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Volume XII, Number 146

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Cadwalader Cabinet: Time to Address Blockchain

OCC Acting Comptroller Argues that Bank Regulation Would Mitigate Crypto Risk

OCC Acting Comptroller Michael J. Hsu addressed the future of crypto-assets and potential benefits of banking regulation.

In remarks before the British-American Business Transatlantic Finance Forum, Mr. Hsu identified some of the risks associated with stablecoins and suggested that the regulation of issuers as banks could actually enable more durable innovation. He acknowledged the importance of stablecoins as a bridge between the fiat and crypto worlds, including stablecoins' pivotal role in decentralized finance. He also noted, however, that stablecoins may be susceptible to potential runs by investors if trust in these assets fades, especially those with "questionable and opaque reserve management procedures." He compared such a potential run on stablecoins to the 2008 financial crisis, where runs affected banks, securities firms, structured finance vehicles and money market funds.

Mr. Hsu proposed that banking regulations could mitigate the risks of potential investor runs by giving these assets the appearance of being as safe as ordinary bank deposits. He suggested that the presence of (i) reserve funds, (ii) oversight by bank supervisors and (iii) access to a central bank's discount window for liquidity could instill consumer confidence. He argued that "strong, targeted federal regulation of money and banking can help establish a solid foundation for the economy enabling healthy innovation and growth."

Mr. Hsu also described how crypto-assets are becoming increasingly intertwined with the rest of the economy, requiring a coordinated regulatory response. For example, he highlighted the OCC's cooperation with the Federal Reserve and FDIC in establishing a common set of defined terms, risks and roadmaps for crypto-asset regulations (see prior coverage). He noted, however, that large crypto intermediaries do not currently face a single, comprehensive regulatory authority and, as they continue to expand, the risks associated with the lack of interagency collaboration will grow.

CFTC Commissioner Stump Describes Regulatory Challenges Presented by Innovation

CFTC Commissioner Dawn D. Stump described regulatory challenges presented by financial technology market innovation.

In remarks before the Chamber of Digital Commerce, Commissioner Stump said that the pace of market innovations in the areas of financial technology, such as digital assets and decentralized finance, was increasingly presenting the CFTC with "novel issues" that require "comprehensive thinking" by regulators. She acknowledged that the CFTC's current approach of relying on enforcement actions to solve these issues was "insufficient," and that the current regulatory framework needed to evolve to meet market demands. She argued that the CFTC must "bridge the gap between its enforcement and oversight functions by setting more clearly defined regulatory expectations for new, innovative applications in the derivatives market infrastructure."

Ms. Stump identified three areas where the CFTC needs to address regulatory challenges posed by innovation:

  • trading platforms (designated contract markets and swap execution facilities) - how to achieve effective regulation in ways that allow infrastructure providers and their customers to profit from innovation;

  • clearinghouses (derivatives clearing organizations) - how to accommodate new retail-focused derivatives clearing organizations that are moving away from an intermediary model in a way that maintains consumer safety while encouraging growth; and

  • brokers and counterparties (futures commission merchants) - how the CFTC's rules for a futures commission merchant should apply to retail commodity transactions involving digital assets, such as Bitcoin.

FRB Governor Brainard Prioritizes Controlling Inflation at Nomination Hearing

At a hearing before the Senate Banking Committee on her nomination to become Vice Chair of the Federal Reserve Board ("FRB"), Governor Lael Brainard argued that monetary policies must be "focused on getting inflation back down to 2 percent while sustaining a recovery."

Governor Brainard addressed rising rates of inflation, stating that lowering the rate is the most important task for the FRB moving forward. Governor Brainard also highlighted the economy's strong rebound in terms of growth and unemployment, noting that this has been the strongest economic recovery in 50 years.

Governor Brainard referenced her prior experience dealing with economic distress, including on (i) stabilizing financial markets during the pandemic, (ii) supporting a recovery post-Global Financial Crisis, and (iii) protecting the economy against contagion effects from economic crises abroad. She reiterated her commitment to the FRB's goals of price stability, maximum employment and maintaining the integrity of the financial system.

Governor Brainard was nominated by President Joseph R. Biden for Vice Chair of the FRB on January 4, 2022. She served on the FRB since being nominated and confirmed in 2014 under President Barack Obama's Administration.

NFA Reminds Members of Deadline on Exemptions for CPOs and CTAs

NFA reminded firms that the CFTC requires any CPO that claims an exemption from registration to file a notice of exemption by March 1, 2022.

NFA stated that CPOs may claim (i) an exclusion from CFTC Rules 4.13(a)(1), (a)(2), (a)(3) and (a)(5) ("Exemption from registration as a commodity pool operator"), (ii) an exclusion from CPO registration under CFTC Rule 4.5 ("Exclusion for certain otherwise regulated persons from the definition of the term 'commodity pool operator'”), or (iii) an exemption from registration as a CTA under CFTC Rule 4.14(a)(8) ("Exemption from registration as a commodity trading advisor"). Those who fail to file by the deadline may be required to be registered.

NFA also provided information as to how CFTC registrants may check on the registration status of their clients. Specifically, NFA Members can identify whether an exempt CPO/CTA has affirmed its exemption in two ways: (i) by using NFA's BASIC System, and/or (ii) by accessing a spreadsheet in the Member's Annual Questionnaire that lists all of those that have exemptions on file with NFA that must be affirmed on an annual basis. NFA cautions Members to contact any of their customers that have not renewed their claims for an exemption and determine whether it is appropriate to continue doing business with them.

MSRB Annual Report Highlights Modernization Efforts

In its 2021 Annual Report, the MSRB highlighted the organization's ongoing modernization efforts amid the challenges posed by the global pandemic.

The MSRB noted progress on four strategic goals:

  • modernizing market transparency systems, including the Electronic Municipal Market Access (or "EMMA®") website;

  • improving data platforms by leveraging cloud computing and data analytics;

  • modernizing market regulation by retiring outdated guidance and providing targeted regulatory relief in light of the COVID-19 pandemic; and

  • upholding the public trust through a commitment to diversity, equity and inclusion.

The MSRB also stated that it plans to undertake an examination of its finances and fee structure to ensure an equitable and sustainable balance of funding.

Primary Sources

  1. OCC Speech, Michael Hsu: The Future of Crypto-Assets and Regulation

  2. CFTC Public Statement: Remarks of Commissioner Dawn D. Stump - We Can Do Hard Things

  3. FRB Governor Lael Brainard: Nomination Hearing Testimony

  4. Senate Banking Committee: Nomination Hearing

  5. Senate Banking Committee: Toomey Opening Statement at Brainard, Thompson Nomination Hearing

  6. NFA Notice I-22-01

  7. NFA's BASIC System

  8. NFA Annual Questionnaire

  9. MSRB Annual Report 2021: Building the Foundation for the Future

  10. MSRB Press Release: MSRB Publishes 2021 Annual Report and Audited Financial Statements

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 15
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