BPInsights: November 5, 2022

Stories Driving the Week

What’s Next for the CFPB?

The CFPB and the company behind payday lender ACE Cash Express hit pause on enforcement action proceedings in light of the Fifth Circuit ruling that the CFPB’s funding structure is unconstitutional. A federal judge in Texas granted the two parties a stay on Monday. The two sides had asserted that there was “good cause” to pause the proceedings until after the Fifth Circuit issues a mandate in the case that struck at the core of the CFPB’s structure.

  • Path forward: The stay offers a glimpse of uncertainty ahead for the Bureau’s enforcement efforts in the wake of the ruling. It’s still unclear how the ruling will affect the agency’s rulemaking and guidance, but the CFPB appears to be moving full steam ahead.
  • Back to a familiar place: The CFPB may be headed back to the Supreme Court, where a previous case took aim at its leadership structure and federal authority surrounding it. Legal experts suggest the Supreme Court will expedite a review of the Fifth Circuit case as early as next year, according to a recent American Banker article. The CFPB could either appeal the Fifth Circuit’s decision by requesting en banc review by the full court, or ask the Supreme Court directly to grant a review, according to the article.
  • Election outcome: The fate of budget authorization for the CFPB could hinge on the outcome of the midterm election and the possibility of a GOP-majority Congress.

Custodia’s Fed Lawsuit Could Go to Trial

The Fed’s request for dismissal of a lawsuit from crypto firm Custodia appears unlikely to be granted.  Last week, a federal judge in Wyoming said it was appropriate for the court to weigh why the firm has waited two years for a decision on its master account application. The Fed now has two options: grant Custodia a master account, or go to trial, according to American Banker. Either option would come with major consequences for master accounts and the firms seeking them, according to the article.

  • Forced hand: If the case goes to trial, the Fed could risk being forced into a decision on Custodia’s application, and it may also have to reveal closely held details on its master account adjudication process in discovery. Such details could include the role of the Fed Board of Governors in the decision-making process, according to the article.
  • Novel risks: The Fed has contended that Custodia’s business model poses novel risks to the banking system.
  • The appeal of account access: Master accounts allow their holders – historically, only regulated and supervised banks – to access the Fed’s payment rails and transfer money directly to other institutions with master accounts. This eliminates hurdles to payment settlement that can complicate, slow or add cost to transactions. A key question at the heart of the Custodia suit is whether nonbank fintechs like crypto firms, which may pose new risks to the system and lack the multi-layered supervision of banks, can access these accounts.
  • Trimming the tree: “Here’s what I want to tell both sides: The tree is going to be trimmed but the tree is not going to be cut down and this matter will survive in some form,” Chief Judge Scott Skavdahl of the U.S. District Court of Wyoming said, according to the article.
  • New Fed proposal: Separately, the Federal Reserve on Friday announced it is seeking public comment on a proposal to publish a periodic list of depository institutions with access to master accounts and payment services. The proposal will “enhance transparency to the public,” Vice Chair Lael Brainard said in a press release. The Fed aims to strike a balance between protecting confidential information and promoting transparency. Among other questions, the Fed asks whether it should take additional actions to enhance transparency, such as publishing a list of firms that have requested account access.

OCC Official: Agency Expected ‘Deluge’ of Bank Digital Asset Plans, But Sees Only a Trickle

The OCC had expected more uptake from banks seeking to engage in digital asset activities after the agency issued an interpretive letter laying out requirements around such efforts, according to Law360. OCC Deputy Chief Counsel Theodore Dowd said “in reality, there have been very few” banks seeking permission to engage in digital asset services such as crypto custody, in contrast to the interest he anticipated. He suggested that volatility in the crypto market could explain some of the low uptake. The interpretive letter informed OCC-regulated banks that they could offer crypto custody and other digital asset services if they demonstrate they can do so in a safe and sound manner and receive OCC signoff.

Federal Reserve Deputy General Counsel Charles Gray, who spoke on the same Practising Law Institute panel as Dowd, expressed similar sentiments. “I think our experience has been fairly aligned with what [Dowd] described,” Gray said. “There have been notifications. I wouldn’t describe it as a deluge.” Gray said the Fed and other agencies continue to focus on providing new clarity on activities such as crypto asset custody, facilitation of customer trading of crypto assets, crypto collateralized lending and bank issuance and distribution of stablecoins.

Reuters: Binance Processed Iran Transactions Despite Sanctions

Crypto exchange Binance processed Iranian transactions valued at $8 billion since 2018, despite U.S. sanctions against the country, Reuters reported this week. Binance faces a U.S. Department of Justice money-laundering investigation. The majority of the Iranian funds were in a cryptocurrency called Tron, which allows users to conceal their identities. The Reuters piece notes: “The scale of Binance’s Iranian crypto flows – and the fact that they are continuing – has not been previously reported.” Iranian crypto exchange Nobitex has repeatedly recommended that its customers use Binance.

Treasury Market Volatility Sounds Alarms

Illiquidity and friction in the Treasury market has alarmed investors, according to a recent Wall Street Journal article. The number of traders ready to buy and sell Treasuries is shrinking, individual trades are moving prices more and Treasuries with similar traits are trading at abnormally large price differences, according to the article. The piece cites a key factor contributing to the volatility: regulatory constraints that impede large banks from making markets in Treasuries. Given the regulatory landscape, “it doesn’t behoove them to take on the inventory,” said Ariel da Silva, director of fixed income at Wealth Enhancement Group, in the article.

Q&A: HFSC Ranking Member Patrick McHenry (R-NC)

House Financial Services Committee Ranking Member Patrick McHenry (R-NC) spoke with POLITICO in a recent Q&A. Here are some key takeaways from the interview.

  • Three buckets: McHenry pointed to three areas where he sees the potential for legislation to cross the finish line if Republicans take the majority in the House – capital formation; digital assets; and data privacy standards for regulated financial institutions. Congress needs to resolve “very long-standing issues with securities law” to allow the digital assets ecosystem to take shape, McHenry said. He also called for Congress to update the Gramm-Leach-Bliley privacy standards for a “modern world.”
  • Oversight: Under a GOP majority, the Financial Services Committee would enhance oversight of both regulators and the financial industry, he said, pointing in particular to the CFPB and SEC. “Both have moved at breakneck pace on rule-making. Both have gone in an expansive way beyond that which we think the law permits them to act.”
  •  Jurisdiction: McHenry dismissed the notion of agriculture committees defining rules around crypto. “Without action from the Financial Services Committee and the Senate Banking Committee, you don’t actually get clarity,” he said. “You don’t get certainty in the world of digital assets.”
  • Climate: McHenry noted a keen interest among Committee Republicans in scrutinizing climate risk policy such as the SEC’s climate disclosure proposal. 

The Crypto Ledger

Here’s what’s new this week in crypto.

  • DOJ Tether probe: new team within the Department of Justice has taken over the DOJ investigation of whether Tether lied to banks about its intent to use bank accounts to engage in crypto transactions. The case was recently transferred to the U.S. Attorney in the Southern District of New York, which has taken an active approach to prosecuting crypto crimes. The office recently secured a guilty plea from people connected with Crypto Capital, a payment processor that Tether used once it lost most of its banking relationships.
  • Sunak and crypto: New UK Prime Minister Rishi Sunak has expressed positive sentiments about crypto, but it’s not yet clear what his leadership will mean for the digital asset space in Britain.
  • Miners hit hard: Several crypto mining companies and their service providers are filing for bankruptcy or going out of business, illustrating the dire effects on such firms from the crypto market volatility this year.

In Case You Missed It

What’s New in CBDC

Here’s what’s new around the world in central bank digital currency.

  • Project Cedar: The Federal Reserve Bank of New York issued a report this week on Phase I of its New York Innovation Center’s “Project Cedar” initiative, which strives to develop a technical framework for a theoretical wholesale CBDC “through exploration of fundamental design choices and modular technical features.” The report states that the project “is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a retail or wholesale CBDC, nor how one would necessarily be designed.” The experiment demonstrated that cross-border payments supported by blockchain technology can deliver faster and safer payments, the New York Fed said in a release. The initial phase of the project simulated an FX spot trade and introduced a wholesale CBDC prototype to test whether blockchain technology could make cross-border wholesale payments faster and safer. 
  • Pilot success: The Bank for International Settlements recently announced a successful pilot of transactions on a CBDC platform. Pilot participants included central banks from mainland China, Hong Kong, Thailand and the UAE. Twenty banks in those jurisdictions used a platform called “mBridge” to conduct 164 payment and foreign exchange transactions totaling over $22 million over six weeks, according to a BIS release.
  • No threat: Binance CEO Changpeng Zhao said he sees “no threat” to other cryptocurrencies from CBDC. “I very much think that the more we have, the better,” Zhao said recently.
  • India launches digital rupee pilot: The Reserve Bank of India announced that its first digital rupee pilot would launch on Nov. 1. The use case for the pilot is “settlement of secondary market transactions in government securities,” the RBI said.

Wells Fargo Promotes Fercho to Head of DE&I Group

Wells Fargo this week announced the promotion of Kristy Fercho, the head of Wells Fargo Home Lending, to head of Diverse Segments, Representation and Inclusion (DSRI). Fercho will succeed Kleber Santos, and she will remain head of Home Lending as the company searches for her successor.

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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.