Hello Fintech Friends,

Welcome to another week of fintech policy updates! This week, we will explore a wide range of developments from the past week, covering crypto regulation, enforcement, central bank digital currencies (CBDCs), payments, artificial intelligence (AI), and the latest initiatives from the Consumer Financial Protection Bureau (CFPB).

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1. Crypto Regulation

Last week, the Financial Action Task Force (FATF) released a report assessing global crypto regulation, following a year-long evaluation involving FATF members and non-member jurisdictions. The report revealed that less than 30% of jurisdictions had begun regulating the crypto sector by June 2023.

In Indonesia, the Financial Services Authority (OJK) will assume control of crypto industry regulation from the commodities agency Bappebti in January 2025. Crypto firms will need to undergo evaluation in a sandbox environment under the new regulator's oversight before receiving approval to operate in the country—a significant regulatory requirement that represents a departure from the current practice.

2. Enforcement

Last week was very busy on the enforcement front. The most notable development was the sentencing of Sam Bankman-Fried, former CEO of defunct crypto exchange FTX, to 25 years in prison and a forfeiture of $11B. Bankman-Fried's defense plans to appeal the decision after he was found guilty of perjury for his involvement in the use of customer deposits by his hedge fund.

In other news, a federal judge dismissed the lawsuit brought by crypto-focused Custodia Bank against the Federal Reserve (Fed). The bank sued the Fed in June 2022 over delays in processing its application for a master account and membership. The judge ruled that the Fed is not obliged under federal laws to give every eligible depository institution access to its master account system.

On March 26, the U.S. Department of Justice (DOJ) filed charges against cryptocurrency exchange KuCoin and its founders for purportedly running an unlicensed money-transmitting business and breaching the Bank Secrecy Act (BSA). The DOJ alleges that KuCoin facilitated the transmission of over $4 billion in "suspicious and criminal funds." Concurrently, the U.S. Commodity Futures Trading Commission (CFTC) filed a civil lawsuit, accusing KuCoin of operating an unregistered futures and swaps operation.

Meanwhile, Coinbase faced a setback on March 27 when District Judge Katherine Failla rejected its motion to dismiss a lawsuit filed by the U.S. Securities and Exchange Commission (SEC), which sought to challenge the SEC's authority over crypto exchanges. The lawsuit will now move to the discovery phase.

In the ongoing legal saga between the SEC and Ripple, a filing submitted by the SEC on March 25 in the U.S. District Court for the Southern District of New York proposed that Ripple pay approximately $2B billion in fines. The lawsuit was initiated by the SEC in December 2020 against Ripple, CEO Brad Garlinghouse, and co-founder Chris Larsen, accusing them of selling $1.3B worth of XRP tokens as unregistered securities.

In our international enforcement news, the US and the UK are investigating $20B in crypto transfers to Russia, facilitated by stablecoin Tether and processed through the sanctioned Russian-based exchange Garantex. This development follows the Office of Foreign Assets Control (OFAC) citing 13 Russia-linked FinTechs for employing cryptocurrency to circumvent sanctions against Russia. In the Philippines, the financial regulator barred local users from accessing Binance due to concerns over its unlicensed operations. Additionally, Nigeria has charged Binance with tax evasion, citing non-payment of Value-Added Tax, Company Income Tax, failure to file tax returns, and complicity in aiding tax evasion by customers. The charges followed the detention of two senior executives from the exchange, with reports indicating that one had fled the country.

3. CBDCs

Swift unveiled the outcomes of the second phase of industry-wide sandbox testing for its CBDC interlinking solution. Results indicate that Swift's connector has the potential to facilitate various transactions using CBDCs and digital tokens, seamlessly integrating them into current business operations. The testing phase engaged 38 institutions, comprising central and commercial banks, and market infrastructures.

4. Payments

The Financial Crimes Enforcement Network (FinCEN) has solicited feedback on its Customer Identification Program (CIP) requirements for banks. Under the CIP Rule, banks must collect a customer's taxpayer identification number before opening an account, usually requiring a full Social Security number for U.S. individuals.

Meanwhile, Mastercard and Visa reached a settlement of a 20-year antitrust dispute with U.S. merchants last week, aiming to end litigation over swipe fees and merchant restrictions. The agreement includes fee reductions and caps for five years, potentially saving merchants $30B. It grants merchants more payment flexibility, allowing them to steer customers towards preferred methods and add surcharges for credit card purchases. However, consumer savings are unlikely, and the proposed settlements may actually diminish existing credit card reward programs, popular among consumers and small businesses.

5. AI

The Treasury Department's recent report on AI, mandated by a Biden administration executive order, highlights AI risks in finance. It stresses a widening capability gap, with large institutions having resources for custom AI, leaving smaller ones vulnerable to third-party solutions. Additionally, it exposes inadequate data sharing on fraud prevention, disadvantaging smaller institutions. Recommendations include streamlining regulatory oversight, expanding the National Institute of Standards and Technology (NIST) standards for financial services, and implementing AI vendor "nutrition labels" for transparency.

6. CFPB

The CFPB plans to scrutinize credit card reward programs more closely due to a surge in consumer complaints. Many consumers report that credit card issuers fail to disclose the availability of alternative options offering lower interest rates and obscure terms that could affect rewards. Additionally, the CFPB has cautioned remittance transfer providers against deceptive advertising of international money transfer costs and speed to prevent consumers from falling victim to hidden fees, especially when services are marketed as “free.” Lastly, in its 2023 Consumer Response Annual Report, the CFPB highlighted fraudulent account openings as a major concern, with installment loans being the most cited type of personal lending in complaints. Notably, 22% of complaints revolved around unexpected interest charges and fees.

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See you next week!