April 7, 2023

New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris said that last month’s closure of Signature Bank was because of problems with the bank’s liquidity, as opposed to the services it was providing to cryptocurrency companies. “The idea that the taking possession of Signature was about crypto and this is ‘Choke Point 2.0’ is really ludicrous,” Superintendent Harris said at the Links NYC conference hosted by blockchain analytics firm Chainalysis Inc.

Superintendent Harris also spoke more broadly about the cryptocurrency industry and stated that “there is still a lack of maturity around Bank Secrecy Act-anti-money-laundering [compliance] and cybersecurity,” but that the NYDFS is “eager for the day when those systems mature and scale as the business side does.” 

The U.S. Department of the Treasury published the 2023 DeFi Illicit Finance Risk Assessment, the first illicit finance risk assessment conducted on decentralized finance (DeFi) in the world. The assessment claims that “actors like the Democratic People’s Republic of Korea (DPRK), cybercriminals, ransomware attackers, thieves, and scammers are using DeFi services to transfer and launder their illicit proceeds. They are able to exploit vulnerabilities, including the fact that many DeFi services that have anti-money laundering and countering the financing of terrorism (AML/CFT) obligations fail to implement them.”

Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson stated that “illicit actors, including criminals, scammers, and North Korean cyber actors are using DeFi services in the process of laundering illicit funds. Capturing the potential benefits associated with DeFi services requires addressing these risks. The private sector should use the findings of this assessment to inform their own risk mitigation strategies and to take clear steps, in line with AML/CFT regulations and sanctions obligations, to prevent illicit actors from abusing DeFi services.”

The full report is available here.

The Department of Justice announced it has seized an estimated $112 million of virtual currency linked to cryptocurrency investment scams. Seizure warrants for six virtual currency accounts were authorized by judges in the District of Arizona, the Central District of California, and the District of Idaho. According to court documents, the virtual currency accounts were allegedly used to launder proceeds of various cryptocurrency confidence scams.

The Consumer Financial Protection Bureau (CFPB) issued a policy statement that explains the legal prohibition on abusive conduct in consumer financial markets and summarizes over a decade of precedent. “In response to the predatory mortgage lending practices that drove the financial crisis, Congress banned abusive conduct in consumer financial markets,” said CFPB Director Rohit Chopra. “The CFPB issued today’s guidance to provide an analytical framework to help federal and state agencies hold companies accountable when they violate the law and take advantage of families.” Read Director Chopra’s remarks here.

The Federal Housing Finance Agency (FHFA) announced its inaugural TechSprint, a team-based problem-solving event hosted by FHFA’s Office of Financial Technology, designed to “secure the free and fair flow of data in a safe and sound housing finance system.​” Named “Velocity,” the TechSprint will bring together experts and practitioners from the technology and the mortgage finance sectors “to propose solutions that can reduce mortgage costs and delivery times while creating a more inclusive and transparent process.”

The Federal Deposit Insurance Corporation (FDIC) issued the March 2023 edition of the Consumer Compliance Supervisory Highlights. The purpose of this publication is to enhance transparency regarding the FDIC’s consumer compliance supervisory activities and to provide a high–level overview of consumer compliance issues identified in 2022 through the FDIC’s supervision of state non–member banks and thrifts. The publication is available here.

The CFPB took action against James R. Carnes and Melissa C. Carnes, both individually and as co-trustees of the James R. Carnes Revocable Trust and the Melissa C. Carnes Revocable Trust for allegedly hiding money through a series of fraudulent transfers in order to avoid paying more than $40 million in restitution and penalties for illegal payday lending activities. The CFPB is seeking injunctive relief, as well as asking the court to award a money judgment for the value of the fraudulently transferred funds.

During an appearance on Yahoo Finance Live, CFPB Director Rohit Chopra said that regulators have been looking, and will continue to look, at the cloud services offered by Big Tech players, with particular concern around the risks tied to outage or attacks by fraudsters and hackers. 

House Small Business Committee Chairman Roger Williams (R-TX), Rep. Andy Barr (R-KY), and Rep. Andy Ogles (R-TN), introduced a Congressional Review Act resolution in opposition to the CFPB’s recently finalized Section 1071 Rulemaking related to small business lending data collection.

The U.S. Securities and Exchange Commission (SEC) charged Merrill Lynch, Pierce, Fenner & Smith Incorporated for charging advisory clients more than $4 million in undisclosed foreign exchange fees for transfers to or from their accounts. To settle the charges, Merrill Lynch has agreed to pay disgorgement, prejudgment interest, and a civil penalty totaling more than $9.5 million and has agreed to distribute funds to harmed clients.

Last week, the Senate Banking Committee and House Financial Services Committee held hearings to review the recent failures of Silicon Valley Bank (SVB) and Signature Bank.

Members of both committees, on both sides of the aisle, took aim at banking regulators for failing to appropriately oversee SVB and Signature Bank in a manner that ensures safe and sound banking practices. Representatives also emphasized the unusual nature of the SVB collapse happening partially as a result of comments on Twitter and exacerbated by the ease and speed of digital banking. Members of both parties sought clarity on the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) on the failure of SVB and Signature Bank.

In both hearings, it was clear that the underlying cause of the failure of SVB was the rampant mismanagement of the bank by former executives. Mismanagement ranged from SVB’s lacking a Chief Risk Officer for more than a year, over-leveraging and failing to diversify deposits, interest rate mismanagement, and more. Several Members of both committees expressed interest in learning more about the FDIC’s auction and bid process for finding successor banks of SVB and Signature.

Another area of bipartisan consensus was on the vital role of community and regional banks and credit unions in our economy. Representatives on both sides of the aisle outlined their support for these smaller financial institutions and encouraged regulators to preserve these financial institutions following the collapse of SVB and Signature.

Several Representatives also discussed digital assets. Rep. Emmer and Rep. Andrew Garbarino (R-NY) questioned the process around selling assets of SVB and Signature Bank, but excluding digital assets-related accounts. 

Read our summary of the hearings here.