Focus on Fintech – Wilson Sonsini Quarterly Fintech Update – July 2022 | Wilson Sonsini Goodrich and Rosati

Welcome to Wilson Sonsini’s Focus on Fintech quarterly newsletter. This quarterly newsletter provides ongoing analyzes and comments on regulatory developments that affect the fintech industry.

This edition of Focus on Fintech focuses largely on an increase in enforcement capacity across industries, as well as various legislative and regulatory proposals that may affect the fintech, blockchain and digital asset industries.

Consumer Financial Protection Bureau (CFPB)

New office for competition and innovation

The Consumer Financial Protection Bureau (CFPB) announced the opening of a new Office of Competition and Innovation on May 24, 2022. The purpose of the Office of Competition and Innovation is to analyze barriers in the broader market for financial services facing new market participants and encourage competition, somewhat which may have implications for fintech companies. Specifically, the new office will focus on 1) ensuring that consumers can easily change finance provider, 2) research structural problems that create barriers to innovation, 3) understand how larger players gain competitive advantage, 4) identify solutions to increase competition, and 5 ) arrange incubator events for industry entrepreneurs, professionals and small business owners. The Office of Competition and Innovation replaces the Office of Innovation, which focused on allowing companies to apply for action-free letters and participate in regulatory sandboxes for testing new products without the threat of regulatory action.

This shift may signal that CFPB intends to more strictly regulate larger established fintech industries, while promoting expansion opportunities for small startups hoping to break into a competitive landscape dominated by a handful of larger established companies. As a result, we may see a tightening of new product offerings and / or a more cautious approach to regulatory compliance with new product offerings from existing fintech companies.

CFPB’s sleeping authority

The CFPB has announced that it will use its “dormant” authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to conduct non-bank financial institutions (such as companies engaged in mortgages, private student loans and payday loan industries) it believes poses a risk to consumers. This investigative authority will also extend to fintech companies offering financial products and services that “CFPB has reasonable cause to determine constitute a risk to consumers.” By regulating non-banking companies that deliver financial products or services to consumers, the fintech industry is placed directly in CFPB’s crossroads.

Furthermore, according to public sources, the CFPB has also announced plans to strengthen its enforcement department by hiring 20 new full-time employees to increase its “investigations of repeat offenders and expand its authority over non-banks and fintechs.” Fintech companies should expect to see increased survey requests and increased enforcement measures based on this development.

CFPB regulation of Stablecoins

Since CEO Rohit Chopra was appointed Director of CFPB in 2021, there has been an increasing focus from CFPB on the digital asset market. At the end of 2021, Director Chopra emphasized the agency’s focus on monitoring the use of stablecoin in consumer financial products. Following the collapse of the TerraUSD stablecoin, Chopra reaffirmed the agency’s focus on digital assets and stablecoins in an interview with Bloomberg, stating that “stablecoins are something all regulators are looking at” and that he expects “a lot of movement this year” in the regulators’ digital assets space . CFPB’s focus on the digital asset market, especially with regard to consumer protection, has been increasing and more targeted in recent months.

Financial Crimes Enforcement Network (FinCEN)

Letter process without action

On June 3, 2022, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued its first advance notice of proposed regulations under the Anti-Money Laundering Act of 2020 (AML Act) to solicit public comment on issues related to the implementation of the non-action letter process. . A non-action letter is “usually understood to be a form of enforcement discretion in which an agency by letter states that it will not take an enforcement action against a submitting party for the specific conduct presented to the agency.” Unlike other federal agencies, FinCEN has not had a letter-without-action process, but the AML Act requires FinCEN to consider whether a process without a letter of action should be established. At the moment, FinCEN is dependent on administrative decisions and exceptions or exceptions for regulatory guidance. Himamauli Das, Executive Director of FinCEN, explained in a press release that “the no-action letter process has the potential to stimulate innovation and improve the overall effectiveness of the AML / CFT framework and the implementation of financial institutions’ compliance programs.”

For participants in the fintech industry, a formal process without action may prove beneficial in determining, among other things, whether certain business operations require fintech, crypto or blockchain companies to register with FinCEN as financial institutions, such as financial services.

Additional funding

FinCEN Executive Director Das recently asked Congress to provide funding for additional resources to implement the AML Act and the Corporate Transparency Act (CTA). Das requested $ 210.3 million for FY 2023, an increase of $ 49.3 million from FY 2022. Das relied specifically on the proposed rules of real ownership to justify the request for increased funding. The potential for additional funding that will allow FinCEN to increase its regulatory efforts is likely to have a direct impact on the fintech, crypto and blockchain industries, particularly related to reporting obligations and problems in combating money laundering.

US Securities and Exchange Commission (SEC)

Chairman Gensler notes crypto concerns

In a recent speech, Gary Gensler, Chairman of the US Securities and Exchange Commission (SEC), raised a number of concerns regarding the crypto industry and reiterated his position that most digital asset platforms are likely to trade in securities. Chairman Gensler noted that he has asked SEC employees to focus their efforts on 1) registering and regulating cryptocurrencies such as exchanges, 2) considering how best to regulate cryptocurrencies where securities and non-securities trading are intertwined, 3) work with crypto. platforms to ensure the protection of customers’ assets, including by separating the custody of these assets, and 4) assessing whether cryptocurrency platforms should separate their market-making functions from their exchange functions.

Chairman Gensler’s speech suggests that the SEC will pursue enforcement and provide further guidance on the regulation of cryptocurrencies in the near future.

Chairman Gensler also raised concerns about stack coins, noting their implications for financial stability and monetary policy and potential use for illegal activity, and called for increased investor protection around stack coins. He also reiterated his view that, like other cryptocurrencies, most stack coins can be securities under federal securities laws. It is unclear whether and how the SEC and CFPB will coordinate their efforts related to stack coins, and companies in this area should take into account related developments.

2022 Exam Priorities

In its stated exam priorities for 2022, the SEC included a focus on new technologies and cryptocurrencies. In addition to focusing on market participants engaged in cryptocurrencies, the report notes that the SEC will continue to focus on registered investment advisers and broker-dealers offering new products and services or using new fintech practices. To make this a priority, the SEC cited the growth in robotic advisors and the use of mobile apps by broker-dealers, as well as the increase in cryptocurrency trading.

Expansion of the SEC’s Department of Enforcement’s cyber unit

Following its stated research priorities for 2022, the SEC renamed the Cyber ​​Unit of the Division of Enforcement the “Crypto Assets and Cyber ​​Unit” and added 20 new positions for a total of 50 employees. Since 2017, the unit has brought more than 80 enforcement actions related to fraudulent and unregistered offers and platforms for cryptocurrencies. The expansion of staff will probably lead to more and faster investigations and enforcement activity for companies engaged in crypto business.

Rule proposal

Definition of “Exchange”: The SEC issued a rule proposal in January that would significantly expand the definition of “exchange” under Rule 3b-16 of the Exchange Act (the exchange proposal). The exchange proposal expands (somewhat ambiguously) the definition of an “exchange” to include systems that “make available” the non-firm’s trading interests and communication protocols for gathering buyers and sellers of securities. The exchange proposal may require that many platforms, including DeFi platforms and other cryptocurrencies, which are not currently registered with the SEC, do so either as an exchange or an alternative trading system.

Definition of “dealer”: The SEC also issued a rule proposal in March that would further clarify the statutory definitions of “dealer” and “government securities dealer” in the Stock Exchange Act (the dealer proposal). The dealer proposal is intended to provide clearer standards for identifying market participants who are engaged in the purchase and sale of securities for their own account “as part of a normal business” and which thus provide significant liquidity in the securities markets. The reseller proposal is likely to have an impact on high-frequency trading companies, as well as the DeFi industry.

Information providers

The SEC has issued a request for information and public comment focusing on the regulatory status of index providers, model portfolio providers and securities pricing services (together with the information providers). The SEC noted a number of concerns, including the degree of adaptation of the information provided; the extent to which information providers trust the publisher’s exclusion; investment advisers ‘use of model portfolios, which may affect clients’ understanding of fees; services rendered by each party and potential conflicts; as well as other potential risks and conflicts of interest. Among other things, the proposed changes may lead to the regulation of information providers and entities that work with index providers to create indices that are used to manage funds or otherwise provide investment advice, and entities that otherwise provide reports, algorithms and other services to fund managers or other investment advisers. .

Reg BI enforcement action

The SEC filed a complaint against a registered broker-dealer and five of its registered representatives alleging breach of Best Interest Bonds under Regulation BI (Reg BI), which requires broker-dealers to trade in the best interests of clients, in connection with their recommendation and sales to private customers of urated, high-risk debt securities. This may signal a new wave of enforcement against broker-dealers based on Reg BI, which was adopted in 2019.

Legislative updates

Senator Cynthia Lummis, a Wyoming Republican, and Senator Kristen Gillibrand, a New York Democrat, introduced the Lummis-Gillibrand Responsible Financial Innovation Act (the bill) which outlines a plan to regulate cryptocurrencies and cryptocurrencies. The bill ensures that many digital assets are regulated as goods as long as the issuer provides the necessary SEC information. The bill also stipulates requirements for reserve, asset type and publication for issuers of payment-stable coins. Although the bill is an attempt to respond to long-standing demands for clarity from the crypto industry, it is unlikely that it will pass in its current form, if it passes at all.