OFR Annual Report Warns of Elevated Risk to Financial Stability

In its 2022 Annual Report to Congressthe Office of Financial Research (“OFR”) warned that threats to U.S. financial stability are elevated compared to previous years because of rising inflation, tight credit conditions and geopolitical uncertainty.

OFR found that U.S. economic growth slowed due to elevated interest rates, a significant increase in commodity prices and lingering supply chain issues from the COVID-19 pandemic. OFR reported that non-financial corporate credit risk is rising, but household credit risk remains low. OFR said that financial stability risk is elevated across the financial system, including (i) macroeconomic risk, (ii) credit risk, (iii) liquidity and funding risk and (iv) contagion risk. OFR also that said (i) high volatility in the digital asset market, (ii) increased frequency and complexity of cybersecurity attacks, and (iii) financial losses due to climate-related financial risk contributed to the increased risk to financial stability.

Additionally, OFR highlighted the launch of two pilot programs:

  • the Non-centrally Cleared Bilateral Repo Pilot Project, which OFR said will give regulators more insight into the non-centrally cleared bilateral repo market. OFR is currently considering a rule to establish an ongoing data collection program as to bilateral repo (see previous coverage); and
  • the Climate Data and Analytics Hub pilot, which provides regulators with reliable climate data and tools to properly assess climate risks to financial stability.


In the report, OFR tells us, “[a]s a frontier risk, climate-related financial risk—though difficult to model and forecast within the financial system—presents an increasing threat to financial stability. Being able to assess it accurately is vital to mitigating its effects.” Put differently, OFR acknowledges that it cannot measure the risk that climate change poses to financial stability, and it cannot demonstrate that climate change is a financial stability risk, or how risky it is, but OFR pledges to find something there. This makes no sense whatsoever. If the U.S. government is able to demonstrate the risks that arise from climate change in a convincing manner, businesses will adjust to these risks. For now, OFR does not have the data.

Further, much of what OFR paints as “climate change risk” is really very ordinary “weather risk,” such as building houses in areas likely to be flooded, or areas at risk of wildfires. (See footnote 167 of the OFR report and the papers cited therein.) These risks do not arise because the temperature rose a degree; they arise because people are building where perhaps they should not, which undoubtedly creates financial risk. But it is not climate change risk; it’s weather risk. If the OFR would approach the issue of weather more temperately, it would be more likely to produce work of value.

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Senate Banking Committee Considers Implications of Digital Assets for Illicit Finance

The Senate Committee on Banking, Housing, and Urban Affairs considered the implications of digital assets for illicit finance, terrorism, and other forms of criminal activity.


Senator Sherrod Brown, Chair of the Senate Banking Committee, emphasized crypto’s role as a tool used by criminals to facilitate ransomware attacks and finance terrorism. Senator Brown contrasted crypto with the dollar, stating that the latter “has safeguards to protect against crime and illicit activity” because companies that use real money are required to “know their customers, and report suspicious transactions.” Senator Brown argued that (i) “[c]rypto allows money launderers and terrorists to do things they never could have done with dollars,” and (ii) in the absence of the safeguards around dollars, “lax rules and little oversight” are giving criminals more opportunities to “hide and move money in the dark.”

Senator Brown also said that President Biden’s recent executive order on digital assets will “jumpstart a coordinated strategy from law enforcement and regulators to fight bad actors who want to use crypto.” He added that without such regulatory and law enforcement action “cybercriminals, rogue regimes [and] terrorists . . . [would] create a shadow financial system that works for them.”

Ranking Member Patrick J. Toomey’s emphasized the need for “regulatory clarity” with respect to digital assets. Senator Toomey argued that criminals have always “tried to utilize new technologies for nefarious gain . . . [b]ut that is not a reason to stifle new technological developments.” He went on to say that cryptocurrencies were being used both by Russia to evade sanctions and by Ukraine which raised over $100 million in donations.

Witness Testimony

Jonathan Levin, Co-Founder and Chief Strategy Officer of Chainalysis, Inc. emphasized that (i) “the transparency of blockchains enhances the ability of policymakers and law enforcement to detect, disrupt, and ultimately, deter illicit activity” and (ii) a financial system founded on the use of blockchain technology “can enhance the effectiveness of financial regulation more broadly.” He provided several short-term recommendations aimed at reducing the risk of sanctions evasion through digital assets, as well as long-term recommendations aimed at improving detection, disruption and deterrence of broader illicit uses of digital assets.

Mr. Levin’s short-term recommendations include:

  • authorities using digital asset wallet addresses as identifiers;
  • OFAC potentially sanctioning those digital asset exchanges and crypto entities that facilitate sanctions evasion; and
  • expanding information sharing.

His long-term recommendations include, among other things:

  • financial regulators and other law enforcement investing in “blockchain intelligence and analytics capabilities . . . that will enhance their ability to detect, disrupt, and deter illicit uses of digital assets”;
  • improving and promoting interagency coordination through the creation of a Virtual Asset Coordination Center; and
  • greater legal clarity over financial digital assets (e.g., commodities and securities).

Michael Mosier, Former Acting Director, Deputy Director/Digital Innovation Officer at FinCEN, stated that policymakers should focus not only on “chas[ing] bad actors,” but also on preventing exploitation of the vulnerable “from the start.” His recommendations include: (i) expanding the AML and Kleptocracy whistleblower programs to explicitly include “sanctions evasion and any violation of money laundering laws not just BSA violations”; (ii) providing the Kleptocracy Whistleblower Program with “dedicated funds and much higher caps” for those whistleblowers under autocratic regimes; and (iii) reducing global regulatory arbitrage, in part through Congress pressing U.S. FATF representatives to “focus on standardizing licensing across jurisdictions.”

Shane Stansbury, Senior Lecturing Fellow in Law and Robinson Everett Distinguished Fellow in the Center on Law, Ethics, and National Security at Duke University School of Law, detailed the challenges that cryptocurrency presents for law enforcement, including (i) deciphering who is responsible for the criminal activity, (ii) lack of regulation, and (iii) tracing digital assets. He stated that even with the latest blockchain analytics, “investigations can take years to complete.”


While President Biden’s Executive Order on digital assets has been interpreted by some to reflect an open-mindedness on digital assets, recent statements by federal regulators and legislative representatives appears to be moving in a contrary direction – with Senator Brown’s statement being the most aggressively example. (See also Statement of SEC Commissioner LeeDOL Warns Plan Fiduciaries of the Substantial Risks of Cryptocurrency InvestmentsSEC Warns Investors of Risks Associated with Interest-Bearing Crypto Accounts.) Senator Brown echoed a phrase used to describe the Executive Order, saying that the “whole of government” must be put to the service of fighting the the problem of crypto. As to the Senate Banking Committee hearing, the “whole of government” is about amping up regulation.

One potentially interesting exception to the negative take on digital assets is the suggestion in the Executive Order that the Administration is open to considering the introduction of a USD-Central Bank Digital Currency. Perhaps the Administration considers private alternatives to a governmental CBDC as being undesirable and unwelcome competitors. A governmental CBDC, in which all transactions are ultimately routed through the banking system, could afford significant government transparency into spending.  

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Primary Sources

  1. Senate Banking Committee Hearing: Understanding the Role of Digital Assets in Illicit Finance

President Biden Signs Executive Order on Digital Assets

President Joseph R. Biden signed an “Executive Order on Ensuring Responsible Development of Digital Assets,” which outlined a “first ever, whole-of-government approach” to address the risks and potential benefits of digital assets.

In an accompanying Fact Sheet, the White House identified seven key priorities:

  1. The protection of U.S. consumers, investors and businesses. The President directed Treasury to assess and develop “policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, and businesses, while promoting equitable economic growth.”
  2. The protection of U.S. financial stability and mitigation of systemic risk. The President directed the Financial Stability Oversight Council to “identify and mitigate systemic risks posed by digital assets and to develop recommendations to address any regulatory gaps.”
  3. The mitigation of illicit finance and national security risks. The President directed all relevant U.S. Government agencies to give an “unprecedented focus of coordinated action” in order to mitigate all risks associated with digital assets.
  4. The promotion of U.S. leadership in the global financial system. The President directed the Department of Commerce to establish a framework for Government agencies to use to promote U.S. technology and economic competitiveness.
  5. The promotion of equitable access to safe and affordable financial services. The President directed the Secretary of the Treasury to produce a report on digital money and payment systems that would include the “implications for economic growth, financial growth and inclusion,” including as to “the risk of disparate impact to communities who have a long standing history of insufficient access to safe and affordable financial services.”
  6. The support of the U.S. Government to ensure technological advances and the responsible development of digital assets. The President directed government agencies to take definitive steps to develop and implement digital asset systems while prioritizing the data privacy, security and exploitation of investors.
  7. The exploration of a U.S. Central Bank Digital Currency (“CBDC”). The President directed U.S. Government agencies to analyze the “technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests.”

Issuance of the Executive Order was accompanied by supportive statements from numerous senior U.S. government and regulatory officials including Treasury Secretary Janet Yellen; National Economic Council Director Brian Deese and National Security Advisor Jake Sullivan; Senate Banking Committee Chair Sherrod Brown; CFTC Chair Rostin Behnam; and CFPB Director Rohit Chopra.


According to the Executive Order, digital assets have implications for climate change, financial growth, financial inclusion, illicit finance, international engagements, democratic values, global competitiveness, and much more. The Executive Order tells us that the United States must be a “global leader [in the] development and adoption of digital assets and related innovation” but we must also develop very substantial regulatory systems.

In light of the above, the President is requiring the involvement of at least eight different Cabinet members, numerous agencies, and every federal financial regulator, among others, to formulate policies. Given the sheer number of agencies to be involved, the complete diversity of interests to be considered, and the absence of any prioritization of those interests, the Executive Order does not actually provide much in the way of direction.  

While a possible interpretive theory is that this Executive Order will move the United States to develop a more digital-friendly regulatory system, it is equally possible that the Order signals very significant additional regulation. (See, e.g. SEC Commissioner Lee’s recent description of the digital asset industry as one that has grown by “largely def[ying] existing laws and regulations,” suggesting many new regulatory proposals to come.) Further, the Order’s frequent references to climate change may be understood as just “politics as usual,” or as many expect, a precursor to regulation on energy usage for mining.  

The Executive Order does seem to indicate federal movement toward the development of a Central Bank Digital Currency. Section 4 of the Executive Order is devoted to this topic and there are numerous other references to the issue throughout the Order. It would seem that some more specific proposal is likely imminent on this topic. 

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Primary Sources

  1. Executive Order on Ensuring Responsible Development of Digital Assets
  2. FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets
  3. White House Press Brief: Background Press Call by Senior Administration Officials on the President’s New Digital Assets Executive Order
  4. Statement by Secretary of the Treasury Janet L. Yellen on President Biden’s Executive Order on Digital Assets
  5. Statement by NEC Director Brian Deese and National Security Advisor Jake Sullivan on New Digital Assets Executive Order
  6. Brown Applauds President Biden’s Crypto Executive Order
  7. CFTC Public Statement: Statement of Chairman Rostin Behnam on the President’s Executive Order on Digital Assets
  8. CFPB Director Chopra Statement on President Biden’s Digital Assets Executive Order

New Giancarlo Crypto book

J. Christopher Giancarlo – America’s leading authority on Cryptocurrency and the coming digital economy – has just released his new book, CryptoDad: The Fight for the Future of Money (https://www.amzn.com/111985508X/). 

CryptoDad is engaging and destined to have great impact. Even the footnotes are superb! The book adds depth to the many vectors influencing the future of cryptocurrencies and regulation.

Chris Giancarlo is the former Chairman of the CFTC – first nominated as a CFTC Commissioner by President Barack Obama and subsequently nominated as Chair by President Donald Trump.  He is the founder of the new Digital Dollar Project (https://digitaldollarproject.org/), which is committed to advancing the exploration of a United States Central Bank Digital Currency (CBDC).  Over the years, he has done pathbreaking work at the intersection of regulation and financial innovation.

IMF Senior Executives Warn of Financial Stability Risks Posed by “Crypto Boom”

In an International Monetary Fund (“IMF”) blog post, IMF senior executives warned of the risks to financial stability from “cryptoization.”

The executives reported that the value of the crypto asset market increased tenfold from early 2020 to September 2021, even though many of the industry’s intermediary entities (e.g., miners and exchanges) lack “strong operational, governance, and risk practices.” They noted the substantial disruptions experienced by crypto exchanges during times of market turmoil, as well as a number of “high-profile” hacking incidents that resulted in stolen customer funds. While such incidents have not significantly affected financial stability, they argued, the crypto industry’s growth poses significant consumer protection risks.

In addition, the executives noted the money laundering, tax evasion and terrorist financing risks arising from the data gaps associated with the “(pseudo) anonymity” of crypto products. They stated that international regulatory collaboration is critical to crypto market regulation because the majority of crypto exchange transactions take place “through entities that operate primarily in offshore financial centers.” They also expressed concern regarding the risks to implementing monetary policy effectively that may result from the widespread use of cryptocurrencies.

To address issues arising from rapid crypto industry developments, the executives recommended that regulators (i) promptly take action to reduce data gaps, (ii) improve cross-border collaboration to reduce the risk of “regulatory arbitrage” and maximize supervision and enforcement efforts, (iii) implement current international standards that are applicable to crypto assets, including with respect to securities regulation, (iv) assess the benefits of adopting a central bank digital currency and (v) prioritize making cross-border payments more economical, efficient, transparent and widely available through the G20 Cross-Border Payments Roadmap.


For all of the concerns that the U.S. and global regulators have expressed regarding digital assets, there has been disappointingly little focus on distinguishing among the different types of digital assets. A “trust” currency such as Bitcoin raises very different issues from a stablecoin that is fully supported by U.S. dollars in a U.S. bank (assuming, of course, that the dollars are there). These assets are different from digital assets that represent ownership of a company and likewise different from utility tokens. The resort to proclaiming that all of these assets should be regulated as securities has the benefit of simplicity, but it is not correct (at least under U.S. law), and it will make impossible a good number of the legal uses for which digital assets are well suited.

Senate Subcommittee Considers Benefits of a Central Bank Digital Currency

The U.S. Senate Banking Subcommittee on Economic Policy considered testimony on the benefits of issuing a central bank digital currency (“CBDC”).

Subcommittee Chair Senator Elizabeth Warren (D-MA) expressed support for a “well-designed” and “efficiently executed” CBDC because of its potential to “drive out bogus digital private money while improving financial inclusion, efficiency, and the safety of our financial system.” By contrast, Ms. Warren criticized cryptocurrencies, calling them a “fourth-rate alternative to real currency” and asserting that they are:

  • a “lousy” means of transacting, since their value substantially fluctuates as a result of speculative day trading;
  • a poor investment, given that there are currently no consumer protections for crypto investors, and pump-and-dump schemes “have become routine in crypto trading”;
  • substantial facilitators of illegal activity, as the secrecy component of cryptocurrencies has enabled criminals to more easily move money; and
  • “staggering” consumers of energy; she pointed to (i) the amount of energy required in “proof-of-work” mining for new cryptocurrency tokens, and (ii) the fact that Bitcoin-related energy consumption is higher than the yearly energy consumption of the Netherlands.

The Subcommittee heard testimony from the following individuals:

  • Dr. Neha Narula, MIT Digital Currency Initiative Director. Ms. Narula testified that a CBDC is not the only method for addressing the issues associated with underbanking in the traditional financial system, noting that a requirement on banks to provide free, no-minimum accounts to users might address the issue. Considering that the U.S. dollar plays a significant role in the global economy, Ms. Narula cautioned against too quickly adopting a U.S. CBDC without thoroughly determining (i) how it should be accessed and managed, and (ii) what data it makes visible, to whom and under what circumstances.
  • Lev Menand, Columbia Law School Academic Fellow and Lecturer in Law. Mr. Menand described shortcomings of the current U.S. banking system, including: (i) inaccessibility for certain U.S. households, (ii) the high cost of overdraft, deposit and minimum balance fees, (iii) slow processing times for check deposits, wire transfers and credit card payments, and (iv) complexity with respect to differing bank ledgers. Mr. Menand stated that the advent of a CBDC could address these shortcomings by, among other things, (i) expanding mainstream banking eligibility, (ii) decreasing the clearing time for payments, (iii) reducing the fees associated with banking, (iv) enhancing financial stability for businesses and institutions, and (v) decreasing regulatory complexity, considering that many of the regulations promulgated following the 2008 financial crisis were aimed at deposit substitutes.
  • Dr. Darrell Duffie, Stanford University Graduate School of Business Professor of Management and Finance. Mr. Duffie urged the United States to invest in the development of a CBDC, considering the progress that has been made internationally in similar ventures, particularly that of China’s eCNY. Mr. Duffie recommended that the United States (i) “take a leadership position” in international conversations regarding the cross-border use of CBDCs, and (ii) enhance the competitiveness and efficiency of the existing U.S. payment system.
  • J. Christopher Giancarlo, Willkie Farr & Gallagher Senior Counsel. Mr. Giancarlo promoted the Digital Dollar Project’s “champion model” proposal for a CBDC, which would involve the Federal Reserve issuing “Digital Dollars” to regulated banking entities. The former CFTC Commissioner stated that the champion model would enable the continuation of the two-tiered commercial bank and regulated money transmitter model through its deployment and recording of the Digital Dollar transition on a “new transactional infrastructure informed by distributed ledger technology.” Mr. Giancarlo asserted that the Digital Dollar would be “far superior” to Bitcoin with respect to environmental sustainability because it would not have to be mined. Rather, the Digital Dollar would be created by the Federal Reserve cryptographically and distributed electronically. Additionally, Mr. Giancarlo contended that the existence of a Digital Dollar during the earlier stages of the COVID-19 crisis would have provided a means of instant monetary relief to targeted beneficiaries. Mr. Giancarlo also noted that a Digital Dollar could be superior to competing financial instruments of foreign jurisdictions, particularly those with anti-democratic regimes that could use those instruments for surveillance purposes. He explained that it would be “in the best national interest of the United States and . . . in the interest of the world economy” to create a well-designed U.S. CBDC. One challenge, Mr. Giancarlo observed, is the ability of the United States to take a leadership role in the innovation of a CBDC, considering that “this global wave of digital currency innovation is quickly gaining momentum.”


A U.S. dollar CBDC seems inevitable. When Senator Warren and former CFTC Chair Giancarlo agree on something, on anything, it is probably time to act. At what point does continuing to conduct studies create delays that may weaken the competitive position of the dollar in the global economy (or at least fail to capitalize on its strengths)?


  1. U.S. Senate Financial Services Subcommittee Hearing: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  2. Senator Elizabeth Warren Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  3. Neha Narula, MIT Digital Currency Initiative Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  4. Lev Menand, Columbia Law School Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  5. Darrell Duffie, Stanford Business School Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency
  6. J. Christopher Giancarlo, Willkie Farr & Gallagher Testimony: Building a Stronger Financial System – Opportunities of a Central Bank Digital Currency

Facebook CEO Mark Zuckerberg Defends Libra

In testimony before the House Financial Services Committee, Facebook CEO Mark Zuckerberg defended his company’s proposed virtual currency, “Libra.” The Committee also considered several bills related to technology and the financial services industry.

Mr. Zuckerberg emphasized that Facebook would not launch the Libra payment system until it has the support of U.S. regulators. He warned that, while these issues are being “debate[d],” China and other countries are working to launch similar payment systems. He argued that since Libra would be backed by U.S. dollars, it would “extend” U.S. financial leadership. He also addressed several concerns, assuring the legislators that:

– a recent white paper co-authored by Facebook (see previous coverage) was intended to start a dialogue with financial experts and regulators, rather than serve as the “final word”;

– Facebook does not intend to “circumvent” regulators; and

– the intended purpose of Libra is to provide for the transfer of money through an online payment system, not to be a replacement for sovereign currency.

Mr. Zuckerberg also affirmed Facebook’s commitment to preventing discrimination among Facebook’s advertisers. To “combat[]” discrimination, he stated, Facebook has made specific changes to policies in order to prevent discriminatory advertisement targeting. For example, Facebook banned the use of age, gender or zip codes in housing and credit advertisements.

Committee members at the hearing discussed several bills concerning technology and finance related to issues raised by the testimony. These included:

H.R. Draft “Keep Big Tech Out of Finance Act” would prohibit large platform utilities (i.e., Facebook) from (i) being authorized as, or affiliating with, a U.S. financial institution or (ii) operating a digital asset that is intended to be “widely used” as a method for exchange, pursuant to the Federal Reserve.

H.R. Draft “Stablecoins Are Securities Act of 2019” would make clear that a managed stablecoin is subject to the same securities laws’ requirements as other securities that are meant to protect investors, such as disclosure, antifraud and conflicts of interest.

H.R. Draft “Bill to Prohibit the Listing of Certain Securities” would limit issuers of stablecoins access to capital markets prohibiting certain trading on U.S. national securities exchanges.

H.R. Draft “Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data” would create more “transparency” on how consumer data is collected by requiring commercial data operators to disclose (i) the type of user data collected, (ii) an examination of how valuable the user data is and (iii) third-party contracts involving the collection of the data.

H.R. Draft “Diverse Asset Managers Act” would require SEC registrants to (i) consider at least one “diverse” asset manager when seeking asset management services and (ii) report to the SEC the extent to which diverse asset managers are used.


Facebook’s attempted entry into the digital currency market accelerated the inevitable: Congress and the financial regulators are more closely scrutinizing the entry of technology firms into the financial markets. What was not inevitable was Congressional overreaction. While it now seems universal practice to refer to Libra as a Stablecoin, it is not: it is an asset-backed coin (try “ABCoin”). Because the managers of Libra would have had the ability to shift the assets supporting Libra, Libra is not stable. Because of the management of the underlying assets backing the product, Libra almost certainly would have been a “security,” at least in the absence of an exemption, and therefore, it is not necessary to amend the securities laws to that end.

A true Stablecoin, whether backed by the dollar or another currency (or even a pool of currencies) may be issued as a custodial receipt that is not a security, and need not be regulated as a security. It would thus be a shame if such Stablecoins, which may very well provide an attractive alternative to other payment methods, were made impossible because of an overbroad reaction to Libra.

Mr. Zuckerberg is absolutely correct that the United States benefits if a global stablecoin backed by the dollar were to emerge. Facebook’s principal mistake, which arguably reflects a certain lack of sophisticated understanding of financial regulation, was to go forward with a managed ABCoin, rather than a true Stablecoin.

SEC Commissioner Hester Peirce Describes Regulatory Challenges Posed by Cryptocurrency

In remarks at the University of Missouri School of Law, SEC Commissioner Hester Peirce described the difficulty in applying securities laws in general, and the Howey test in particular, to virtual currency and initial coin offerings. Ms. Peirce expressed concern that the SEC’s application of the Howey test will be “overly broad,” stating that token offerings do not always resemble traditional securities offerings. Some cryptocurrency projects may be unable to proceed because they cannot comply with applicable securities regulations, she said. In addition, she encouraged a “delay in drawing clear lines” for the regulation of virtual currency transactions which may provide more freedom for the technology to develop. Ms. Peirce noted that the SEC staff is working on “supplemental guidance” to “help people think through whether their crypto-fundraising efforts fall under the securities laws.”

Ms. Peirce stated that regulators tend to be unenthusiastic about innovation, given that it forces unwanted adjustments on them, as well as the possibility of negative consequences that are difficult to predict. The Commissioner said that the SEC must be open to innovation, given its potential to make our “lives easier, more enjoyable and more productive.” She raised a number of questions as to regulatory changes that might be considered in light of new technology; changing the ways in which firms communicate with their investors, for example, or revising the SEC’s recordkeeping rules.

Ms. Peirce also praised the SEC’s new office of “Small Business Capital Formation” and its first Advocate, Martha Miller.

Lofchie Comment: It’s a great thing when we have regulators who are thoughtful about the exercise of regulatory power, and are willing to weigh in a public forum the benefits and detriments of the use of that power. (I look forward, even if it requires quite a long look forward, to seeing her on late night television talk shows.)

SEC Office of Investor Advocate Reviews FY 2018 Activities

The SEC Office of the Investor Advocate (“OIA”) identified “problematic products or practices” and summarized steps the agency and self-regulatory organizations took to respond to investor concerns during the past year.

In a “Report on Activities,” the OIA Investor Advocate identified “potentially problematic products or practices during Fiscal Year 2018” as reported by the SEC, NASAA, FINRA and the MSRB. These include, among others: (i) initial coin offerings, cryptocurrency and blockchain; (ii) a variety of scams and schemes (related to, e.g., regulator impersonations, Ponzi schemes, natural disasters and investments in “unicorns,” binary options, oil and gas, marijuana, microcap stocks and real estate, among others); (iii) cybersecurity; (iv) investment fees and expenses; (v) suitability of wrap fee programs; (vi) registrations of third-party providers, marketers and gatekeepers; (vii) a variety of risks (e.g., trading on margin, data aggregation, disclosure, and use of credit cards); and (vii) other practices (e.g., pennying and prearranged trading in connection with primary offerings).

In the report, the OIE focused on five key policy areas: public company disclosure, equity market structure, municipal market reform, accounting and auditing, and fiduciary duty.

On some of the broader policy questions, the OIA:

  • approved of the SEC’s current approach to ICOs, including its emphasis on the responsibilities of gatekeepers and others under securities laws;
  • encouraged FINRA to publicize the “data sets, models, and rankings” it uses to evaluate broker risk to help retail investors;
  • urged the SEC to prioritize reforming “outdated transfer agent regulations”; and
  • supported the continuing publication of investor education materials regarding the use of margin debt, although the OIA did not recommend any immediate regulatory changes.

Investor Advocate Rick A. Fleming recounted specific steps the OIA took to address investor concerns. The OIA:

  • requested additional research on the impact of proposed amendments to modernize public company reporting requirements;
  • collaborated with SEC staff and several SROs to “encourage equity market structure reforms designed to enhance market resilience, efficiency, transparency, and fairness”;
  • reviewed rulemaking proposals to reform the regulation of the fixed income markets and municipal securities markets;
  • supported the SEC’s proposed amendments concerning enhanced municipal securities disclosure under Exchange Act Rule 15c2-12;
  • provided feedback in response to MSRB’s draft amendments to rules on primary offering practices;
  • continued monitoring accounting and auditing standard setters:
  • urged the FASB to return to its earlier proposal for harmonizing its definition of materiality with “the courts, the SEC, and the PCAOB” due to investor concerns;
  • encouraged the SEC’s attention to problems regarding non-GAAP financial measures;
  • monitored developments with respect to auditor attention requirements;
  • sought internal and external feedback on accounting and auditing issues;
  • assisted the SEC in researching how proposed Regulation Best Interest would affect investors; and
  • submitted a comment supporting FINRA’s proposal to amend Rule 2111.

Mr. Fleming also stated that budgetary constraints affected some 2018 initiatives, including the agency’s failure to “build out” the Ombudsman role and certain research functions.

SEC Commissioner Peirce Criticizes “Mixed Messages” on Cryptocurrency

SEC Commissioner Hester M. Peirce expressed concern over the United States’ conflicting regulatory approach to cryptocurrency, stating that U.S. regulators are sending “mixed messages” to entrepreneurs. She encouraged the SEC to be less conservative in the approval process for crypto-exchange-traded products.

In a speech before blockchain entrepreneurs in Switzerland, Ms. Peirce stated that the U.S. regulatory environment likely is not giving crypto entrepreneurs a “welcoming impression.” According to Ms. Peirce, the U.S.’s “diffused financial regulatory system” leaves entrepreneurs unclear about which laws apply to their projects. Additionally, Ms. Peirce noted that regulators are not uniform in their approach to cryptocurrencies. For example, while the CFTC has approved crypto-derivatives markets, the SEC has not approved the application of any exchange-traded products based on cryptocurrencies or crypto-derivatives, she said.

In criticizing U.S. regulators’ “mixed messages,” Ms. Peirce also addressed the SEC’s recent hesitancy in approving crypto-exchange-traded products. Ms. Peirce encouraged the SEC to empower investors to make decisions about whether or not to invest in these products. Ms. Peirce urged the SEC to be more transparent, and to better explain the agency’s decision-making process for exchange-traded crypto-products.

Lofchie Comment: No doubt the SEC believes that crypto-investments are very risky and that they are saving investors, particularly retail investors, from making bad investments. If SEC Commissioners believe that the public offering of crypto-securities constitutes an “emergency” that justifies “aggressive” regulatory action, then, at a minimum, while the SEC stalls exchange-traded crypto products, it should seek legislation endorsing such authority. Presumably, if the authority were granted, it would be subject to limits and to procedural conditions, including the transparency sought by Commissioner Pierce. In the absence of such a Congressional grant of authority, the SEC should not seek to exceed its legislated powers. It is worth noting that the advantage of allowing public trading of crypto-securities is that it would facilitate short sellers coming in, which should serve to dampen prices (assuming that the short sellers agree with the SEC’s skepticism on valuations).