By Madden v. Midland Funding, which cast doubt on the enforceability of some interest rates charged on loans that nonbanks acquire from bank originators.
Alston & Bird’s Stanford added that the valid-when-made rules were “long needed and long desired, especially in the lending space in fintech, providing clarity in the secondary market for loans generated on [lending] platforms.”
A related concern, the true lender question, is being addressed by the OCC as well, with a proposed rule released earlier this month that would clarify that a bank is the “true lender” of a loan if that institution is named on the loan document at the date of origination or if it funds the loan.
States Continue to Delve Into Fintech and Consumer Protection
Large states like New York and California, homes to the headquarters of numerous financial institutions, have seen their regulators enhance cooperation with fintech companies through innovation offices.
Reflecting what New York did in 2019, California Gov. Gavin Newsom’s plan to restructure the California Department of Business Oversight and rename it the Department of Financial Protection and Innovation would include the establishment of a Financial Technology Innovation Office to manage the development of new financial products responsibly.
The plan to restructure the DBO would also put an increased focus on financial protection. The governor noted in his budget address in January that it was his administration’s aim to fill a gap left by the federal government under President Donald Trump. The budget summary outlined that the CFPB has left Californians vulnerable to predatory businesses and companies without the clarity they need to innovate.
California’s proposed reform to its financial regulator would also allow for more powers, including enforcement to better protect consumers. New York Gov. Andrew Cuomo announced a similar proposal in January to reinforce the state’s ability to oversee financial protection.
“The political movement in California to create a mini-CFPB and reorganize the DBO looks to be gaining significant political steam. Obviously, the politics of California are much different than the politics of Washington at the moment,” White & Case’s Vallabhaneni said.
“It is very interesting and potentially very exciting and influential, because either companies are based in California, so they’re going to be under the regulation of the California financial services regulator, or if they’re not based in California, they certainly do business in California with California residents,” he added. “So they will be caught up and in this way, California can synthetically become a national regulator on par with the feds.”
New York, for its part, has been moving quickly on the digital asset front, proposing updates to its BitLicense regime as it hit its five-year anniversary. In late June, the New York Department of Financial Services issued a proposal outlining its concept for a conditional version of its BitLicense that would give startups and other early- to mid-stage companies a regulatory on ramp to the New York market.
This conditional license would allow its recipients to engage in cryptocurrency activities in the state while partnered with an existing BitLicense holder for sponsorship and support, providing them with a platform to begin operations until they’re ready to shoulder the costs and challenges of getting fully licensed.
COVID-19 Highlights Digital Asset Opportunities and Concerns
As the COVID-19 health and economic crises roil countries around the world, consumers have started to shift toward digital banking. Congress held hearings on the potential for a digital dollar, during which the former chairman of the U.S. Commodities Futures Trading Commission, J. Christopher Giancarlo, urged the adoption of a digitized dollar.
Separately, legislation to create a digital wallet through which Americans eligible for the COVID-19 stimulus relief payments could receive a cash infusion was proposed by Sen. Sherrod Brown, D-Ohio. The Banking for All Act would provide for the creation of “digital dollar wallets,” or FedAccounts, to be maintained by any Federal Reserve bank. FedAccounts would be accessible at any post office or local bank and could be opened by any U.S. citizen.
“The COVID-19 crisis and its resulting social distancing arguably has provided an extended proof-of-concept for a wide variety of digital innovations, potentially greatly accelerating their mainstream adoption,” Linklaters’ Klayman said.
“In my view, this has been true in terms of payments innovations generally, and the crypto space is no exception,” she added. “At a time when numerous financial institutions have closed branches, many banks arguably are facing growing pressures to provide broad digital solutions and face competition not just from other banks, but also from digital native companies.”
Klayman explained that remote work and virtual learning have been familiar to those in the blockchain and crypto space, and that she sees signs of a “digital dawn” following an extended “crypto winter.”
As interest in digital assets waxes, federal agencies have released notices cautioning consumers about potential nefarious activity that may involve cryptocurrency. COVID-19 has led to the emergence of new cyber-focused illicit schemes targeting vulnerable individuals and companies, FinCEN Director Kenneth Blanco said at a conference in May.
That same month, the Financial Action Task Force, a global watchdog that sets international standards for combating money laundering, published a report detailing various risks businesses are facing in light of COVID-19 as a result of widespread business closures and a general policy shift to focus on the health crisis.
Those risks include an increase in the incidence of fraud, including the impersonation of officials and the proliferation of investment scams; increased cybercrime; and an increase in the “misuse of online financial services and virtual assets to move and conceal illicit funds,” the FATF report stated.
–Editing by Kelly Duncan and Michael Watanabe.
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