Hello Fintech Friends,

This week, thousands of families in Turkey and Syria are mourning the loss of their loved ones after a 7.8 magnitude earthquake struck in Gaziantep province near the Turkish-Syrian borders. The earthquake, one of the deadliest this century, has so far claimed the lives of over 33,000 people and displaced millions on both sides of the borders. Our thoughts and condolences go out to all those affected by this devastating event. Fundraisers all over the world are racing to deliver aid, and the U.S. Treasury Department has announced a six-month exemption of all transactions contributing to relief efforts in Syria that would otherwise be prohibited under existing sanctions.

Our coverage for the week spans the efforts of the Consumer Financial Protection Bureau (CFPB) to protect mortgage borrowers, the Securities and Exchange Commission (SEC)’s enforcement action against crypto exchange Kraken, and a new initiative sponsored by the Bank for International Settlements (BIS) to monitor stablecoin issuers.

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1. The CFPB

Last week, the CFPB issued an advisory opinion that explains how companies, especially digital comparison-shopping platforms, violate the Real Estate Settlement Procedures Act (RESPA) when they direct users of their platforms to specific lenders instead of providing users with “comprehensive and objective information.” The advisory opinion does not create any new obligations under RESPA, but rather offers guidance on how firms can navigate issues associated with digital mortgage comparison-shopping platforms.

2. Enforcement

Last week was big on enforcement. On February 9, the SEC charged crypto exchange Kraken with “failing to register the offer and sale of their crypto asset staking-as-a-service program.” The program allows investors to deposit their tokens with Kraken, otherwise known as “staking,” and earn a passive return on these tokens amounting up to 21 percent. The staked tokens enable the staking party, Kraken in this case, to validate new transactions on the chain and earn income in return, most of which is then passed on to the owner of the tokens. Faced with these charges, Kraken agreed to pay a $30M fine and to cease offering the service, which the SEC considered an unregistered security. The Internal Revenue Service (IRS) has also filed a court petition to compel Kraken to comply with a summons for information about the identity and transaction records of its customers.

The SEC’s enforcement action against Kraken cast doubt on whether the proof-of-stake, the validation mechanism blockchain Ethereum uses after the Merge, can be considered an unregistered security. Some experts tried to draw a distinction between proof-of-stake and staking services, even though old statements of SEC’s Chair, Gary Gensler, suggest otherwise. Now, the stakes are very high for Coinbase, the largest crypto exchange in the U.S. by trading volume, which offers a similar service but has said in response to the Kraken news that its service is not a security and that it will stay committed to offering the service.

In other enforcement news, the New York Department of Financial Services is reportedly investigating Paxos, the issuer of the third largest stablecoin in the U.S., for reasons that are not yet clear. Immediately after the news became public, Paxos’s partner, PayPal, announced that it is giving up on its plans to issue a stablecoin.

3. Crypto Regulation

On February 7, the Federal Reserve released the full text of a recent policy statement that prohibits state banks, regardless of whether they have deposit insurance, from engaging in activities not permitted by national banks, primarily the custody of crypto assets, unless they are authorized by a state law. The goal of the new policy is to limit regulatory arbitrage (i.e., relocating activities to jurisdictions with more permissible regulations) between state and national banks.

Internationally, the BIS announcedthat it is planning to launch a new project under the name “Pyxtrial” whose goal will be to create a new platform for central banks to monitor stablecoin issuers’ balance sheets and to build new policy frameworks related to stablecoins using integrated data.

4. CBDCs

Last week, the Head of the BIS Innovation Hub, Cecilia Skingsley, made some important and sobering statements about the future of central bank digital currencies (CBDCs) and their interoperability. Skingsley noted that "[w]e will never have full interconnectedness" because “[t]here will be too many frictions and not all countries in the world will be prepared to cooperate fully with all the other countries in the world –That’s the reality.” If this is true, then the question we should all ask is: what else can be done to bring the global payment system into the future?

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See you next week!