet that demand. To that end, CBDCs offer a lower bar to entry for businesses and consumers in the online marketplace or for payment processing where existing payment systems may be too cost prohibitive. CBDCs also create easier avenues into the global marketplace, eliminating the higher costs and inefficiencies of traditional international payment systems.

CBDCs are not without potential risks, however. The introduction of cryptocurrencies and other digital assets has had enormous effects on consumers, businesses, and governments alike. The Fed’s report recognizes that the introduction of a CBDC could lead to foundational changes in the structure of the financial market. For example, a CBDC — particularly one that bore interest — could lead to significant changes in the commercial banking market and put strains on banks’ lending capabilities if enough consumers transitioned from deposits in banks to digital assets. There also are more direct risks, such as those to consumer privacy and the resiliency of digital payment systems.

The Fed’s paper and insight into its thinking on the creation of a Fed-backed digital currency dovetail with policy guidance being prepared by the Federal Deposit Insurance Corp. (FDIC) and recent comments by FDIC Chairman Jelena McWilliams on the need for stability and security in the crypto marketplace when it comes to stablecoins (i.e., cryptocurrencies that are backed 1:1 by some other asset-like fiat currency). The Fed’s report does seem to leave room for private stablecoins to continue to coexist, reflective of Fed Chair Powell’s view that a “well-regulated, privately issued stablecoins could coexist with a CBDC.”

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, 2022. 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. The administration has yet to comment on the possibility of a CBDC, but this may come as early as next month with the release of the executive order. Congress first will have to agree on a framework for authorizing the new CBDC.

Like most industries today, Consumer Finance Services businesses are being significantly impacted by the novel coronavirus (COVID-19). Troutman Pepper has developed a dedicated COVID-19 Resource Center to guide clients through this unprecedented global health challenge. We regularly update this site with COVID-19 news and developments, recommendations from leading health organizations, and tools that businesses can use free of charge.

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest COVID-19 driven 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 January 14, four House Republicans introduced legislation to “abolish” the Consumer Financial Protection Bureau (CFPB). Rep. Byron Donalds (R-FL) issued a press release, indicating Ted Cruz (R-TX) would sponsor the legislation in the Senate. For more information, click here.
  • On January 14, the CFPB announced it settled a lawsuit, alleging that the Taskforce on Federal Consumer Financial Law did not comply with the Federal Advisory Committee Act. For more information, click here.
  • On January 13, the CFPB released a bulletin, reminding debt collectors and credit bureaus of their legal obligations in light of the No Surprises Act, which protects consumers from certain unexpected medical bills. Companies that try to collect on medical bills prohibited by the No Surprises Act, or who furnish information to credit bureaus about such invalid debts, may face significant legal liability under the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. The bulletin advises credit bureaus that the accuracy and dispute obligations apply to debts stemming from charges that exceed the amount permitted by the No Surprises Act. For more information, click here.
  • On January 13, a group of U.S. state banking regulators dropped a lawsuit, seeking to block the federal government from granting bank charters to fintech companies after the company that was first in line modified its business plan. For more information, click here.
  • On January 13, the Federal Trade Commission (FTC) settled charges against a business credit reporting company, arising from allegations that the company engaged in deceptive and unfair practices. The company agreed to an order, requiring substantial changes in its operations that would benefit small- and mid-sized businesses. Under the proposed order, the company also would provide refunds to certain businesses that purchased the company’s products in the belief that using the products would improve their business credit scores and ratings. For more information, click here.
  • On January 12, Congressman Tom Emmer (R-MN) introduced a bill, prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) directly to individuals. The bill contains a single amendment to the Federal Reserve Act, extending Section 13 to ban the Federal Reserve from offering products or services directly to an individual, maintaining an account on behalf of an individual, or issuing a CBDC directly to an individual. For more information, click here.
  • On January 11, the FTC issued a blog post to help consumers take advantage of the U.S. Department of Education’s decision to extend the pause on federal student loan payments. For more information, click here.
  • On January 10, the CFPB announced that it sued several debt-collection companies and their owners for illegal debt-collection practices. The CFPB alleges that the defendants placed consumer debt with, or sold consumer debt to, collection companies that used unlawful and deceptive collection tactics. The defendants knew, or should have known, the collection companies made false threats and false statements to consumers. For more information, click here.
  • On January 10, the Government Accountability Office (GAO) identified virtual currency kiosks as one reason driving an increase in the use of crypto payments to facilitate illegal activities, such as human and drug trafficking. According to the report, virtual currency kiosks are less regulated than crypto exchanges, and transactions are more difficult to trace. The GAO believes the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) should do more to regulate crypto automated teller machines (ATMs), and its report indicates the agencies agreed with its two recommendations to tighten crypto ATM regulations. For more information, click here.
  • On January 10, the FTC issued an alert about a new cryptocurrency payment scam involving impersonators convincing consumers to send money obtained from a cryptocurrency ATM via a quick response code. For more information, click here.

State Activities:

  • On January 13, one of the nation’s largest student loan servicers entered into a $1.85 billion settlement agreement with a coalition of 39 attorneys general. New York Attorney General Leticia James stated that the servicer “deceived thousands of student loan borrowers into costly, long-term, forbearance plans, causing students to pay more than they should have.” Under the terms of the agreement, the servicer would cancel $1.7 billion in subprime, private student loan balances — with an additional $95 million in restitution payments to borrowers and $142.5 paid to the states. For more information, click here.
  • On January 10, New York Attorney General Letitia James issued a consumer alert to warn New York homeowners about deceptive practices related to the Homeowner Assistance Fund (HAF). According to the alert, the “HAF is a federally funded program designed to assist homeowners who are experiencing financial hardship due to the coronavirus disease 2019 (COVID-19) pandemic,” with New York state receiving approximately $540 million in HAF funding. Attorney General James warned homeowners against scams that request upfront HAF application fees or fees for upfront mortgage assistance. For more information, click here.
  • On January 10, California Attorney General Rob Bonta urged the Federal Communications Commission (FCC) to take action to prevent a “flood of illegal foreign-based robocalls that ‘spoof’ U.S. phone numbers by imposing additional obligations on the U.S.-based telecom companies that first receive such calls.” According to the attorney general’s press release, the FCC attributes “the majority of robocall scams are perpetuated by foreign actors who gain access to the U.S. phone network through ‘gateway providers.'” Attorney General Bonta urged the FCC to implement caller ID frameworks that detect and block robocalls with spoofed caller IDs. For more information, click here.
  • On January 10, New York State Assemblywoman Rodneyse Bichotte Hermelyn introduced a bill that would ban debt collectors from attempting to collect debts using social media platforms, which is in contradiction with the CFPB’s Regulation F. Under the bill, collectors would be prohibited from joining or requesting to join a consumer’s social media network or communicating or attempting to communicate with a debtor using a social media platform for the purpose of collecting or attempting to collect a debt owed by such debtor. For more information, click here.

Privacy and Cybersecurity Activities:

  • On January 13, the U.S. Chamber of Commerce sent a letter to Congress, urging members to pass a federal privacy legislation. The letter was signed by various groups, local affiliates of the chamber, and others. The letter urges a “comprehensive privacy legislation” to avoid a patchwork of state laws. To read the letter, click here.
  • On January 13, U.S. Senators Bill Cassidy (R-LA) and Ben Ray Luján (D-NM) joined U.S. Representative Lori Trahan (D-MA-03) in introducing the Terms-of-Service Labeling, Design, and Readability (TLDR) Act, which would require commercial websites and mobile apps to create a simple and readability summary of their terms-of-service agreements. To read the press release, click here.
  • On January 13, the Brookings Institute released a study on how COVID-19 has impacted internet users’ privacy. This report examined websites between April 9 and August 27, 2020, and it noted that third-party data sharing “increased with internet use as the pandemic progressed and users relied more on online alternatives.” However, websites “that asked for permission before placing cookies on users’ browsers have been shown to reduce their third parties over time as their traffic surged over the pandemic.” To read the press release and report, click here.
  • On January 10, Massachusetts released a “much-anticipated” digital vaccine card through a system called SMART Health Card — a system already used in California, Connecticut, and New York, among other states. To read about the release, click here. For further Troutman Pepper analysis on digital vaccine records, click here.
  • On January 7, Florida State Senator Jennifer Bradley reintroduced the Florida Privacy Protection Act, a comprehensive privacy bill that previously failed in the Florida Senate last year. The bill would create affirmative obligations on companies that collect consumer personal information and provide consumers with certain rights. To view the bill, click here.
  • On January 10, Indiana State Representative Carey Hamilton introduced a comprehensive privacy bill that would require businesses to disclose certain information to consumers, allow consumers to request information from businesses, and assign enforcement of consumer privacy to the Indiana division of consumer protection. To view the bill, click here.
  • On January 10, Washington State Senator Reuven Carlyle reintroduced the Washington Privacy Act for a fourth consecutive session, along with companion bill Senate Bill 5813. The senate bill includes provisions on children’s privacy, data brokers, and the Global Privacy Control. To view the bill, click here.
  • On January 7, House Representative Vandana Slatter introduced a separate Washington state privacy bill, which would “establish mechanisms for consumers to exercise control over their data; and requires companies to be responsible custodians of data as technological innovations emerge.” To view the bill, click here.

Will 2022 be the year of comprehensive digital asset legislation in the U.S.?

In 2021, Congress waded into the digital asset policy waters through its inclusion of expanded cryptocurrency and digital asset rules as part of the $1 trillion Infrastructure Investment and Jobs Act (HR 3584), which was signed into law by President Joe Biden on November 15. That legislation expanded the definition of a broker to likely include US cryptocurrency asset exchanges and digital wallet providers, thereby requiring them to report certain information related to digital asset transactions. Although the text of the bill regarding the definition of a “broker” has generated controversy, the digital asset industry’s nascent influence in Washington was possibly a bigger story. Digital asset lobbyists and policy groups seemingly cemented their ability to influence Congress as it shapes digital asset legislation, which the industry will look to build upon this year.

Perhaps the most pressing policy issue facing Congress is stablecoin legislation. On November 1, the President’s Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued an Interagency Report on Stablecoins which recommended that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.” The next month, on December 17, the Financial Stability Oversight Council (Council) stated in its 2021 annual report that it will take steps to “address risks outlined in the PWG Report on Stablecoins in the event comprehensive legislation is not enacted.” Treasury Undersecretary for Domestic Finance Nellie Liang further emphasized the need for stablecoin legislation in a December 18 interview with Bloomberg News, in which she commented that government regulators need action from Congress to protect the financial system from risks posed by stablecoins. Liang referred to the Council’s intention to take steps on its own to address stablecoins if Congress fails to pass legislation as “not a good Plan B.”

On January 11, during the Senate Banking Committee hearing to consider his second nomination to serve as chair of the Board of Governors of the Federal Reserve System, Jerome Powell assured the committee that the Federal Reserve’s report on digital currency will be released in the coming weeks. Ranking Member Pat Toomey (R-PA) discussed the creation of a central bank digital currency, and asked if Congress were to authorize and the Federal Reserve were to pursue a digital dollar, whether anything should preclude well-regulated and privately issued stablecoins from coexisting with a central bank digital dollar (CBDC). Mr. Powell stated, “No. Not at all.”

The very next day, Rep. Tom Emmer (R-MN) introduced a bill prohibiting the Federal Reserve from issuing a CBDC directly to individuals. The bill contains a single amendment to the Federal Reserve Act, extending section 13 to ban the Federal Reserve from offering products or services directly to an individual, maintaining an account on behalf of an individual, or issuing a CBDC directly to an individual. In a press release issued by his office following the introduction of the bill, Rep. Emmer proclaimed that the Federal Reserve does not, and should not, have the authority to offer retail bank accounts. He also expressed his concerns about privacy, stating that the Federal Reserve could use a CBDC “as a surveillance tool” by collecting personal identifiable information on users and tracking their transactions “indefinitely.” Emmer’s bill is the latest development in his continued engagement with pro-cryptocurrency legislation. In November, Emmer joined a bipartisan group of representatives in introducing a bill to significantly amend the crypto-related provisions in the Infrastructure Investment and Jobs Act. That bill, titled the “Keep Innovation in America Act,” has not progressed since it was referred to the House Committee on Ways and Means on November 17.

Most recently, during his speech at the British-American Business Transatlantic Finance Forum, Michael J. Hsu, Acting Comptroller of the Currency, declared that “bank regulation would give credibility to the ‘stable’ part of stablecoins,” and that “regulating stablecoin issuers as banks could also enable more innovation in crypto….” Hsu’s statements came as a surprise to some considering his past comments, in which he expressed doubt about the reliability and safety of stablecoins. With his recent comments, Hsu might be signaling his desire for digital asset legislation that gives the OCC the authority to regulate national banks’ participation in the digital asset space.

Looking ahead to the rest of the year, below are three recent policy proposals introduced by members of Congress that aim to address stablecoins and further normalize the regulatory treatment of digital assets in the US.

Senator Cynthia Lummis (R-WY)

Sen. Lummis, a member of the Senate Banking Committee, is reportedly planning to introduce a comprehensive bill in 2022 that would cover everything from consumer protection provisions to updated digital asset taxation guidance. The sweeping policy bill would also establish how different types of digital assets are classified for regulatory purposes and outline regulations for stablecoin providers. The bill would also create a new self-regulatory organization under the joint jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to oversee the digital asset market.

Senator Pat Toomey (R-PA)

At the December 14 Senate Committee on Banking, Housing, and Urban Affairs hearing on stablecoins, Sen. Toomey released a set of principles that will guide his reportedly forthcoming legislative framework for stablecoins. Sen. Toomey’s principles are as follows:

  • Stablecoin issuance should not be limited to insured depository institutions.
  • Stablecoin issuers would choose from at least three regulatory regimes based on their business models:
    • Operate under a conventional bank charter;
    • Acquire a special-purpose banking charter designed for stablecoin providers in accordance with new legislation; or
    • Register as a money transmitter under an existing state regime and as a money services business under FinCEN’s federal regime.
  • All stablecoin issuers should have to adopt clear redemption policies and disclosure requirements regarding the assets backing the stablecoin, and potentially meet liquidity and asset quality requirements.
  • Commercial entities should be eligible to issue stablecoins, provided they choose one of the three regimes listed above.
  • Non-interest bearing stablecoins should not necessarily be regulated like securities.
  • Regulation should protect the privacy, security, and confidentiality of individuals utilizing stablecoins, including allowing customers to opt out of sharing any information with third parties.
  • Financial surveillance requirements under the Bank Secrecy Act (BSA) should be modernized, including for existing financial institutions, in light of emerging technologies like stablecoins.

Representative Don Beyer (D-VA)

On July 28, 2021, Rep. Beyer, the chairman of Congress’ Joint Economic Committee, introduced the Digital Asset Market Structure and Investor Protection Act, which attempts to clarify a wide range of issues currently impacting digital asset market participants. Specifically, the bill would:

  • Create statutory definitions for digital assets and digital asset securities, and provide the SEC with authority over digital asset securities and the CFTC with authority over digital assets;
  • Provide legal certainty as to the regulatory status for the top 90% of the digital asset market (by market capitalization and trading volume) through a joint SEC/CFTC rulemaking;
  • Require digital asset transactions that are not recorded on the publicly distributed ledger to be reported to a registered Digital Asset Trade Repository within 24 hours to minimize the potential for fraud and promote transparency;
  • Explicitly add digital assets and digital asset securities to the statutory definition of “monetary instruments,” under the BSA, formalizing the regulatory requirements for digital assets and digital asset securities to comply with anti-money laundering, recordkeeping, and reporting requirements;
  • Provide the Federal Reserve with explicit authority to issue a digital version of the U.S. Dollar, clarify that digital assets, digital asset securities, and fiat-based stablecoins are not U.S. legal tender, and provide the U.S. Treasury Secretary with authority to permit or prohibit U.S. dollar and other fiat-based stablecoins;
  • Direct the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Securities Investor Protection Corporation (SIPC) to issue consumer advisories on “non coverage” of digital assets or digital asset securities to ensure that consumers are aware that they are not insured or protected in the same way as bank deposits or securities; and,
  • Require legislative recommendations from FinCEN, SEC and CFTC to provide clarity on dividing lines between who must register as a money services business versus who must register as a securities or commodities exchange.

Like all things on the Hill, it remains to be seen whether partisan politics will prevent digital asset legislation from progressing this year. Lummis’s bill, once introduced, will likely be sent for consideration to the Senate Banking Committee, where Toomey is the ranking Republican. It will be interesting to see whether Lummis incorporates elements of Toomey’s stablecoin legislative framework into her comprehensive bill in an effort to cement his support. However, any bill put forth by the Republicans on the Senate Banking Committee will have to receive the blessing of Sen. Sherrod Brown (D-OH), the committee chair, who, in his opening statement at a December stablecoin hearing, stated “[s]tablecoins and crypto markets aren’t actually an alternative to our banking system. They’re a mirror of the same broken system – with even less accountability, and no rules at all.”