BPInsights: March 5, 2022

Stories Driving the Week

Could Crypto Be an Escape Hatch from Russia Sanctions?

Cryptocurrency could enable bad actors worldwide to skirt Russia sanctions as the U.S., European Union and other allies cut the country off from much of the global financial plumbing after the Ukraine invasion, according to Bloomberg. Crypto trading has surged since the sanctions were announced. Here’s how policymakers and crypto exchanges are handling the prospect of crypto as a sanctions evasion tool.  

  • Senators concerned: group of Senate Democrats including Banking Committee Chairman Sherrod Brown (D-OH) and Sen. Mark Warner (D-VA) urged Treasury Secretary Janet Yellen to ensure Russia does not use crypto as a sanctions workaround. The senators sought details on how Treasury is enforcing sanctions compliance in the crypto industry.
  • DoJ warning: “We are at a crossroads with cryptocurrency, and frankly we need to focus on a new category of crime and that’s the use of cryptocurrency to conduct criminal activity,” Deputy Attorney General Lisa Monaco said Wednesday on Bloomberg TV. The Department of Justice recently launched a crypto enforcement team. 
  • Exchanges’ approaches: U.S. officials have urged crypto exchanges to take a targeted approach and focus on people who have been sanctioned, according to Bloomberg. Binance has taken steps to identify crypto wallets of sanctioned individuals and is prepared to take action against them. Coinbase is blocking transactions to or from addresses banned by Treasury’s OFAC or that are flagged as possibly controlled by sanctioned entities. FTX plans to keep applying laws related to sanctioned countries.
  • Other avenues: Inefficiency at large scale, expensive transactions and the need for liquidity among Russian banks could make crypto an impractical conduit for large-scale sanctions evasion, some experts say. Other methods may work easier at scale, such as alternate payment systems shared by China or other countries that don’t adhere to U.S. sanctions, according to American Banker. One practical challenge for using crypto to evade sanctions: it’s hard to convert it into usable fiat currency if you’re trying to remain anonymous.
  • In Europe: EU financial officials, including ECB President Christine Lagarde and French finance minister Bruno Le Maire, recently discussed potential actions to prevent Russia from using crypto to avoid sanctions. One potential proposal would preclude firms issuing crypto assets or providing related services from doing business with Russian clients.
  • Task forces: The White House previewed a “transatlantic task force” that will identify and freeze assets of sanctioned people and firms within the U.S. and allied jurisdictions. The Administration also announced a “KleptoCapture” task force this week to enforce sanctions on Russian oligarchs and other officials. The KleptoCapture task force includes the FBI, U.S. Marshals Service, IRS, Postal Inspection, Homeland Security Investigations and Secret Service.

NIST Report Gives Narrow Glimpse of Complex Consumer Data-Sharing Picture

The National Institute of Standards and Technology recently released a draft report on cybersecurity considerations for open banking. While the NIST report rightly identifies the importance of cybersecurity and privacy safeguards when it comes to how companies share sensitive financial data about customers, it offers a wholly incomplete picture of the current consumer financial data-sharing ecosystem in the U.S., BPI, ABA and SIFMA said in a comment letter filed this week. The draft report also endorses open banking without examining potential risks or recommending security and privacy measures to mitigate those risks.

  • BPI’s take: “Policymakers should empower consumers to access their financial data safely, and they should put privacy and cybersecurity safeguards at the forefront. The NIST report describes positive outcomes of open banking without citing supporting evidence, considering the full range of potential risks or recommending robust security and privacy protections. It also fails to discuss the important issue of consumer control and consent over how their data is used, stored and shared. These aspects of the data sharing ecosystem are all the more critical in the context of potential government actions — by Congress or the CFPB — to address this ecosystem.” –SVP and Associate General Counsel Paige Pidano Paridon.

To learn more about our recommendations, see our full statement here.

Who Gets a ‘Master Account’? The Fed’s Updated Proposal Offers Hints

The Federal Reserve this week proposed an updated framework for evaluating requests for “master accounts” at the central bank, a prized goal of many FinTech firms, Wyoming crypto banks and other institutions with unconventional charters. The newly proposed framework would sort account applicants into tiered levels of scrutiny based on their deposit insurance and federal supervision. A Fed master account allows more seamless payments system access. The new proposal is open to public comment and builds on the Fed’s May 2021 proposal for such a framework. It would offer federally supervised institutions with federal deposit insurance more streamlined review and subject those supervised by a federal banking agency but without deposit insurance to an intermediate level of review. Firms without deposit insurance or federal banking-agency supervision would undergo a stricter review.

For BPI’s work on FinTechs, Big Tech and master account access, click here.

Ukraine, Climate, Digital Cash: Powell on the Hill

Much of Fed Chair Jerome Powell’s Capitol Hill testimony this week centered on the news of the day – Russia’s invasion of Ukraine and the financial markets fallout – and the central bank’s monetary policy path amid historic inflation. The Fed is preparing to raise rates by 25 basis points at its meeting this month, Powell said. The economic impact of the Ukraine invasion and related sanctions is still uncertain, he said. Here are other notable takeaways from his testimony.

  • M&A: At the House hearing, in response to a question from Rep. Jesus Garcia on a potential bank merger moratorium, Powell replied that Congress gave the banking agencies a framework for evaluating bank mergers, and “we’re continuing to implement that.” Changes to bank merger evaluation would have to come from either legislation or through new personnel at the Fed, he said, “neither of which we have right now.”
  • Master accounts: Powell said at the Senate hearing that the Fed’s revised proposal laying out a framework for master account access for FinTechs or firms with novel charters is “highly precedential.” The measure is a reflection of “what’s going on in the world of digital finance,” he said.
  • Climate: On climate “stress scenarios,” Powell said at the House hearing that “the idea is not to use them in the way we use traditional stress tests to set capital levels in effect.” Instead, they are intended to enable banks and regulators to understand the implications of climate financial risk. “It is not our job to tell, we don’t think, to tell banks which legal companies they can and can’t lend to and I don’t see that as an appropriate role for us,” Powell said.
  • LIBOR: Powell said a Senate bill recently introduced by Sens. Tillis (R-NC) and Tester (D-MT) to provide clarity for tough-legacy LIBOR contracts without clear fallback language is “important legislation.”
  • Stablecoins: “There may well be a role for well regulated stablecoins,” Powell said at the House hearing, in response to a question from Rep. Ritchie Torres (D-NY) on whether dollar stablecoins could help the U.S. compete with China’s digital yuan.
  • CBDC: The Fed is striving to understand whether the benefits of a U.S. CBDC actually outweigh the costs, “which I think is an unanswered question both here and around the world,” Powell said at the House hearing. “In principal, it depends on why people are using unbacked digital currencies,” he said – if they’re using them to evade the law, then a legal CBDC wouldn’t change that. Existing unbacked cryptocurrencies are speculative vehicles, he said, whereas a U.S. CBDC would have broader usage. The Fed has not decided either way on a CBDC, he reiterated.

What’s Happening in Sanctions

Here’s the latest news on Russia sanctions as Russia escalates aggression against Ukraine.

  • SWIFT: The U.S., U.K. and other global allies recently agreed to cut several Russian banks off from the SWIFT payments messaging system. Shortly after that announcement, the EU released a list of Russian banks, including VTB and Bank Otkritie, that it is banning from the SWIFT system starting March 12.
  • Central bank sanctions: The U.S. and allies also imposed sanctions on the Russian central bank. The action will prevent it from using its stockpile of foreign reserves and will constrain the central bank’s ability to control the ruble’s value.
  • Belarus: The U.S. announced sanctions this week against Belarus for enabling the Russian invasion of Ukraine.
  • FSOC: The Financial Stability Oversight Council, a group of U.S. financial regulatory officials led by the Treasury secretary, met in closed session Monday to discuss the effects of the Russian invasion.
  • Global yacht hunt: Officials from the U.S. to France are hunting down yachts, jets and other luxuries of sanctioned Russian oligarchs – but they may find that seizing assets is more complicated than imposing sanctions. Property rights, anonymous shell companies and crypto can hinder seizures.
  • Adeyemo: Deputy Treasury Secretary Wally Adeyemo said this week that sanctions are triggering an “acute financial crisis” in Russia, with prices for goods surging, markets crashing and citizens scrambling to get cash.
  • China: A key question for investors and policymakers is whether China will try to help Russia access payment systems outside of SWIFT. According to a recent Wall Street Journal article, it would face major risks and hurdles if it does. The alternate Chinese payments system, known as CIPS, still depends on SWIFT and is not completely separate; plus, Chinese banks must weigh the risk of international retaliation if they do business with sanctioned Russian firms or people, analysts say.

A Turbulent Flight to Safety: Ukraine War Shows Strains in Treasury Market 

The flight to Treasuries triggered by Russia’s war against Ukraine intensifies the urgency for Treasury market reforms, experts say. The latest volatility in the critical market, which investors expect to be highly liquid even in times of severe stress, underscores the need for greater capacity for market intermediation in Treasuries. One obstacle to intermediation by bank-affiliated dealers, which provide the lion’s share of existing capacity, is the supplementary leverage ratio (SLR), which requires banks to allocate far more capital to holdings of Treasuries and Treasury repos than risk-based capital ratios.

  • What they’re saying: Former Fed Governor Jeremy Stein, a Harvard economics professor and contributor to the Group of Thirty’s recent Treasury market reform study, said regulators should dial back the SLR and expand access to the Fed’s new standing repo facility. JPMorgan’s Jay Barry, the bank’s head of government-bond strategy, also said an adjustment to the SLR is necessary. Fed Chair Powell has said the central bank may revisit the ratio, but it has not taken action so far, despite promising nearly a year ago to invite comments on SLR modifications “soon.”
  • Key officials like Nellie Liang, Treasury Under Secretary for Domestic Finance, and former Federal Reserve Vice Chair for Supervision Randal Quarles have also called for Treasury market overhauls to avoid a repeat of the turmoil in March 2020. Groups of former officials, academics, and bankers, including the Group of Thirty and a Booth-Brookings task force, have recommended comprehensive reform packages.

For BPI’s work on leverage ratios and Treasury market functioning, see below:

BPI Senior Fellow Pat Parkinson served as Project Director for the Group of Thirty Treasury market study.

In Case You Missed It

‘Tough Legacy’ LIBOR Contracts to Get Much-Welcomed Federal Fix

A Senate LIBOR transition bill introduced this week will provide much-needed clarity for tough-legacy LIBOR contracts without adequate fallback language, a group of financial trades including BPI, SIFMA and the Structured Finance Association wrote in a letter to Senate leaders this week urging swift passage of the bill. “The legislation is narrowly crafted to allow parties to contracts that already have effective fallback provisions to opt-out of the legislation, and to only apply to tough legacy contracts so that new or future business will not be affected, while clarifying regulatory standards for the use of alternative reference rates going forward,” the trades said in the letter. We expect swift Senate movement.

TD to Buy First Horizon

TD Bank this week announced its agreement to acquire First Horizon for $13.4 billion. The acquisition would expand TD’s presence in the southeastern U.S. The deal is expected to close by late November. TD’s U.S. headquarters is Cherry Hill, N.J. and First Horizon is headquartered in Memphis, Tenn.

Senate Passes Cyber Bill

The Senate this week passed a bipartisan cybersecurity bill, the Strengthening American Cybersecurity Act. The legislation combines three previous bills advanced out of the Homeland Security and Governmental Affairs Committee: the Cyber Incident Reporting Act, the Federal Information Security Modernization Act and the Federal Secure Cloud Improvement and Jobs Act.

Fed Approves M&T Purchase of People’s United 

The Federal Reserve on Friday announced its approval of M&T Bank’s application to acquire People’s United Financial Inc. 

POLITICO Q&A: BofA’s Brian Moynihan

In a recent POLITICO Q&A, Bank of America CEO Brian Moynihan discussed the bank’s ESG strategy, investing in employee wellness and fostering diversity and inclusion.

  • Key quote: “Getting X or Y to get greener on their steel production every year, or commitments made by the oil and gas industry — not only their operations, but with carbon capture and storage and things that offset their emissions — their change is actually the great change,” he said. “The binary decision of invest-not invest, lend-not lend, do business with or not do business with — that doesn’t change the behavior of those companies. You want those companies to declare net-zero, put a plan on the table. Then society wants to hold them accountable.”

M&T CEO Calls for More Regulation of Nonbanks

M&T CEO Rene Jones called for holding nonbank lenders to the same regulations as banks, particularly on the Community Reinvestment Act, but also in anti-money laundering and other policy areas.

  • Key quote: “How can newly designed regulations and policies have their desired effect when they apply to an ever-shrinking set of financial services companies?” Jones wrote in a shareholder letter. “Today, hedge funds and private equity firms own and rent houses, fintechs process payments and partner with small banks to bypass debit interchange restrictions, and retailers extend credit through ‘buy now/pay later’ products. Large retailers hold billions of customer money on their balance sheets and cryptocurrencies are proliferating and operate outside the bounds of the regulated system. One is left to wonder how the national interests of preventing terrorism, money laundering, and redlining, while providing safety of deposits and access to affordable housing, can be effectively served in view of this ever-widening regulatory gap.”

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Disclaimer:

The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.