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In a series of recent interviews (including with the American Bankers Association and a podcast with the ABA Banking Journal), Acting Comptroller of the Currency Brian Brooks discussed the Office of the Comptroller’s (OCC’s) plans to soon roll out another special purpose national bank (SPNB) charter specifically geared toward payments companies. This “payments charter” could be especially appealing for those companies looking for a national licensing platform for their payments business because it would provide federal preemption of state money transmitter licensing and related laws, which would eliminate the need to obtain a license to operate in each state.

In a recent post, we discussed the increasing focus by state attorneys general on the use of their enforcement authority against payment processing applications platforms that were not licensed under state money transmitter laws. As we pointed out, one of the challenges raised by these state laws is the fact that they are not uniform in either their language or how they are interpreted or applied.

In the spirit of looking at the glass-half-full aspects of these developments, it is worth pointing out that the Conference of State Bank Supervisors (CSBS) is undertaking an initiative to develop model payments legislation with the goal of increasing uniformity of state legislation in this area. The multistate licensing initiative is part of Vision 2020, a set of initiatives that CSBS and state regulators are implementing to harmonize the multistate licensing and supervisory experience for nonbank financial services providers, including fintechs. One primary area of focus for the CSBS is state money transmitter legislation. To this end, a committee of state financial institution supervisors, under the auspices of the CSBS, has developed model language for money services businesses, and recently published this model language for public comment. The model language focuses on areas such as core definitions of money transmission–related activities, money transmitter exemptions, control and changes in control of money transmission businesses, financial condition issues, and interstate parity and coordination activities.

Payment apps and the legal and regulatory issues they present were front and center at a November 5 meeting of state attorneys general consumer protection leaders.

Attorneys general recognize the value of these apps and noted those available through traditional banking services. Moreover, there is a general recognition that the unbanked and underbanked require digital access in order to perform routine consumer functions and that payment apps can provide this service.

Regulators on both sides of the Atlantic continue to monitor and address cryptoasset and distributed ledger technology activities. We recently posted on the guidance issued by the US Financial Crimes Enforcement Network on cryptocurrencies and in another post touched upon differences in the regulatory treatment of cryptoassets across jurisdictions. Today we report on two new developments relating to the treatment of cryptoassets by UK and US regulators.

The Joint Committee of the European Supervisory Authorities (the ESAs) issued a report on 7 January 2019 on the status of regulatory sandboxes and innovation hubs following consultations with national regulators across the European Union.

The report compares the innovation hubs and regulatory sandboxes established in 21 EU member states and three EEA states, flagging too that Hungary and Spain are in the process of establishing regulatory sandboxes.

The ongoing and accelerating pace of developments in the realm of cryptoassets in multiple jurisdictions warrants continual review and monitoring. In a report issued earlier this month on the implications of cryptoassets, the international Financial Stability Board (FSB) stated that, while cryptoassets do not currently pose a material risk to global financial stability, vigilant monitoring is needed in light of the speed of market developments. The FSB believes that due to risks such as low liquidity and the use of leverage, market risks from volatility, and operational risks, cryptoassets lack the key attributes of sovereign currencies and do not serve as a stable store of value or a mainstream unit of account. The financial stability implications of these cryptoasset characteristics include an impact on confidence in, and reputational risk to, financial institutions and regulators; risks arising from financial institutions’ exposures to cryptoassets; and risks arising if cryptoassets were to become widely used in payments and settlement. Therefore, regulators are encouraged to “keep an eye on things” as cryptoassets continue to spread throughout the world economy.

The UK Financial Conduct Authority (FCA) issued a press release on August 7 announcing that it has joined 11 other financial regulators from around the world to create the Global Financial Innovation Network (GFIN), building on its proposals earlier in the year to create a “global sandbox.” The network is intended to provide fintech firms a more efficient way to interact with regulators as they test new ideas across different markets and to create a new framework for regulators to cooperate on areas of innovation. This announcement continues a regulatory trend of being more hospitable to fintech innovation, as we have previously discussed.

Arizona has become the first state in the United States to enact a law to create a “Fintech Sandbox” – a safe zone for fintech startups to test new applications and financial services otherwise subject to state money transmitter, banking, and similar licensing requirements without having to obtain a state license. Although other countries, such as the United Kingdom, Singapore, and Australia, have created similar fintech sandboxes, similar legislation or regulations thus far have not been adopted in the United States at the federal or state level.

The Fintech Sandbox idea was promoted by the Arizona attorney general and will be administered by the Arizona Office of the Attorney General (AZ OAG). However, the Fintech Sandbox does not mean that fintech companies will be unregulated in Arizona. There will be a substantive application and oversight process.

Less than a year after the Conference of State Bank Supervisors (CSBS) announced Vision 2020, an initiative to modernize state regulation for non-bank financial companies, the CSBS revealed plans to establish a standardized licensing practice for money services businesses. Seven states have agreed to a compact whereby all participating states accept the findings of one state that has reviewed money transmitter licensing requirements, including IT, cybersecurity, business plan, background check, and compliance with the Bank Secrecy Act. The states that have joined the compact include Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas, and Washington.

As we have been reporting, cryptocurrency, as an asset class, is currently taking the world financial markets by storm. Total market capitalization of cryptocurrency is estimated to be in the hundreds of billions of dollars and new initial coin offerings (ICOs) seem to crop up every other day, while the United States and other countries' governments have been left scrambling to figure out how to best regulate this new asset class and protect market participants and end users.

The US Securities and Exchange Commission (SEC) has been a leader in taking affirmative steps toward exercising some oversight of the fragmented cryptocurrency market. On January 18, the SEC’s Division of Investment Management published a staff letter detailing some of the Commission’s concerns about how cryptocurrency-related products will comply with the Investment Company Act of 1940, including specific issues relating to valuation, liquidity, custody, arbitrage, and potential manipulation.