Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

CFTC and SEC Chairmen Publish Joint Op-Ed
Following a joint meeting last month, SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo published a joint op-ed in the Wall Street Journal reaffirming both agencies’ mutual commitment to stricter enforcement in the distributed ledger and cryptocurrency industry.  Chairmen Clayton and Giancarlo wrote that they will continue to monitor initial coin offerings (ICOs) and continue to crackdown on unregistered sales of coins deemed to be securities, in addition to fraudulent and other criminal activities. See WSJ 1.24.18

In a sign of continued collaboration, SEC Chairman Clayton and CFTC Chairman Giancarlo will testify on the topic of cryptocurrency regulation before the Senate Committee on Banking, Housing, and Urban Affairs. The hearing is scheduled on February 6 at 10:00am ET.  The live cast of the hearing can be accessed here:  See Coindesk 1.31.18

Congress Holds Fintech Hearing
The U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit held a hearing this week to discuss consumer protection in the context of Fintech innovation.  The hearing focused on addressing problems with how consumers access and manage credit, noting that nearly 1/3 of adult Americans have at least one past due account.  The witnesses who made up the panel at the hearing represented voices from the Fintech industry, and legal and academic fields.  Much of the discussion centered around challenges to Fintech innovation posed by existing regulations.  The panel noted that one of the primary barriers to innovation was patchwork state-by-state rules for money transmission and lending.  Professor Adam Levitin of Georgetown Law Center offered several recommendations for Congress: Encourage a national money transmitter license; Encourage greater consumer financial data portability; Don’t encourage predatory lending practices, which he alleged would result from introducing bills under consideration: R. 329 and H.R. 4439.  Lawmakers reiterated a commitment to protecting consumers while encouraging the Fintech industry to address problems with how Americans access and manage credit. See Financial Services Committee 1.30.18

CFPB Finalizes Prepaid Accounts Rule
Last week, the U.S. Consumer Financial Protection Bureau (CFPB) announced that it has finalized proposed updates to its 2016 rule concerning prepaid accounts, digital wallets, and P2P transfers.  The following significant changes will take place under the amended Rule:

  • Delay of the Rule’s effective date, until April 1, 2019, providing more time for financial institutions to make the necessary procedural changes.
  • Regulation E’s error resolution and limited liability requirements will only apply after consumer identification and verification process has been completed.
  • Certain business arrangements between issuers of prepaid accounts and credit card issuers will be exempt from Regulation Z’s provisions relating to credit, which offers greater flexibility for credit cards linked to digital wallets. The change would permit prepaid account issues to run negative balances on prepaid accounts, where certain criteria are met. Under the change, consumers can more easily link credit cards to digital wallets, and would continue to be protected under federal law on their traditional credit card accounts.

For the complete Amended Rules Concerning Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), see CFPB. See also National Law Review 1.1.18.


Enforcement Updates

SEC Halts AriseBank ICO
On January 30, the SEC announced it had filed an emergency action to halt an allegedly fraudulent initial coin offering (ICO) by AriseBank, which sought retail investors to fund what would purportedly be the world’s first “decentralized bank.” The SEC also obtained an emergency TRO, asset freeze, and the appointment of a Receiver.  See CNBC 1.30.18

CFTC Files Suit Against My Big Coin Pay
The CFTC filed its third lawsuit against a virtual currency company this year, against Nevada-incorporated company My Big Coin Pay, Randall Crater of New York, and Mark Gillespie of Michigan.  In a Complaint filed in Massachusetts federal court, the CFTC alleged that the defendants made “false and misleading claims and omissions” about My Big Coin (MBC), offered as a virtual currency.  Defendants allegedly sought $6 million from investors through its sale of MBC, the proceeds of which were transferred into personal bank accounts.  Among the misrepresentations purportedly made by Defendants are claims that MBC was backed by gold, which it is not, and a claim that My Big Coin Pay had a partnership with MasterCard, which would allow its users to use MBC for payment to any merchant accepting MasterCard. See CFTC  for a copy of the Complaint.


International Developments

Japanese Regulators Raid Coincheck Offices After Hack
Early this morning, Japan’s Financial Services Agency (FSA) raided the offices of cryptocurrency exchange Coincheck, following the security breach by which hackers stole 58 billion yen ($530 million) last week in digital currency from 260,000 customers.  Earlier this week, the FSA issued a business improvement order to Coincheck, directing the company to establish a risk-management system by February 13.  The FSA is now looking into Coincheck’s finances and trying to determine how the hack occurred.  This is the first regulatory action against Coincheck since it suspended services following the hack.  Although Japan tightened its regulation on crypto exchanges after the Mt. Gox heist in 2014, regulators are facing new scrutiny for leaving gaps in its currency regulatory scheme. See Reuters 2.2.18 and CNBC 2.2.18