On October 3, the Financial Stability Oversight Council (FSOC) released its “Report on Digital Asset Financial Stability Risks and Regulation” (Report), concluding, among other things, that unregulated cryptocurrencies could pose a risk to the stability of the U.S. financial system. FSOC further recommended legislation empowering financial regulators to more vigorously oversee the industry and to expand bank exams to require federal and state agencies to inspect services provided by crypto-asset service companies. Issued in response to Executive Order 14067, the Report called on federal regulators to come up with plans for overseeing cryptocurrencies. A fact sheet summarizing FSOC’s findings can be found here.

In a press release issued that same day, Treasury Secretary Janet Yellen said: “This report provides a strong foundation for policymakers as we work to mitigate the financial stability risks of digital assets while realizing the potential benefits of innovation. The report concludes that crypto-asset activities could pose risks to the stability of the U.S. financial system and emphasizes the importance of appropriate regulation, including enforcement of existing laws. It is vital that government stakeholders collectively work to make progress on these recommendations.”

Established under the Dodd-Frank Act, FSOC is chaired by Treasury Secretary Yellen, and its members include the heads of financial agencies, such as the Federal Reserve Board, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission. FSOC is tasked with identifying emerging threats to the country’s financial security and organizing a coordinated response across U.S. financial regulators. FSOC is authorized to supervise and regulate nonbank financial companies, financial market utilities, and payment, clearing, or settlement activities to address possible vulnerabilities to financial stability.

Although the Report acknowledges that the existing regulatory system covers large parts of the crypto-asset system, it identifies three gaps:

  1. Spot markets — or financial markets where commodities are traded for immediate delivery as opposed to the futures market — for crypto assets that are not securities are subject to limited regulation. These markets may not be subject to the rules and regulations designed to ensure transparent trading, prevent conflicts of interest and market manipulation, and protect investors.
  2. Crypto-asset businesses do not have a comprehensive regulatory framework and can engage in regulatory arbitrage, i.e., financial transactions designed specifically to capture profit opportunities created by different regulations or laws.
    • Some businesses may have affiliates or subsidiaries operating under different regulatory frameworks, and no single regulator may have visibility into the risks across the entire business.
    • As Acting Comptroller of the Currency Michael Hsu said in his statement supporting the Report: “We know from the 2008 financial crisis what happens when regulatory agencies fail to coordinate effectively on risks that cut across jurisdictional lines: an unlevel playing field emerges and financial stability risks grow in the shadows.”
  3. A number of crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertical integration of the services provided by intermediary broker-dealers.
    • This vertical integration may have negative implications for financial stability and investor protection.

To address these gaps, the Report makes the following recommendations:

  • Passing legislation providing rulemaking authority for financial regulators over the spot market for crypto assets that are not securities;
  • Passing legislation giving regulators authority to have visibility into and supervision over the activities of all affiliates and subsidiaries of crypto-asset entities;
  • Studying potential vertical integration proposed by crypto-asset firms.

The Report also recommended bolstering its members’ capacities related to data and to the analysis, monitoring, supervision, and regulation of crypto-asset activities.

SEC Chair Gary Gensler highlighted the need for oversight in his statement on the Report, noting his belief that “crypto cannot exist outside of our public policy frameworks, regardless of what the crypto industry initially expected or what certain market participants might say today. The policy frameworks include protecting investors and consumers, guarding against illicit activity, and supporting financial stability. Whether you call something a crypto token, stablecoin, or decentralized finance platform (DeFi), those public policy goals remain the same.”

Consumer Financial Protection Bureau Director Rohit Chopra also issued statement supporting the Report , which highlighted the risks of stablecoins, while Texas Banking Commissioner and FSOC state banking representative Charles Cooper supported the Report in a statement, focusing on the need for federal and state coordination.

To keep you informed of recent activities, below are several of the most significant federal and state events that have influenced the Consumer Financial Services industry over the past week:

Federal Activities

State Activities

Federal Activities:

  • On December 15, the Consumer Financial Protection Bureau (CFPB) took action against a medical debt collector, Commonwealth Financial Systems, for allegedly trying to collect unverified medical debts after consumers disputed the validity of the debts. Under this order, the company will cease operations and pay a $95,000 penalty to the CFPB’s victims relief fund. For more information, click here.
  • On December 15, the Securities and Exchange Commission (SEC) denied Coinbase’s Petition for Rulemaking, which was submitted to the SEC on July 20, 2022, as “currently unwarranted.” Coinbase’s petition requested the SEC to propose and adopt rules to, among other things, “identify which digital assets are securities.” According to the statement issued by SEC Commissioner Gary Gensler, “the existing securities regime appropriately governs crypto asset securities.” For more information, click here and here.
  • On December 14, the Bank of International Settlements (BIS) issued a consultive whitepaper, drafted by the Basel Committee, to amend certain digital asset standards related to stablecoins. For example, the whitepaper discusses how the quality of a stablecoin issuer’s reserve asset composition, and its ability to meet redemption requests, will determine whether a particular stablecoin meets the conditions to be included in the Group 1b category and be subjected to existing bank capital requirements. On the other hand, Group 2 stablecoins will be subjected to a new highly conservative capital treatment. For more information, click here.
  • On December 14, Acting Comptroller of the Currency Michael J. Hsu issued a statement at the Financial Stability Oversight Council (FSOC) meeting on the FSOC’s Annual Report. For more information, click here.
  • On December 13, by a vote of 4-1, the Federal Communications Commission (FCC) adopted new rules aimed at “closing the ‘lead generator’ robocall/robotexts loophole.” Specifically, the rule requires telemarketers to obtain consumer consent to receive robocalls and robotexts one seller/brand at a time, instead of allowing a single consent to apply to multiple telemarketers. This is also known as one-to-one consent. The order does not specifically define “robocall” or “robotext.” For more information, click here.
  • On December 13, the U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) announced that it has entered a consent order with California-based digital asset exchange, CoinList Markets LLC (CoinList). The consent order alleges that CoinList processed 989 transactions on behalf of users located in Crimea between April 2020 and May 2022, in violation of OFAC’s Russia/Ukraine sanctions. As part of the settlement and to avoid potential civil liability, CoinList agreed to pay $1,207,830. For more information, click here.
  • On December 12, the U.S. District Court of the Southern District of New York denied bankrupt digital asset services company Celsius Network Inc.’s motion to dismiss the Federal Trade Commission’s (FTC) enforcement action against it for allegedly misrepresenting that consumers’ digital asset deposits maintained on Celsius’ platform were protected by insurance issued by the Federal Deposit Insurance Corporation (FDIC). For more information, click here.
  • On December 12, the FTC announced that it had finalized a new rule — the Combating Auto Retail Scams (CARS) Rule — addressing two types of illegal tactics consumers allegedly face when buying a car: bait-and-switch tactics and hidden junk fees. For more information, click here.
  • On December 12, the Basel Committee on Banking Supervision published a consultative document to propose targeted adjustments to its 2016 standard on interest rate risk in the banking book (IRRBB). The adjustments are intended to fulfill a commitment to periodically update the calibration of the interest rate shock factors used in the standard. For more information, click here.
  • On December 12, Jonathan McKernan, a member of the FDIC Board of Directors, issued remarks about its Endgame proposal’s reliance on Basel Committee decisions. For more information, click here.
  • On December 12, the Office of the Comptroller of the Currency (OCC) reported on the performance of first-lien mortgages in the federal banking system during the third quarter of 2023. The OCC Mortgage Metrics Report, Third Quarter 2023 showed that 97.3% of mortgages included in the report were current and performing at the end of the quarter, the same as the previous quarter. Performance improved compared to third quarter of 2022, when 97.2% of mortgages were current and performing. For more information, click here.
  • On December 11, the OCC published its 2023 Annual Report. The OCC Annual Report provides Congress with an overview of the condition of the federal banking system, discusses the OCC’s strategic priorities and initiatives, and shares the agency’s financial management and condition. For more information, click here.
  • On December 9, stablecoin issuer Tether, announced that, in collaboration with OFAC, it has initiated a voluntary digital asset wallet-freezing policy to combat activity connected with sanctioned persons on OFAC’s Specially Designated Nationals list. For more information, click here.
  • On December 7, U.S. Senators Mark. R. Warner (D-VA), Mike Rounds (R-SD), Jack Reed (D-RI). and Mitt Romney (R-UT) introduced bipartisan legislation to expand sanctions to foreign entities supporting all U.S.-designated terrorist groups, including through digital asset transactions. This bill also contains a provision from the Crypto-Asset National Security Enhancement and Enforcement (CANSEE) Act, which provides authority to the Financial Crimes Enforcement Network (FinCEN) to restrict transactions with “primary money laundering concerns” that do not involve a U.S. correspondent bank account. For more information, click here.
  • On December 7, the U.S. District Court for the Eastern District of Louisiana dismissed a lawsuit brought by the FDIC against the chairman, president, and CEO, and board members of First NBC Bank President and CEO Ashton J. Ryan, Jr. after the parties reached a confidential settlement. The complaint alleged that Ryan and others conspired to defraud First NBC Bank through a variety of schemes, including by disguising the true financial status of certain borrowers and their troubled loans, concealing the true financial condition of the bank from the board of directors, auditors, and examiners. For more information, click here.

State Activities:

  • On December 13, New York Governor Kathy Hochul signed S4907. The bill will add a new article, Article 49-A, Medical Debt Reporting, to the state’s Public Health Law. The new law prohibits consumer reporting agencies from reporting or maintaining in consumer files any information about medical debts. Per the bill, any contract between a collection entity and a hospital, health care professional, or ambulance service for the purchase or collection of medical debt must contain a provision that prohibits the reporting of any portion of such medical debt to a consumer reporting agency. For more information, click here.
  • On December 12, the Office of the New York State Attorney General (NYAG) announced its entry into a consent order with foreign digital asset exchange KuCoin (KuCoin) for alleging acting as unregistered securities broker and/or commodities-broker-dealer by offering, selling, and purchasing “securities and commodities” like “ETH, LUNA, and UST.” Notably, the consent order requires KuCoin to “terminate access to its services for users in the State of New York … and … close … relevant accounts of NY users no later than 120 days after the [e]ffective [d]ate” of the consent order.” For more information, click here.
  • On December 12, the California Department of Financial Protection and Innovation (DFPI) issued a press release concerning the digital asset kiosk operator-related provisions within its new Digital Financial Assets Law, which is slated to become fully effective on July 1, 2025. However, digital asset kiosk operators must begin to comply with certain requirements by as early as January 1, 2024, including but not limited to, complying with daily transactions limits. For more information, click here.
  • On December 12, Minnesota Attorney General Keith Ellison announced that his office obtained a settlement with a California student loan debt relief company. The company is alleged to have illegally collected fees from customers and misrepresented its services to consumers. The settlement requires the company to cease operating in Minnesota and provide full refunds to its Minnesota consumers. For more information, click here.
  • On December 10, a new law designed to protect consumers’ accrued credit card points took effect in New York. Under the law, credit card companies must take additional steps to prevent consumers from losing credit card points they have earned when rewards programs are modified or terminated. Credit card issuers will have 45 days to provide notice to consumers when their credit card account or rewards program is canceled or is otherwise modified in a way that is less favorable to the consumer. The consumer will then have a 90-day grace period to redeem account rewards in accordance with the program’s original terms and conditions. For more information, click here.
  • On December 7, the New York Supreme Court denied a request seeking review of the New York Department of Financial Services’ (NYDFS) January 18 amendment to the state’s regulation governing the maximum rates that check-cashing businesses may charge their customers, and dismissed allegations raising the regulation’s unconstitutionality. The petitioners alleged that the amendment, which reduced the percentage rate that check-cashing facilities may charge their consumers from 2.27% to 2.2% for most checks, and 1.5% for government-issued checks, and limited the time before a check-cashing facility could seek the establishment of a new rate, was “arbitrary and capricious” and “effected an unconstitutional deprivation of property without due process of law.” In rejecting the petitioners’ arguments, the court found that the regulation had a rational basis and was supported by the administrative record. The court also found that NYDFS complied with the procedural requirements of the state’s Administrative Procedure Act (Act), agreeing with NYDFS that a court should not “annul a rule or regulation that was promulgated in ‘substantial compliance’ with the requirements of [the Act].” Additionally, the court found that the regulation did not deprive the petitioners of property without procedural or substantive due process. For more information, click here.
  • In its December bulletin, California’s DFPI stated that it will be requiring debt collectors that are licensed prior to January 1, 2024, to file an annual report by March 15, 2024, for the year 2023. The requirements for the annual report can be found in California Financial Code section 100021(a) (1) – (4), (6), and (7). The annual report must be filed through the DFPI portal. A draft of the report will be sent mid-December to the designated email set up in the licensee’s portal account. Licensees will be able to input the reports from January 1, 2024, through midnight, March 15, 2024.
  • DFPI also reminded covered entities that Financial Code section 521 requires state-chartered banks and credit unions to report the revenue they received from fees on nonsufficient funds and overdraft charges during the calendar year on an annual basis. These reports are due by March 1, 2024, to allow the DFPI to publish the information on its website by March 31. On December 29, the DFPI will send an email with a report link to the designated email address of each reporting institution. For more information, click here.

To keep you informed of recent activities, below are several of the most significant federal and state events that have influenced the Consumer Financial Services industry over the past week:

Continue Reading Troutman Pepper Weekly Consumer Financial Services Newsletter

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 December 23, the Federal Trade Commission (FTC) issued a proposed consent order, requiring Mastercard to end a practice that allegedly forced merchants to route debit card payments through Mastercard’s payment network in violation of the Durbin Amendment to the Dodd-Frank Act and Regulation II. The advent of e-wallet applications like Apple Pay has enabled consumers to process payment transactions directly from a cellular phone. The FTC alleged that Mastercard blocked merchants from routing e-wallet Mastercard debit transactions to competing payment card networks that may charge lower transaction fees than Mastercard. Mastercard effectuated this practice through a process called “tokenization.” A “token” is a converted code representation of the cardholder’s primary account number. When a consumer makes a purchase using an e-wallet application, the merchant receives a token from the cardholder’s device and sends the token to the merchant’s bank, which in turn, sends the token to a payment card network for processing. To settle the transaction, however, the payment card network that receives the token from the merchant’s bank must be able to convert the token to the cardholder’s primary account number. The FTC alleged Mastercard refused to provide token conversion services to competing networks for remote e-wallet transactions, which made it impossible for merchants to route their e-wallet transactions on a network other than Mastercard. For more information, click here.
  • On December 21, the FTC announced it extended the public comment period on whether it should explore a rule on the harms caused by so called “junk fees” until February 8, 2023. For more information, click here.
  • On December 21, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-PA) introduced the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022” bill. On April 6, Toomey released a draft version of this bill, which we discussed here. However, the introduced version of the bill contains a few notable amendments:
    • Joint Supervision: If a payment issuer has been authorized by the appropriate federal banking agency, which the bill designates as the Office of Comptroller of Currency (OCC) and the applicable state banking supervisor to issue payment stablecoins, the payment stablecoin issuer will be jointly supervised by the federal banking agency and state banking supervisor.
    • Master Account Access: Upon application from a national limited payment stablecoin issuer (an entity with an OCC license and OCC approval to issue payment stablecoins) or a payment stablecoin issuer (which includes money transmitter businesses, non-depository trust companies, or any other entity authorized by a state banking supervisor to issue payment stablecoins), the bill requires the Federal Reserve to establish and maintain master accounts for those entities.
    • Insolvency of Payment Stablecoin Issuer and Priority of Competing Claims: The bill states that in any insolvency proceeding, including bankruptcy and any insolvency proceedings brought by a federal or state banking regulator, a claim of a person holding payment stablecoins issued by the payment stablecoin issuer will have priority over all other claims against the payment stablecoin issuer.
    • Asset-Backed Stablecoins Only: Although the bill does not specifically reference payment stablecoins, the bill seems to indirectly prohibit the issuance of algorithmic stablecoins through exclusion since the bill requires payment stablecoins to be backed 1-to-1 by level 1 high-liquid assets denominated in United States dollars. Notably, the bill includes deposits maintained at an insured depository institution as a permissible asset for stablecoin reserves.

    For more information, click here.

  • On December 21, the Securities and Exchange Commission (SEC) filed a civil enforcement action against Thor Technologies, Inc. and Thor co-founders David Chin and Matthew Moravec for conducting an unregistered offering of securities through an initial coin offering. According to the SEC’s complaint, Thor claimed it would use the $2.6 million it raised through sales of “Thor” tokens to develop a software platform for “gig economy” companies and workers, but the platform was never completed. Further, the SEC alleged that during the 2018 initial coin offering of “Thor” tokens, the tokens had no practical use, and the tokens themselves were marketed as an investment vehicle that might rise in value based on Thor’s and the co-founders managerial and entrepreneurial efforts in developing the gig economy software platform. Therefore, the SEC alleged that Thor sold unregistered “investment contracts” — a type of investment vehicle that can become a security if certain criteria are met. For more information, click here.
  • On December 21, the SEC filed a civil enforcement action against Alameda Research ex-CEO Caroline Ellison and ex-CTO Gary Wang. In its complaint, the SEC alleged that Ellison and Wang knowingly assisted Sam Bankman-Fried divert FTX customer crypto deposits from the FTX exchange platform by requiring FTX customers to deposit fiat currency into bank accounts controlled by Alameda. Critically, the SEC asserted that FTT, the native token of the FTX exchange platform, “was offered and sold as an investment contract” at the time of its 2019 offering and was therefore a security. For more information, click here.
  • On December 20, the U.S. District Court for the Northern District of California issued an order, confirming that the Commodity Futures Trading Commission (CFTC) properly served the Ooki DAO with process. Initially, the CFTC attempted to serve Ooki DAO online by submitting its summons and complaint through Ooki DAO’s online chat help box and discussion forum. In response, several crypto stakeholders filed amicus briefs, arguing the CFTC is not capable of serving the Ooki DAO because (1) it is a technology and not an entity that has the capacity to be sued, and (2) service of process through an online chat help box does not constitute sufficient service under applicable federal or state law. In its order, the court examined federal law (FRCP 17(b)) and state law (California Civil Procedure Code Section 369.5(a)) and determined that the CFTC sufficiently alleged that Ooki DAO constitutes an unincorporated association, and therefore, Ooki DAO has the capacity to be sued. When an unincorporated association does not have a mailing address, California law permits the court in which the action is pending to direct the summons be served in a manner that is reasonably calculated to give actual notice to the party to be served and proof of such service be made as prescribed by the court. Here, the court concluded that Ooki DAO received actual and constitutionally sufficient notice of the CFTC’s lawsuit through its online chat box and discussion forum for two reasons: (1) posting service of process on the Ooki DAO’s online discussion forum, which was dedicated to conversation about the Ooki DAO, was reasonably likely to inform the Ooki DAO of the CFTC’s lawsuit, and (2) at least some of the token holders of OOKI, the native token of Ooki DAO, acknowledged service of process by instituting a governance proposal and taking “snapshot” votes of potential plans of action to the CFTC’s complaint. Previously on December 12, the U.S. District Court for the Northern District of California ordered the CFTC to personally serve Ooki DAO founders as individually identifiable holders of BZRX tokens, which was the native token of Ooki DAO’s predecessor bZx DAO. For more information related to our previous discussion of the bZx DAO lawsuit, click here. For more information related to the court’s order, click here.
  • On December 16, the Financial Stability Oversight Council (FSOC) unanimously approved its 2022 Annual Report in which FSOC focused on four key priorities to address risks and emerging threats to the stability of the U.S. financial system:
    • Nonbank Financial Intermediation: FSOC continues to monitor data-retention vulnerabilities posed by three types of nonbank financial institutions: open-end mutual funds, hedge funds, and money market funds.
    • Digital Assets: FSOC recommended that federal regulatory agencies continue to enforce existing laws applicable to crypto-asset activities, including actions related to unregistered offers and sales of crypto-asset securities, episodes of fraud and market manipulation, and false and misleading statements concerning the availability of federal deposit insurance for crypto-assets. Additionally, FSOC discussed three gaps in the current U.S. regulatory framework of crypto-assets: (1) lack of direct federal regulation of the spot markets for crypto-assets that are not securities; (2) regulatory arbitrage; and (3) offering retail customers direct access to markets through vertical integration. Notably, regarding the spot market issue, FSOC recommended that Congress pass legislation that provides for explicit rulemaking, enforcement, and examination authority for federal financial regulators over the spot market for crypto-assets that are not securities.
    • Climate-Related Financial Risk: In October 2021, FSOC published a report on climate-related financial risk, which recommended the formation of two committees: a staff-level Climate-Related Financial Risk Committee (CFRC) and an external advisory committee, the Climate-Related Financial Risk Advisory Committee (CFRAC). The CFRC began meeting in February 2022 and assists with translating climate data into potential financial impacts. On the other hand, the CFRAC assists FSOC in receiving information and analysis on climate-related financial risks from a broad array of stakeholders, including but not limited to, the financial services industry, nongovernmental research institutions, and academia.
    • Treasury Market Resilience: In the face of increased uncertainty and volatility caused by a rapid increase in the 2022 federal funds rate, FSOC reported that the Treasury market has shown resilience. This resilience is attributable to coordinated policymaking through the Inter-Agency Working Group for Treasury Market Surveillance, which pursued specific principles to fortify the Treasury market, including: (1) bolstering the resilience of market intermediation; (2) improving data quality and availability; (3) evaluating expanded central clearing; and (4) enhancing trading venue transparency and oversight.

    For more information, click here.

  • On December 16, Consumer Financial Protection Bureau Director Rohit Chopra issued a statement, outlining the key financial stability risks discussed in FSOC’s 2022 Annual Report:
    • Big Tech Cloud Providers: Director Chopra noted that financial services providers continue to rely upon Big Tech cloud providers to house data, and the operational resilience of these cloud companies could eventually lead to financial stability risks. Additionally, Director Chopra proposed that FSOC evaluate whether these cloud companies may be subject to oversight through the Dodd-Frank Act’s systemically important financial market utility authority.
    • Digital Assets: Director Chopra considered how the separation of digital assets from traditional financial markets has contributed to the preservation of financial stability in 2022. Notably, Director Chopra asserted that “state money transmitter laws were not designed to ensure the long-term stability of [crypto-related entities].” Therefore, he proposed that FSOC consider whether to proceed with a designation process under FSOC’s Dodd-Frank Act Title VIII for entities that engage in crypto-related activities, including stablecoin issuance.
    • Major Fund Strategies: Director Chopra took issue with the lack of direct supervision of major fund strategies. Furthermore, he noted that unlike traditional hedge funds, these entities generally face “no leverage limits or direct supervision,” and their ties to global systemically important banks can potentially undermine the efficacy of U.S. financial markets.

    For more information, click here.

  • On December 16, the Basel Committee on Banking Supervision issued its Prudential Treatment of Cryptoasset Exposures publication, which outlines the finalized crypto-asset categorization standard that Basel Committee member banks must implement by January 1, 2025. In part, the publication defines “Group 2 crypto-assets” as “all unbacked crypto-assets.” The publication suggests that “Group 2 crypto-assets” pose higher risks to financial stability. Therefore, under the finalized standard, a bank’s total exposure to Group 2 crypto-assets generally should not be higher than 1% and must not exceed 2% of the bank’s Tier 1 capital. For more information, click here.

State Activities:

  • On December 22, New York Governor Kathy Hochul signed A.2666A/S.145B into law, which will require businesses to warn consumers of potential scams when selling gift cards. The legislation amends existing general business law to require retailers to post a notice, warning customers of gift card scams and providing information about how to respond appropriately if consumers believe they are victims of a scam. Hochul said in a statement that “consumers deserve to be protected from scams that target their hard-earned money.” For more information, click here.
  • On December 21, the California Department of Financial Protection and Innovation (DFPI) issued a desist-and-refrain order to CONST LLC (doing business as “MyConstant”) regarding the company’s alleged violations of the California Securities Law and the California Consumer Financial Protection Law. According to DFPI, MyConstant operated an online platform, offering several crypto-asset-related and interest-bearing services and products. The company thereby allegedly engaged in unlicensed peer-to-peer loan brokering and the unregistered sale of securities. DFPI’s desist-and-refrain order will “remain in full force and effect until further order of the Commissioner.” For more information, click here.
  • On December 21, the New York State Department of Financial Services (DFS) Superintendent Adrienne Harris announced new proposed guidance for New York State-regulated banking and mortgage institutions. The proposed guidance intends to help these institutions manage safety and soundness risks associated with climate change and seeks to support their efforts to identify, measure, monitor, and control their banking and financial risks. The guidance centers around several components of prudent risk management, including: (1) corporate governance, (2) internal control framework, (3) risk management process, (4) data aggregation and reporting, and (5) scenario analysis. DFS will host a webinar to provide an overview of the proposed guidance on January 11, 2023 at 10:30 a.m. EST. For more information, click here.
  • On December 19, DFPI announced that it moved to revoke BlockFi Lending LLC’s (BlockFi) California Financing Law license. If BlockFi does not request a hearing by December 30, 2022, DFPI Commissioner Clothilde Hewett may issue an order revoking BlockFi’s license. For more information, click here.

On November 30, Senate Banking Committee Chairman Sherrod Brown (D-OH) sent a letter to Treasury Secretary Janet Yellen requesting that she coordinate with other financial regulators to further work on the recommendations from the Financial Stability Oversight Council Report on Digital Asset Financial Stability Risks and Regulation (FSOC report), which we previously discussed here. Specifically, Senator Brown advocates for the development of legislation that would provide authority for federal regulators to have visibility into, and otherwise supervise, the activities of the affiliates and subsidiaries of crypto asset entities. The letter comes in the wake of the collapse of FTX.com, a Bahamas-based crypto exchange, which filed for bankruptcy last month.

The crypto giant was valued at $32 billion, yet now seeks court protection. Over a three-day span, FTX customers attempted to withdraw billions of dollars in deposits stored on the platform, but FTX was unable to fulfill those requests and ultimately spiraled into insolvency. FTX CEO, Sam Bankman-Fried, stepped down the same day as the bankruptcy filing and was replaced by John J. Ray III, who previously oversaw Enron’s bankruptcy proceedings.

In his letter, Senator Brown argues that FTX’s collapse, “highlights many of the troubling risks in the crypto asset markets discussed in the FSOC report,” including gaps in the regulation of crypto asset activities such as vertically integrated market structures and platforms and an overdependence on leverage. Senator Brown contends that FTX’s connections to other crypto firms, “likely deepened its losses and continue to send shock waves to other entities.”

Senator Brown called on Secretary Yellen for her, “input and partnership to develop a broad framework for all crypto assets.” Senator Brown ended his letter with the age-old adage that, “if it seems too good to be true, it probably is.”

Our Take:

We expect Congress to hold more hearings on the fall of FTX and the risks of cryptocurrency generally in 2023 as it looks to move forward with proposed legislation to regulate entities in the cryptocurrency ecosystem.

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 December 1, U.S. Rep. Tom Emmer (R-MN), ranking member on the House Financial Services Subcommittee on Oversight and Investigations, issued a letter to Susan Collins, president of the Federal Reserve Bank of Boston (Boston Fed), about “Project Hamilton,” an exploratory research initiative between the Boston Fed and the Massachusetts Institute of Technology that studies the potential risks and benefits associated with implementation of a U.S. central bank digital currency (CBDC). According to Emmer, “any U.S. CBDC must be open, permissionless, and private,” and private firms engaging in Project Hamilton should not receive an “unfair competitive advantage” over other private competitors who intend to develop CBDC products in the future. For information related to the press release of Emmer’s letter, click here. To read Emmer’s letter, click here.
  • On November 30, the Federal Trade Commission (FTC) announced that it has temporarily shut down a credit card debt relief program and its affiliated companies that allegedly took millions from consumers by falsely promising to eliminate or substantially reduce their credit card debt. In its complaint, the FTC alleges that the operators engaged in several deceptive and unlawful tactics, including deceptive telemarketing, making phony debt relief promises, and charging deceptive upfront fees. For more information, click here.
  • On November 30, in remarks at the Futures Industry Association’s Asia Derivatives Conference in Singapore, CFTC Commissioner Christy Goldsmith Romero proposed potential crypto-related consumer protection initiatives to mitigate the risks revealed by the collapse of FTX. Romero emphasized the catastrophic risks associated with “the commingling of customer funds with company funds,” and how the user agreements of two of the world’s leading cryptocurrency exchanges, Coinbase, Inc. and Kraken, authorize the commingling of customer cryptocurrency deposits with cryptocurrency owned by the exchanges. Notably, Romero advocated for a two-tiered approach to reducing consumer harm in the crypto markets:
    1. Redefining the definition of a “retail investor” to include two categories of retail customers: (1) household retail; and (2) professional and high net worth individuals. This bifurcation would enable the CFTC to devise specific customer protections relevant to the different risks imposed on each category of customer.
    2. Heightened supervision of cryptocurrency exchanges, which would entail frequent examinations, an increased focus on cybersecurity, conflicts of interest, and a safety and soundness financial review.

For more information, click here.

  • On November 30, U.S. Sen. Sherrod Brown (D-OH), chair of the Senate Banking Committee, issued a letter to U.S. Treasury Secretary and Chair of the Financial Stability Oversight Committee (FSOC) Janet Yellen about the consumer, investor, and financial stability risks of crypto assets and how the collapse of FTX was precipitated by “three of the most common hazards in financial markets,” each of which contributed to the demise of the Lehman Brothers in 2008: leverage; illiquid holdings; and extreme concentration. Brown’s letter requests the U.S. Treasury to collaborate with other financial regulators to refine and implement the recommendations promulgated by FSOC in its October 2022 report discussing the need for a regulatory framework for crypto-related entities. For more information, click here.
  • On November 29, the Office of the Comptroller of the Currency (OCC) announced revisions to its civil money penalty (CMP) manual, which the OCC will begin using on January 1, 2023. The OCC’s CMP manual summarizes the agency’s policies and procedures governing the imposition of civil money penalties against national banks, other OCC-regulated institutions, and their institution-affiliated parties. OCC Acting Comptroller Michael J. Hsu noted that the “revised CMP matrix for OCC institutions will strengthen the effectiveness and fairness” in the OCC’s enforcement actions. For more information, click here.
  • On November 28, 2022, U.S. Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, issued a letter to Coinbase, Inc. inquiring into the policies and procedures Coinbase has in place to protect its customers’ assets in the event of bankruptcy. Wyden’s letter comes after the bankruptcy of FTX and corresponding reports of widespread corporate mismanagement and misappropriation of consumer cryptocurrency deposits held by FTX on its exchange platform. Wyden’s letter primarily focuses on the need for consumer protection assurances in the cryptocurrency industry and requests Coinbase to provide responses to certain questions by December 12, 2022. Notably, one of the questions posed in Wyden’s letter concerns whether Coinbase will publish proof-of-reserves of both its working capital and equity. After the collapse of FTX, many industry stakeholders have begun to implore crypto-related entities to adopt a proof-of-reserves auditing practice, which reveals whether a custodial exchange has sufficient liquidity to cover all customer withdrawals and provides transparency to customers. For more information, click here.

State Activities:

  • On December 1, the New York State Department of Financial Services (NYDFS) announced that it is seeking public comment on a proposed regulation that will permit the agency to charge the cryptocurrency companies it regulates for the costs associated with their oversight. Rules currently in place permit NYDFS to charge other non-crypto financial institutions for these expenses. NYDFS Superintendent Adrienne Harris explained that “[t]he ability to collect supervisory costs will help the department continue protecting consumers and ensuring the safety and soundness of this industry.” The proposed regulation is subject to a 10-day pre-proposal comment period, which began December 1, followed by a 60-day comment period upon publication in the State Register. For more information, click here.
  • On November 23, New York Gov. Kathy Hochul signed S.6522A/A.7363A to protect patients with significant medical debts. The legislation amends current laws to prohibit health care providers from securing a lien against an individual’s primary residence or garnishing an individual’s wages to collect on medical debt. This legislation furthers the goals Hochul outlined in her 2022 State of the State Address to protect the state’s consumers and improve their financial health, in part, by addressing medical debt and shielding them from abusive and punitive practices that create financial stress. “No one should face the threat of losing their home or falling into further debt after seeking medical care,” Hochul said, adding, “I’m proud to sign legislation today that will end this harmful and predatory collection practice….” For more information, click here.

On November 10, the Consumer Financial Protection Bureau (CFPB) released a new complaint bulletin, highlighting consumer complaints it has received related to crypto-assets. The bulletin suggests that fraud, theft, hacks, and scams pose a significant problem in crypto-asset markets. Also, according to the bulletin, consumers reported issues with executing transactions and transferring assets between exchanges. In response, the CFPB is advising consumers to be aware of common schemes, report suspicious FDIC insurance claims, and continue submitting complaints directly to the CFPB.

In President Biden’s “Executive Order on Ensuring the Responsible Development of Digital Assets” (Order), a number of deadlines were set for numerous federal agencies to submit reports, including a deadline for the Financial Stability Oversight Council (FSOC) to produce a report that identifies “specific financial stability risks and regulatory gaps” from the use of digital currencies and proposes recommendations to mitigate those risks. Also, the Order “encouraged” the director of the CFPB “to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.” Subsequently, the White House released a “First-Ever Comprehensive Framework For Responsible Development of Digital Assets,” which noted that the reports encouraged the CFPB to “redouble [its] efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”

Over the past decade, the number of crypto-assets has expanded; indeed, one estimate puts the total at more than 1.8 million. The CFPB also reports a similar rise in the number of complaints. From October 2018 to September 2022, the CFPB received more than 8,300 complaints related to virtual currency, with the majority being submitted in the last two years. The most common issue selected was fraud and scams (40%) followed by transaction issues.

The CFPB highlighted the following common issues among consumers:

  • Romance scams and “pig butchering”
    • Romance scams or schemes where scammers play on a victim’s emotions to extract money are increasingly common. Data from the CFPB shows that romance scams are particularly common among older consumers.
    • Some of these scammers combine romance scams with a technique law enforcement refers to as “pig butchering,” where fraudsters pose as financial successes and spend time gaining the victim’s confidence and trust. Even going as far as coaching victims through setting up crypto-asset accounts.
    • Some scammers use social media posts by crypto-asset influencers to trick victims. For example, a scammer may impersonate a celebrity or influencer using verified (sometimes stolen) social media accounts or promotional videos to promote giveaways or “double your crypto” scams.
  • Transaction issues:
    • Consumers reported having trouble executing transactions, especially during times of increasing crypto-asset prices, resulting in losses or the inability to realize profits.
    • Other consumers had issues with compatibility between crypto-assets they owned and those that could be used on a specific crypto-asset platform. Other consumers experienced losses when attempting to transfer incompatible assets between different wallets or crypto-asset platforms.
    • Many crypto-asset platforms offer products marketed by companies as credit, debit, or prepaid cards with various features, including offering rewards in crypto-assets. Consumers submitted complaints, including the inability to make purchases, issues closing their account, rejecting their claims for reimbursement on fraudulent charges, or failing to receive advertised rewards.
    • Consumers also complained that several large crypto-asset platforms have recently either frozen customers’ account withdrawals, filed for bankruptcy protection, or both.
  • Undisclosed or unexpected costs:
    • Some consumers complained about undisclosed or unexpected costs on crypto-asset platforms, or claims there were no fees when, in reality, the consumer noticed a large cost in the form of a large spread, e.g., the gap between the price an asset can be purchased at and the price an asset can be sold at.
  • Customer service issues:
    • Consumers sometimes complained about the difficulties they face in getting in touch with customer service representatives.
    • Lack of customer service options creates opportunities for social media scams where attackers pretend to be customer service representatives to gain access to customers’ wallets and steal crypto-assets.

The CFPB went on to note that in situations where consumers have had assets stolen, or had their account hacked, they are often told there is nowhere to turn for help. In one complaint, a consumer reported a loss of their life savings in a scam, which the company stated was not recoverable. In other situations where consumers are having problems with a crypto-asset platform or wallet that does not involve fraud or technical issues, companies sometimes cite boilerplate user agreement language to absolve themselves of responsibility. Consumers have also reported to the CFPB that some crypto-asset platforms have incorporated arbitration clauses into their terms and conditions that requires consumers to resolve disputes through arbitration.

Our Take

Director Chopra’s recent public statement have focused on the adoption of cryptocurrencies for real-time payments, in particular the risks of hacks, errors and fraud, and consumer protection. To date, the CFPB has not brought any enforcement actions against crypto companies, but the complaint bulletin is another signal of the CFPB’s increased activity in this space.

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.

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.

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.