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As 2024 concludes, financial markets are witnessing significant shifts, particularly within the world of cryptocurrency. As crypto investors profit, many cash out from more volatile assets, such as Bitcoin, to safer options such as real-world asset (“RWA”) tokens—tokenized representations of tangible assets traded on a blockchain, and stablecoins—assets pegged to traditional currencies like the U.S. dollar. The regulation of digital currencies is an ongoing focus for federal and state regulators (previously discussed here, here, and here). As stablecoin and RWA token products gain popularity with consumers, it will be interesting to see how consumer finance regulators choose to address the novel risks that these products pose.Continue Reading Riding the Wave: How the Crypto Surge is Influencing Finance

On November 26, the U.S. Fifth Circuit Court of Appeals overturned sanctions imposed by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) against a decentralized cryptocurrency mixing service (a blockchain-based technology used to enable transaction anonymity) accused of facilitating money laundering.Continue Reading Fifth Circuit Overturns OFAC Sanctions on Blockchain-based Privacy Technology

On February 7, a Florida-based cryptocurrency company agreed to settle charges brought by the SEC and the California Department of Financial Protection and Innovation alleging that, an interest-earning feature offered on the company’s platform, constitutes an illegal securities offering.Continue Reading Crypto Platform Settles SEC and State Regulator Charges over Interest Bearing Feature on Customer Accounts

On July 13, the FTC issued a press release announcing that it had reached a settlement with a bankrupt crypto platform. The New Jersey based company, which filed for bankruptcy in July 2022, marketed a variety of cryptocurrency products and services to consumers including interest-bearing accounts, personal loans secured by cryptocurrency deposits, and a cryptocurrency exchange. According to the FTC, the company and its executives induced consumers to deposit cryptocurrency by deceiving users and falsely promising access to deposits, high yields, and deposit security. The FTC complaint alleges that rather than securing these deposits, the platform took title to and misappropriated deposits totaling more than $4 billion. Specifically, it is alleged that the company used consumer deposits to fund operations, pay rewards to other customers, borrow from other institutions, and make high-risk investments. As the fiscal health of the company declined, executives concealed the fiscal condition of the company all the while protecting themselves by withdrawing significant sums of cryptocurrency from the platform two months before the company filed for bankruptcy.Continue Reading FTC Reaches Settlement with Crypto Platform

On June 16, Michael Hsu, the Acting Comptroller of the Currency gave remarks at the American Bankers Association’s Risk and Compliance Conference about the risks of tokenization and AI on the banking industry. While reiterating his skepticism of cryptocurrency (see our previous blog post here), Hsu cautions that the decentralization and “trustlessness” associated with public blockchains will impose severe limitations on the scalability of tokenization, and its associated benefits. Rather, Hsu advocates for the development of centralized and regulated “trusted blockchains” that, due to the security and safety they offer, are better positioned to facilitate the growth of tokenization at scale in a safe, sound, and fair manner.Continue Reading Hsu Suggests Caution in Rollout of AI and Tokenization in Banking

On May 1, NYDFS settled with a cryptocurrency trading platform over the company’s cybersecurity deficiencies, resulting in a consent order and $1.2 million fine for the crypto company. NYDFS alleged “multiple deficiencies in the Company’s cybersecurity program” discovered during NYDFS examinations in 2018 and 2020. The examinations prompted an investigation, ultimately leading to the consent order and the fine.Continue Reading New York Settles with Crypto Company, Proposes Crypto Legislation

On March 16, NYDFS entered a consent order resolving an examination of a payment service provider that allows merchants to accept Bitcoin payments from customers in exchange for the equivalent value in local currency credited to the merchant’s bank account. The company is licensed by the NYDFS to engage in virtual currency business activity pursuant to 23 NYCRR Part 200. Licensees under Part 200 are required to, among other things, adhere to federal and state laws mandating effective controls to guard against money laundering and certain other illegal activities.Continue Reading NYDFS Examination of Crypto Payment Service Provider Ends in Settlement

On January 26, the California DFPI announced its participation in a $22.5MM multi-state into a settlement with a with a Cayman Islands digital asset firm to resolve a securities enforcement action in connection with the platform’s earn interest product program. A North American Securities Administrators Association working group—composed of the DFPI and state regulators from Washington, Kentucky, New York, Oklahoma, Indiana, Maryland, South Carolina, Vermont, and Wisconsin—collaborated in the investigation into the firm. The group alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance (we discussed similar actions in a previous blog post here). The DFPI’s previous desist-and-refrain order concluded that the earn interest accounts, which enables retail investors to earn interest upwards of 36% APR on crypto assets, constituted the unqualified sale of securities in the form of investment contracts in violation of California law.Continue Reading Recent Crypto Settlements Signal State and Federal Enforcement Trends

On January 23, the NY DFS released updated guidance with regard to better protecting consumers in the event of virtual currency insolvency. This updated guidance applies to entities that DFS has licensed or chartered to hold or maintain virtual currency assets on behalf of their customers. The guidance reiterates that as custodians, such entities must have practices in place to maintain custody and control of virtual currency similar to that of traditional financial service providers. DFS’ previous guidance already required certain practices, such as maintaining books and records, disclosure of certain terms, and protections in place for the assets held. The new guidance sets forth additional requirements and most pertinently, custodians must:Continue Reading NY DFS Releases Custodial Guidance on Crypto Insolvency

On January 27, the Federal Reserve Board (FRB) announced that it unanimously voted to deny a crypto firm’s application to become a member of the Federal Reserve System. This denial ends the crypto firm’s 27-month effort to obtain a “master account,” which allows companies to move money through the Federal Reserve System without having to use a federally insured bank.Continue Reading Fed Board Denies Crypto Firm’s Bid to Join Federal Reserve System