Stories Driving the Week
Crypto’s Political Capital to Be Tested
Cryptocurrency is rising to the top of the priority list of top officials in Washington as the Biden Administration contemplates a broad crypto oversight push, including a potential executive order. The National Security Council and National Economic Council are coordinating in a “whole-of-government focus” to supervise crypto, which criminals can exploit to facilitate ransomware or money laundering. The efforts, which also examine crypto risks to the financial system, follow recent Treasury Department sanctions against a crypto exchange and the Justice Department’s launch of a crypto enforcement team. This government focus is sparking a response from the crypto industry to propose its own rules.
At the same time, the Financial Stability Oversight Council has added stablecoins to the agenda of its meeting next week. The closed-door executive session of the meeting will include an update on the upcoming stablecoin report from the President’s Working Group on Financial Markets, expected to lay the groundwork for a stablecoin regulatory model. Treasury Under Secretary for Domestic Finance Nellie Liang previewed the PWG’s areas of focus in comments this week. Liang said the use of stablecoins as a payments mechanism “raises a whole set of issues that the President’s Working Group wanted to focus on,” including consumer and investor protection, regulation to prevent financial crimes, regulations to protect the integrity of the payments system and protecting the stability of the overall financial system.
FSOC will also discuss a report on climate risk at its upcoming meeting, according to the agenda.
Washington Post Opinion: Joe Biden Isn’t a Socialist, but His Nominee to Regulate Banks Has Pretty Radical Ideas About the Fed
OCC nominee Saule Omarova’s “radical” ideas about the Federal Reserve should give senators pause, Charles Lane wrote in a Washington Post op-ed this week that compared the unconventional nature of Omarova’s views on the Fed’s economic powers to those of former Federal Reserve nominee Judy Shelton. “Omarova’s left-wing views on banking, and on the Fed’s economic powers, are the opposite of Shelton’s ideologically but are, if anything, more radical,” Lane wrote. “Centrist Democratic senators could — and should — use this nomination to demonstrate the limits of their party’s progressive drift.” He also rebutted Omarova’s plan for the Fed to take over commercial banking: Rather than a way to “democratize money,” he says, “[a] more plausible view is that, much like a return to the gold standard, it would destroy the economy in the name of saving it.”
Tether Hit with $41M Penalty Over ‘Dollar Backing’ Claims
Stablecoin issuer Tether must pay a $41 million Commodity Futures Trading Commission penalty over misleading claims that its stablecoin was fully backed by U.S. dollars. The agency separately levied a $1.5 million penalty against crypto exchange Bitfinex for engaging in “illegal, off-exchange retail commodity transactions in digital assets” and operating as a futures commission merchant without registering. Tether recently received press coverage from Bloomberg over the elusive dollars backing its stablecoins and its complex, international business scheme.
Quarles Departs Supervision Post
Federal Reserve Vice Chair for Supervision Randal Quarles left the vice chair position on Oct. 13 as his term expired. Quarles’ term on the Fed Board, however, lasts until 2032. Until the next vice chair for supervision is appointed and confirmed, regulatory and supervisory issues will be brought to the Fed Board only if there is consensus. Quarles remains chair of the Financial Stability Board until the end of this year.
BPI Research Double Feature
BPI published two research notes this week on liquidity regulations. “Bank Treasurers’ Views on Liquidity Requirements and the Discount Window,” by Bill Nelson and Brett Waxman, summarizes the interviews with BPI bank treasurers conducted over the past few months. “Rummaging Through the Fed Archives: When Capital and Liquidity Regulations Were Integrated,” by Nelson and Gonzalo Fernandez Dionis, describes a bank regulatory metric used by the Fed in the 1950s that combined a risk-based capital requirement with an adjustment for the bank’s liquidity situation.
FSB Aims to Bolster Money Market Funds’ Resilience
The Financial Stability Board this week issued a report aimed at strengthening money market fund resilience, a topic that came to the fore after such funds’ weaknesses were highlighted in the March 2020 Treasury market meltdown. The report recommended implementing swing pricing, implementing a minimum balance at risk, creating a capital buffer, removing ties between regulatory thresholds and imposition of fees and gates, removing stable net asset value, and limiting assets and developing additional liquidity requirements and escalation procedures. The FSB will coordinate with the IOSCO and take stock of jurisdictions’ progress in this area by the end of 2023 and evaluate the measures’ effectiveness by 2026, FSB Chair Randal Quarles said in a letter. The proposals mark the latest attempt by global regulators to patch liquidity vulnerabilities among money market funds after the pandemic market turmoil.
In Case You Missed It
The Economist: Credit-Card Firms are Becoming Reluctant Regulators of the Web
A recent Economist article shed light on the implications of “reputational risk” in bank examination. The piece explores how financial services firms are balancing business with disfavored but legal industries amid a sanctions and AML regime that tends to deputize them as law enforcers.
New Stablecoin Charter Could Hinge on National Bank Act Rewrite
A special-purpose banking charter for stablecoin issuers – one of the potential options for federal regulators to rein in the risks posed by the digital asset – may require a revamp of the National Bank Act, the statute that defines the “business of banking,” analysts said in an American Banker piece this week. The prospect of the Biden Administration urging Congress to authorize such a charter was recently reported by the Wall Street Journal. The National Bank Act stipulates that the core activities for national banks are taking deposits, making loans and facilitating payments. The same statute is at the center of legal disputes over the OCC’s FinTech charter that would allow firms engaging in only one of those activities to receive a banking charter and essentially act as a bank.
Cross-Border Payments Competition Heats Up
The Clearing House, EBA Clearing and Swift have reached a positive “proof of concept” in their upcoming immediate cross-border payments service that will provide real-time cross-border payments, according to Payments Dive. The technology has been developed, and the clearinghouses will now layer in AML and sanctions safeguards. The service is expected to provide 24/7 instant international payments, synchronizing settlement in one instant payment system with settlement in the other.
The effort to develop speedier, more efficient cross-border payments comes amid competition from FinTech startups and other nonbanks.
Statement: BPI Urges House Subcommittee to Preserve Consumer Protections in a Digital Economy
The U.S. Financial Services Subcommittee on Oversight and Investigations held a hearing this week entitled “Cashed Out: How a Cashless Economy Impacts Disadvantaged Communities and Peoples.” Paige Pidano Paridon, BPI senior vice president and associate general counsel, issued the following statement in advance of the hearing:
“The hearing today will explore, among other things, the important topic of consumer protection in a digital economy, particularly for low- and moderate-income, unbanked, underbanked or otherwise disadvantaged consumers, for whom financial fraud or abuse can have devastating effects. While innovation in banking and payments services may offer important opportunities for these consumers to access financial services, innovation should not come at the expense of consumer protections. Nonbanks that provide consumer financial services — including nonbank payment providers — should be held to the same rigorous consumer protection standards as banks, meaning also that the nonbanks should be subject to the same rigorous supervision and examination standards to assess their consumer compliance.”
Chopra Hires Key Staff
Newly confirmed CFPB Director Rohit Chopra this week announced the addition of several new senior staffers. Zixta Q. Martinez, a senior CFPB official who has also worked on Capitol Hill and for Freddie Mac, will serve as deputy director. Karen Andre, a Biden White House and campaign alumna, will serve as associate director for consumer education and external affairs. Jan Singelmann, previously senior litigation counsel in the CFPB enforcement office and counsel to Senate Banking Committee Chairman Sherrod Brown (D-OH), will serve as chief of staff. Erie Meyer, a former CFPB official and FTC aide, will serve as chief technologist.
Rosengren: U.S. CBDC Would Pose ‘Political Challenge’
Political woes would likely form a bigger obstacle to a U.S. central bank digital currency than mastering the technology, former Boston Fed chief Eric Rosengren said in recent comments at a conference. “The major issue for a digital currency, at least in the United States, is much more likely to be on the policy front,” Rosengren said. “Ideally, there would be agreement on appropriate design features between Congress, the administration and the Fed. But to get all three to agree in an environment where both regulated and unregulated entities are going to have very strong interests in exactly how the structure develops, I think that’s going to pose a political challenge.” The Boston Fed has been working on CBDC research with MIT and will soon release a report on the project.
U.S., EU, 30 Other Nations Issue Joint Statement on Ransomware
The U.S., European Union and 30 other countries this week released a joint statement pledging to work together and share best practices to reduce the risk of ransomware. The jurisdictions said they are “dedicated to enhancing our efforts to disrupt the ransomware business model and associated money-laundering activities,” including by ensuring their national AML frameworks address risks associated with “virtual asset” providers such as crypto exchanges and enhancing their regulators’ and law enforcement authorities’ ability to supervise such assets. The group also said it will promote information sharing between governments and the private sector. BPI has compiled a set of ransomware recommendations, including intensifying enforcement of AML standards on crypto entities.
JPMorgan Joins Net-Zero Banking Alliance
JPMorgan Chase pledged to align its lending and investment portfolios with net zero emissions by 2050 as it joined the Net-Zero Banking Alliance. The group represents the banking sector arm of the Glasgow Financial Alliance for Net Zero, an initiative led by former Bank of England Governor Mark Carney.
BofA Launches ‘Recipient Select’ Service for Money Transfers to Customers
Bank of America unveiled a service called “Recipient Select” that enables consumers to receive refunds or rebates through more efficient, faster transfers. The feature will allow BofA’s corporate clients to readily meet their consumers’ preferences for different payment options.