On April 8 the House Financial Services Committee held a hearing with the general counsels of the federal banking agencies regarding, among other things, Operation Choke Point, the federal enforcement operation reportedly intended to cut off from the banking system certain lenders and merchants allegedly engaged in unlawful activities. Numerous committee members from both sides of the aisle raised concerns about Operation Choke Point, as well as the federal government’s broader pressure on banks over their relationships with nonbank financial service providers, including money service businesses, nonbank lenders, and check cashers. Committee members asserted that the operation is impacting lawful nonbank financial service providers, who are losing access to the banking system and, in turn, are unable to offer needed services to the members’ constituents. The FDIC’s Richard Osterman repeatedly stated that Operation Choke Point is a DOJ operation and the FDIC’s participation is limited to providing certain information and resources upon request. Mr. Osterman also asserted that the FDIC is not attempting to, and does not intend to, prohibit banks from offering products or services to nonbank financial service providers operating within the law, and that the FDIC’s guidance is clear that banks are neither prohibited from nor encouraged to provide services to certain businesses, provided they properly manage their risk. Similarly, the OCC’s Amy Friend stated that the OCC wants to ensure that banks conduct due diligence and implement appropriate controls, but that the OCC is not prohibiting banks from offering services to lawful businesses. She stated the OCC has found that some banks have made a business decision to terminate relationships with some nonbank providers rather than implement additional controls.
On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…
On April 3, the Texas Department of Banking issued a supervisory memorandum on the regulatory treatment of virtual currencies under the Texas Money Services Act. The memorandum states that money transmission licensing determinations regarding transactions with decentralized virtual currencies such as Bitcoin, referred to by the Banking Department as cryptocurrencies, turn on whether cryptocurrencies should be considered “money or monetary value” under the Money Services Act. The memorandum concludes that cryptocurrencies currently cannot be considered “money or monetary value” because they are not currencies as that word is defined in the Money Services Act, and a unit of cryptocurrency is not a claim under the Act. However, when a cryptocurrency transaction includes sovereign currency, it may constitute money transmission depending on how the sovereign currency is handled. The memorandum provides examples of common types of transactions involving cryptocurrencies and whether they would constitute money transmission subject to state licensing requirements. For example, the Department states that exchanging cryptocurrency for sovereign currency through a third party exchanger is generally money transmission, and that exchange of cryptocurrency for sovereign currency through an automated machine is usually but not always money transmission. The Department advises that cryptocurrency businesses conducting money transmission must comply with state licensing requirements. The Department further advises that (i) a money transmitter that conducts virtual currency transactions is subject to a $500,000 minimum net worth requirement; (ii) a license holder may not include virtual currency assets in calculations for its permissible investments; and (iii) license applicants who handle virtual currencies in the course of their money transmission activities must submit a current third party security audit of their relevant computer systems.
On March 26, the California Department of Business Oversight issued a request for comments on proposed changes to regulations impacting money transmitters. The Department is required to amend outdated regulations that correspond to the repealed Payment Instruments Law, and establish new regulations to implement the Money Transmission Act. Specifically, the regulations under consideration include amendments to definitions, exemptions from the Money Transmission Act, license application requirements, administrative standards and procedures relating to an application for a license, tangible shareholders’ equity, consumer disclosures, and eligible securities. Comments on the proposal are due by April 26, 2014.
On March 25, the IRS issued a notice in which it stated that, for federal tax purposes, bitcoins and other convertible virtual currencies are treated as property rather than currency. The IRS added that a third party that settles payments made in virtual currency on behalf of a substantial number of unrelated merchants that accept virtual currency from their customers may be a third party settlement organization (TPSO) and thus subject to IRS information reporting requirements. The IRS addressed several questions related to the use of virtual currency in the notice but acknowledged that there may be other questions regarding virtual currency not addressed that warrant consideration. The IRS is therefore accepting public comment on other types or aspects of virtual currency transactions that should be addressed by the IRS in future guidance. The notice does not specify a deadline for submitting such comments.
On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board’s final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.
This week, Treasury Under Secretary David Cohen and FinCEN Director Jennifer Shasky Calvery outlined the Treasury Department’s approach to regulation of virtual currency. Mr. Cohen acknowledged that large scale adoption of virtual currency is possible, but asserted that the long term viability of virtual currency is dependent on establishing consumer and investor protections, and addressing the risk that virtual currency can be used to facilitate illicit finance. Although Treasury does not currently see widespread use of virtual currencies in terrorism financing or sanctions evasion, Mr. Cohen highlighted those risks in addition to money laundering risk posed by the anonymous nature of virtual currencies. Treasury’s basic policy approach is to seek a balance between allowing new technologies to flourish while ensuring systems are sufficiently transparent to protect the U.S. economy. Mr. Cohen made clear that Treasury will err on the side of transparency when necessary. Currently, Treasury and FinCEN are focused on “the moment ‘real’ money is exchanged into virtual currency, and when virtual currency is exchanged back into ‘real’ money.” Mr. Cohen believes that such an approach is sufficient given current adoption levels, but added that Treasury will need to consider whether to apply “cash-like” reporting requirements to virtual currency when it appears that “daily financial life can be conducted for long stretches fully ‘within’ a virtual currency universe.” Treasury is advancing its objectives and approach internationally through the Financial Action Task Force, which Treasury anticipates will publish an updated paper on virtual currency definitions and risks later this year. Finally, both officials announced that, for the first time, Treasury will include a member of the virtual currency community as part of the Bank Secrecy Act Advisory Group, which advises Treasury on anti-money laundering and counter-terrorist financing policy.
On March 18, the CFPB announced that it has begun testing two potential model prepaid card disclosures. After holding field tests last month in Baltimore and this week in Los Angeles, the CFPB plans a final field test next month at a location to be determined. The model forms would provide a standard format for disclosing certain fees, including, among others, monthly, reload, per purchase, ATM withdrawal, and inactivity fees. The two models primarily differ in design—the fees included on the two test models are identical, but for a “decline” fee, which appears only on one of the models.
The field testing follows the CFPB’s May 2012 advance notice of proposed rulemaking soliciting comments to evaluate prepaid cards. The CFPB received hundreds of comments in response to that initial inquiry, and since that time, advocacy groups and members of Congress have continued to pressure the CFPB to take action on prepaid cards. For example, in the last several months, Senate Democrats introduced two prepaid card bills that would establish certain disclosure requirements, and the PEW Charitable Trusts released a paper outlining its latest position and model disclosures.
Finally, in addition to the field testing, the CFPB is seeking comments on the model disclosures through its blog, Twitter, Facebook, or email “from anyone who is interested in making prepaid card disclosures better.” Following completion of the testing, the CFPB expects to propose a rule “later this spring.” That timeline matches one laid out in the CFPB’s most recent rulemaking agenda, in which the Bureau anticipated a proposed rule in May 2014.
On March 11, the New York State Department of Financial Services (DFS) issued an order calling for “proposals and applications in connection with the establishment of virtual currency exchanges located in the State of New York.” Proposals can be submitted immediately. Approved exchanges would be subject to any eventual virtual currency regulatory framework established by the DFS, which the DFS now states will be proposed no later than the end of June. The DFS also announced it will “in the near future” consider applications for other virtual currency firms beyond exchanges.
On March 7, Visa and Mastercard announced the formation of a cross-industry payment security working group, which the payment system providers state will be focused on “enhancing payment system security to keep pace with the expectations of consumers, retailers and financial institutions.” The group’s initial focus will be on supporting the adoption of EMV chip technology in the United States. In addition, the group will promote tokenization and point-to-point encryption, and will develop “an actionable roadmap for securing the future across all segments of the payments industry.” The group will include representatives from banks of all sizes, credit unions, acquirers, retailers, point-of-sale device manufacturers and industry trade groups.
On March 8, the Digital Asset Transfer Authority (DATA), a trade group launched last year and tasked by its members with “leading regulatory, best practices and consumer protection initiatives for companies in the emerging field of digital assets,” announced the election of a board of directors and its inaugural annual meeting. The group explains that digital assets include digital, asset-backed and cryptographic currencies like Bitcoin, Ripple, and Ven, as well as “the emerging ecosystem of payment innovations, fiscal tools, and P2P products enabled by these new Internet technologies.”
State Banking Associations Object To Senators’ Request For Increased Bank Payment System Security Oversight
On March 5, 53 state bankers associations sent a letter to Federal Reserve Board Chair Janet Yellen defending banks’ efforts to secure consumer financial data and highlighting the responsibilities of other parties, in particular merchants, to do the same. The banking associations, representing bankers in every state and Puerto Rico, took issue with a letter Democratic Senators Dick Durbin (D-IL) and Al Franken (D-MN) sent last month to the Federal Reserve Board Chair seeking information about the Board’s oversight of card issuers’ fraud prevention policies and recommending that the Board do more to verify the effectiveness of such policies. The banking associations contend that the Senators’ letter is a “thinly veiled effort to once again advance the regulation of interchange under the guise of current concerns over data security,” and criticize the Senators for converting a discussion about security responsibilities into one about interchange fees.
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there’s no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
On February 20, the CSBS announced the formation of an Emerging Payments Task Force to study changes in payment systems—including virtual currencies and other innovations—to determine the potential impact on consumer protection, state law, and banks and nonbank entities chartered or licensed by the states. The Task Force is comprised of nine state regulators, including New York State Department of Financial Services Superintendent Lawsky who has recently indicated New York will seek to become the first state to directly address virtual currency through new regulations. The Task Force will be chaired by David Cotney, Commissioner of the Massachusetts Division of Banks, who testified on these issues on behalf of the CSBS last fall before the Senate Banking Committee. The CSBS stated that the Task Force will “take a comprehensive approach to studying the changing payment systems” by engaging with a broad range of federal, state, and industry stakeholders to understand how new entrants and technologies affect the stability of payment systems and the broader financial marketplace and “to develop ideas for connecting the emerging payments landscape to the financial regulatory fabric.”
On February 11, at an event on the future of virtual currency, New York DFS Superintendent Benjamin M. Lawsky reiterated his intention to move forward with a virtual currency rulemaking this year as the DFS is “increasingly coming to the conclusion that simply applying our existing money transmission regulations to virtual currency firms is not sufficient.” Mr. Lawsky’s remarks follow a recent two-day DFS hearing regarding the potential state regulation of virtual currency. According to his most recent remarks, the proposal may include a specifically tailored BitLicense that adapts existing money transmission rules to virtual currency. In addition, the proposed rules may, among other things, include “a strong set of specially tailored, model consumer disclosure rules” that could address, for example, the irreversible nature of most transactions, the need to keep private keys private, and potential volatility. The DFS proposal may also seek to address capital, collateral, net worth, and investment requirements. Mr. Lawsky explained that the DFS would like more input about whether it should require licensed firms to only use public ledgers and whether to ban or restrict the use of tumblers by licensed firms.