November 29, 2023

We hope everyone had a happy and restful holiday weekend! Please find news from last week at the bottom of this newsletter. 

The U.S. Department of the Treasury (Treasury) is proposing establishing a new crypto-related category of “financial institution” under the Bank Secrecy Act that would subject exchanges, token trading platforms, wallet providers, DeFi and certain blockchain validators to rules designed to counter money laundering and terrorist financing.

Treasury is also requesting explicit authority under its sanctions regime to designate nodes and individual blockchain networks, and wants a tailored, secondary sanctions tool that would allow it to sever fintech and crypto operators from U.S. relationships without placing a full stop on their other activity. Treasury is further requesting that the Office of Foreign Assets Control (OFAC) receive jurisdiction over dollar-denominated stablecoins.

Two other legislative proposals included in the term sheet would extend Treasury’s authority under the BSA and the International Emergency Economic Powers Act to foreign entities with defined “U.S. touchpoints.”

Deputy Secretary of the Treasury Wally Adeyemo delivered remarks at the 2023 Blockchain Association’s Policy Summit and elaborated on Treasury’s proposals. In his remarks, he called on industry to build new tools that help prevent money laundering while continuing to provide legitimate protections to individuals and cutting off firms that are failing to take steps to prevent illicit finance.

The Treasury’s Office of Foreign Assets Control (OFAC) sanctioned (Sinbad), a virtual currency mixer that serves as a key money-laundering tool of the OFAC-designated Lazarus Group, a state-sponsored cyber hacking group of the Democratic People’s Republic of Korea (DPRK). Sinbad has processed millions of dollars’ worth of virtual currency from Lazarus Group heists, including the Horizon Bridge and Axie Infinity heists. Sinbad is also used by cybercriminals to obfuscate transactions linked to malign activities such as sanctions evasion, drug trafficking, the purchase of child sexual abuse materials, and additional illicit sales on darknet marketplaces.

The Securities and Exchange Commission (SEC) adopted Securities Act Rule 192 to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest. It prohibits a securitization participant, for a specified period of time, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in the relevant ABS. Under new Rule 192, such transactions would be “conflicted transactions.”

Chair Gary Gensler’s statement.
Commissioner Hester Peirce’s statement.
Commissioner Mark Uyeda statement.
Commissioner Jaime Lizárraga statement.

The Consumer Financial Protection Bureau (CFPB) ordered Bank of America to pay a $12 million penalty for submitting false mortgage lending information to the federal government under a long-standing federal law. Under the CFPB’s order, Bank of America must pay $12 million into the CFPB’s victims relief fund.

The Federal Trade Commission (FTC) approved an omnibus resolution authorizing the use of compulsory process in nonpublic investigations involving products and services that use or claim to be produced using artificial intelligence (AI) or claim to detect its use.

House Financial Services Committee Chair Patrick McHenry (R-NC) continues to push both digital asset bills (stablecoin and market structure) as part of end-of-year passage of the defense spending reauthorization (NDAA).

House Financial Services Committee Ranking Member Maxine Waters delivered testimony at Rules Committee in response to Senate Joint Resolution 32, which is a Republican-led resolution that disapproves of the Consumer Financial Protection Bureau’s (CFPB) rule relating to “Small Business Lending Under the Equal Credit Opportunity Act (Regulation B).” Rep. Waters expressed her disapproval of the resolution.

The Treasury, through the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and IRS Criminal Investigation (CI), has taken action against Binance Holdings Ltd. and its affiliates (collectively, Binance) for violations of the U.S. anti-money laundering (AML) and sanctions laws. Binance settled with FinCEN and OFAC for violations of the Bank Secrecy Act (BSA) and apparent violations of multiple sanctions programs. Read Treasury Secretary Janet Yellen’s remarks on the action here.

The Commodity Futures Trading Commission (CFTC) also announced that Binance and its CEO Changpeng Zhao agreed to a proposed consent order for permanent injunction, civil monetary penalty, and equitable relief that, if entered by the U.S. District Court for the Northern District of Illinois, will resolve all charges the CFTC brought against Zhao and Binance for knowingly disregarding provisions of the Commodity Exchange Act (CEA) to profit from their operation of an illegal digital assets derivative exchange. Further, the CFTC announced former Binance Chief Compliance Officer, Samuel Lim, agreed to a proposed consent order for permanent injunction, civil monetary penalty, and equitable relief that, if entered by the U.S. District Court for the Northern District of Illinois, will resolve all charges the CFTC brought against Lim.

The SEC charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. In February of this year, Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million.

The CFPB published their Semi-Annual Report to Congress for the period beginning October 1, 2022 and ending March 31, 2023.

The CFPB and 11 states announced that Prehired will provide more than $30 million in relief to student borrowers for making false promises of job placement, trapping students with “income share” loans that violated the law, and resorting to abusive debt collection practices when borrowers could not pay. The CFPB partnered with Washington, Delaware, California, Oregon, Minnesota, Illinois, South Carolina, North Carolina, Massachusetts, Virginia, and Wisconsin to bring the enforcement action against Prehired and two affiliated companies. The order approved by a federal court requires Prehired to cease all operations, pay $4.2 million in redress to consumers that were affected by its illegal practices, and voids all of its outstanding income share loans, valued by Prehired at nearly $27 million.

The CFPB ordered Toyota Motor Credit Corporation to pay $60 million in consumer redress and penalties for operating an illegal scheme to prevent borrowers from canceling product bundles that increased their monthly car loan payments. The CFPB is ordering Toyota Motor Credit to stop its unlawful practices, pay $48 million to harmed consumers, and pay a $12 million penalty into the CFPB’s victims relief fund.

The Federal Deposit Insurance Corporation (FDIC) Board of Directors announced the establishment of a special committee of the Board to oversee an independent third-party review of the agency’s workplace culture. The Board appointed Directors Jonathan McKernan and Michael J. Hsu to co-chair this special committee. Read Chairman Martin Gruenberg’s statement here and Vice Chairman Travis Hill’s statement here.

Following the FDIC’s announcements, Reps. Andy Barr (R-KY), Chairman of the House Financial Services Committee Financial Institutions and Monetary Policy Subcommittee and Bill Huizenga (R-MI) Chairman of the House Financial Services Committee Oversight and Investigations Subcommittee sent letters to Chairman Gruenberg demanding he recuse himself from any ongoing independent investigation. Read Rep. Barr’s letter here and Rep. Huizenga’s letter here.

The Senate Banking and House Financial Services committees held hearings on the oversight of financial regulators. Both hearings included discussions concerning recent FDIC workplace allegations, the Basel III endgame capital proposal, implementation of the banking agencies’ final Community Reinvestment Act (CRA) rule, and financial risk management practices and mitigation. Read our summary here.

The House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing to discuss the role of cryptocurrencies in funding illicit finance, particularly among terrorist groups. Read our summary here.

The California Department of Financial Protection and Innovation published an invitation for comments on their proposed application-related rulemaking under the Digital Financial Assets Law (DFAL). The Commissioner invites interested parties to submit comments by January 12, 2024.

President Biden signed a short-term funding bill to avert a government shutdown. The bill passed the House and the Senate with overwhelming bipartisan support. The continuing resolution, or CR, will fund part of the government — including the Agriculture, Transportation, Housing and Urban Development and Veterans Affairs departments — through January 19, 2024 and fund the Defense Department and other remaining parts of the government through February 2, 2024. 

Need to catch up on what happened two weeks ago? Check out our November 17th End of Week Wrap Up here