Troutman Pepper Weekly Consumer Financial Services Newsletter

To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:

Federal Activities

State Activities

Federal Activities:

• On June 23, the U.S. Supreme Court ruled in Coinbase, Inc.’s favor, holding that litigation in district court is automatically stayed when a party appeals the denial of a motion to compel arbitration. The 5-4 decision supported Coinbase’s argument that it should not have had to move forward with discovery in California district court, while challenging rulings denying arbitration. The decision reversed the Ninth Circuit, and settled a circuit split that left the decision to stay to the discretion of trial judges. In delivering the opinion, authored by Justice Kavanaugh, the Court reasoned that the clear background principle is that any appeal takes away district court control of the parts of the case at issue in the appeal. For more information, click here.
• On June 23, the U.S. Department of Justice (DOJ) announced that infamous celebrity Twitter hacker James O’Connor (aka @PlugwalkJoe) was sentenced to five years in prison for his role in organizing a cybersecurity attack and perpetrating fake Twitter giveaways. In exchange for Bitcoin deposits, O’Connor’s scheme offered phony giveaways from Twitter accounts of Elon Musk, Jeff Bezos, and President Joe Biden. Additionally, O’Connor and his co-conspirators utilized a subscriber identity module (SIM) swap attack to steal $794,000 from a Manhattan-based cryptocurrency company specializing in digital wallet infrastructure. For more information, click here.
• On June 22, the International Monetary Fund (IMF) retracted its earlier suggestion that banning cryptocurrencies is the best way to mitigate their associated risks. The IMF reasoned that the approach may not be effective in the long run, and instead, suggested that Latin American and Caribbean countries considering central bank digital currency adoption should focus on addressing the drivers of crypto demand, including citizens’ unmet digital payment needs and the need for improved transparency. For more information, click here.
• On June 22, the Commodity Futures Trading Commission (CFTC) filed suit against a foreign exchange trader, claiming that the trader misappropriated more than $1.3 million. The trader allegedly sold forex and digital assets to U.S. customers not eligible to purchase them. For more information, click here.
• On June 22, the Federal Trade Commission filed an amicus brief in the U.S. Court of Appeals for the Seventh Circuit, challenging a district court decision to dismiss the CFPB’s claims that a nonbank mortgage company and its owner violated the Equal Credit Opportunity Act when it engaged in discriminatory marketing and consumer outreach practices. For more information, click here.
• On June 22, the Commodity Futures Trading Commission filed an enforcement action in the U.S. District Court for the Central District of California against Cunwen Zhu and his company Justby International Auctions. The complaint alleged that Zhu and Justby, through a “pig butchering” scheme, fraudulently misappropriated over $1.3 million in customer funds intended for digital asset commodity and forex trading. Notably, this is the CFTC’s first “pig butchering” enforcement action. For more information, click here.
• On June 22, the U.S. Securities and Exchange Commission (SEC) filed an enforcement action against William K. Ichioka and his investment firm Ichioka Ventures. The complaint alleged that Ichioka solicited investments for his unregistered investment fund by claiming he was an accomplished investor, promising oversized returns, and guaranteeing investors’ principal. However, the complaint alleged that Ichioka could not pay investors because he used investor money to for his personal use. The DOJ and CFTC also filed criminal and civil actions against Ichioka. For more information, click here.
• On June 21, the House Financial Services Committee announced its plan to advance two proposed new cryptocurrency laws in July 2023. Committee Chair Patrick McHenry (R-NC) told his panel that he planned to hold sessions on legislation that would create a more distinct pathway for digital assets to transition from securities to commodities, which have lower reporting and regulatory requirements. The bill also would feature other market structure-related provisions. The committee is also set to consider a separate bill that creates a comprehensive regulatory framework for stablecoins. For more information, click here.
• On June 20, the U.S. Department of the Treasury’s Office of Foreign Assets Control announced a settlement with Swedbank AS (Latvia) (Swedbank Latvia), a subsidiary of Swedbank AB (publ), headquartered in Stockholm, Sweden. Swedbank Latvia agreed to remit $3,430,900 to settle its potential civil liability for 386 apparent violations of OFAC’s Crimea sanctions. Throughout 2015 and 2016, a customer of Swedbank Latvia used Swedbank Latvia’s e-banking platform from an internet protocol address in Crimea to send payments to persons in Crimea through U.S. correspondent banks. The settlement amount reflected OFAC’s determination that Swedbank Latvia’s apparent violations were not voluntarily self-disclosed and were non-egregious. For more information, click here.
• On June 20, the Consumer Financial Protection Bureau (CFPB) released its annual report on the top financial concerns facing military families. The report highlighted the growth of digital payment app usage in the servicemember community, the unique risks to servicemembers from these services, and the potential abuse from bad actors. For more information, click here.
• On June 20, the CFPB published a blog post, detailing its response to a request for information issued by the White House (Hearing from the American People: How Are Automated Tools Being Used to Surveil, Monitor, and Manage Workers?). The CFPB alleged concerns about the potential harms workers may face when algorithms determine a worker’s earnings, hours, and more. In the blog, the CFPB reported that it received complaints from the public about inaccuracies and the lack of transparency in the employment background screening industry. For more information, click here.
• On June 20, the CFPB published a blog post regarding worker surveillance and the threats posed to worker privacy. For more information, click here.
• On June 16, SEC Division of Enforcement Director Gurbir Grewal restated the SEC’s commitment to apply existing laws to cryptocurrency products until Congress passes legislation directing it to do otherwise. He further stated that based on the SEC’s most recent enforcement actions, as well as its listing of a dozen tokens as registered securities, it should be clear how the agency views the application of securities laws to the cryptocurrency space. In delivering these comments, Grewal indirectly rejected calls from the cryptocurrency industry for the SEC to engage in a rulemaking process to clarify the application of securities laws to cryptocurrency projects. For more information, click here.
• On June 16, the Bank for International Settlements released two publications, addressing central bank digital currencies. The first is the final report on Project Rosalind, “an experiment exploring application programming interfaces (APIs) for retail central bank digital currency.” The second — “Blueprint for the future monetary system: improving the old, enabling the new” — explores the concept of “[a] new type of financial market infrastructure — a unified ledger — [that] could capture the full benefits of tokenisation by combining central bank money, tokenised deposits and tokenised assets on a programmable platform.” For more information, click here.
• On June 16, the FDIC updated its Supervisory Guidance on Multiple Re-Presentment NSF Fees (FIL-40-2022) to clarify its supervisory approach for corrective action when a violation of law is identified. For more information, click here.
• On Jun 16, Acting Comptroller of the Currency Michael J. Hsu discussed the benefits and risks of tokenization and artificial intelligence (AI) in remarks at the American Bankers Association’s Risk and Compliance Conference in San Antonio. In his remarks, the Hsu spoke about how risk and compliance can facilitate responsible innovation in AI and tokenization, as well as the distinctions between public, trustless blockchains and centralized, trusted blockchains. For more information, click here.
• On June 15, the Federal Deposit Insurance Corporation (FDIC) issued a letter to OKCoin USA, Inc. regarding potential violation so the Federal Deposit Insurance Act. The FDIC asserted that the company made false and misleading statements regarding the exchange’s insured status. For more information, click here.
• On June 15, House Financial Services Committee Chairman Patrick McHenry (R-NC) sent a letter to Treasury Secretary Janet Yellen, urging the Financial Oversight Council (which Secretary Yellen chairs) to revisit its proposals for an analytical framework for financial stability risks posed by nonbank financial firms. Chairman McHenry criticized the proposal for evaluating risk based on size and not activities. He also criticized the proposals for their ability to undo the changes made in 2019, which incorporated principles considering a financial institution’s systematic risk rather than merely its size. For more information, click here.
• On June 14, the FDIC issued a letter, demanding that three companies and certain of their officers cease and desist from making false and misleading statements about FDIC deposit insurance. The FDIC demanded that Bodega Importadora de Pallets, Money Avenue LLC, and OKCoin USA, Inc. take immediate corrective action to address these false or misleading statements. For more information, click here.
• On June 14, the CFPB filed its appellate brief in the U.S. Court of Appeals for the Seventh Circuit, appealing the lower court’s decision to dismiss the CFPB’s claims that a nonbank mortgage company and its owner violated the Equal Credit Opportunity Act when it engaged in discriminatory marketing and consumer outreach practices. For more information, click here.
• On June 12, the Small Business Administration (SBA), in consultation with the Department of the Treasury, updated its additional guidance to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), including both First Draw PPP Loans and Second Draw PPP Loans. The SBA added question No. 72, which clarifies whether “the amounts paid by a borrower to a third-party payer for the third-party payer’s employees to operate the borrower considered eligible payroll expenses for the purpose of calculating the maximum loan amount.” For more information, click here.

State Activities:

• On June 23, the Oregon legislature passed the Oregon Consumer Privacy Act, making it the eleventh state to pass a data privacy law. The bill will now be sent to Governor Tina Kotek for approval, and if enacted, will take effect July 1, 2024. The bill includes, among other things, the following consumer rights and protections: (1) right to know whether controllers are processing their data; (2) right to correct inaccuracies in their data; (3) right to require a controller to delete their personal data; (4) right to opt out of having their personal data processed; (5) right to data portability; (6) sensitive data protections; and (7) special protection for children and youth. The bill differs from data privacy laws enacted by other states because it does not include an exemption for financial institutions regulated by the Gramm-Leach-Bliley Act, nor does it establish an exemption for entities covered by the Health Insurance Portability and Accountability Act. For more information, click here.
• On June 22, Nevada ordered Custodian Prime Trust to end its operations after the cryptocurrency custodian failed to satisfy customer withdrawal requests. The Nevada Department of Business and Industry stated in its order that based on the company’s financial deficiencies, it materially and willfully breached its fiduciary duties to its customers by failing to safeguard assets under custody. The order comes shortly after BitGo, another cryptocurrency company, announced it was abandoning its takeover of Custodian Prime Trust. For more information, click here.
• On June 21, the CFPB published a report on consumer finances in rural areas of the Southern region, which includes Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee. The CFPB also released a data spotlight, analyzing banking and credit access in the Southern region. The CFPB states that the data spotlight “seeks to identify gaps, as well as opportunities to increase financial access in the region, particularly branch presence and bank account access, and capital access such as mortgage lending and small business lending.” For more information, click here.
• On June 19, Arizona Governor Katie Hobbs signed HB2292, which (1) requires a motor vehicle dealer to verify that a vehicle lien obligation is complete and recorded properly on a dealer purchased vehicle; (2) requires a dealer to obtain all documentation on a vehicle the dealer has purchased; (3) provides all the types of documentation the dealer is to obtain and that the documents could be in electronic form; and (4) provides provisions for a vehicle dealer to cancel the sale of any vehicle with a buyer if all parties agree to the cancellation, the proper documentation is completed, and that the state agency is sent all documentation of the cancellation. The bill is effective from and after December 31. For more information, click here.
• On June 16, securities regulators in New Jersey filed an emergency cease-and-desist order and issued fines against California-based crypto company Abra and several related entities. The New Jersey Bureau of Securities alleged violations of the state’s securities laws, including offering and selling unregistered securities and failing to disclose material facts about the offering. Abra allegedly offered “earn accounts,” which the company used to fund its lending operations. Then, the company restricted deposits into earn accounts and transitioned investors’ crypto-assets into newly created “boost accounts,” which were sold in reliance on an exemption from securities registration. The bureau further alleged Abra failed to disclose that it did not obtain any federal or state banking charters or licenses as required, nor make required disclosures. For more information, click here.
• On June 16, SB78 was vetoed by Nevada Governor Joe Lombardo. The bill would have amended Nevada Revised Statute 118.101 to require that before a landlord can report an account balance to a credit reporting agency, it must deliver an itemized, written accounting of all outstanding amounts owed by the tenant at least 30 days in advance of the reporting. The bill would have required that an itemized, written accounting must contain a disclosure, stating that if the outstanding amounts are not paid within 30 days, the landlord will report the outstanding amount to a credit reporting agency. The bill would also have required a landlord to refund any fee charged for a background report on a prospective tenant when the landlord rents the unit to another person and does not obtain the background report for which the fee was collected. In his veto message, Lombardo stated that because the bill would make wide-ranging changes, he could not support a bill that would “only serve to exacerbate an already challenging period for Nevadan renting families.” For more information, click here.
• On June 15, the New York attorney general’s office announced a $1.8 million settlement with a cryptocurrency platform to resolve claims that the company failed to register as a securities and commodities broker-dealer, as well as for representations it made regarding its status as a cryptocurrency exchange. In addition to issuing refunds and making payments to the state, the company must cease operations in the U.S. and implement geo-blocking to prevent New Yorkers from accessing the platform. For more information, click here.
• On June 13, Louisiana’s governor signed Senate Bill 185, amending provisions relating to the regulation and licensure of virtual currency businesses. The regulation, which became effective immediately, clarified several definitions, including “acting in concert,” “responsible person,” and “affiliate,” as well as other technological terms, including “blockchain,” “mining,” and “non-fungible activity.” With respect to licensure, the new act requires applicants to provide a copy of their business plan, financials and details related to cryptocurrency operations. The act further implements various requirements relating to background checks and other pre-requisites to obtain a license. For more information, click here.
• On June 9, Texas’ governor signed House Bill 1666, which imposes rigorous requirements on digital asset service providers that handle customer funds. The bill requires service providers supporting more than 500 customers or holding at least $10 million in customer funds within Texas to segregate customer funds. The bill further mandates that providers offer customers quarterly accountings of outstanding liabilities and assets in custody, as well as independent audits. For more information, click here.