The Financial Stability Board (“FSB”) updated its assessment of the risks to financial stability created by crypto-assets. In the new report, the FSB considered three segments of the crypto-asset markets: (i) unbacked crypto-assets such as Bitcoin, (ii) stablecoins and (iii) decentralized finance and other crypto-asset trading platforms.
The FSB reviewed the growth of the crypto-asset market over the past few years and highlighted the public policy concerns that arise from the lack of understanding of crypto-assets among investors and consumers. The FSB notes the expanding links between crypto-assets and traditional financial markets and identified some of the structural vulnerabilities with respect to crypto markets and stablecoins. These vulnerabilities include (i) liquidity mismatches, (ii) credit and operational risks, (iii) susceptibility of stablecoins to sudden and disruptive runs on their reserves, (iv) the increased use of leverage, (v) the concentration of risk on a few large crypto-asset trading platforms and (vi) the opacity and lack of regulatory oversight of the crypto sector.
The FSB identified a number of areas that warrant continued supervision and consideration for purposes of maintaining financial stability. These include:
the increasing involvement of banks in the “crypto-asset eco-system, especially where activities give rise to balance sheet exposure to crypto-assets, not captured by (or not in compliance with) appropriate regulatory treatment”;
loss of confidence in stablecoins and losses in crypto-assets overall, particularly where such assets are tied to leverage, liquidity mismatch or interconnections with traditional financial markets;
regulatory arbitrage created by jurisdictional differences in the regulation of crypto-asset markets; and
the increasing adoption of crypto-assets for payments.
The FSB said it plans to continue monitoring developments and risks in the crypto-asset markets, and exploring the regulatory and supervisory implications of unbacked crypto-assets.
OFAC Issues Chinese Military-Industrial Complex Sanctions Regulations
The final rule will implement Executive Order (“EO”) 13959 (as amended by EO 4032), which relates to securities investments that finance identified Chinese companies connected to China’s military-industrial complex. The new regulations became effective upon their publication in the Federal Register on February 16, 2022.
OFAC also amended the Weapons of Mass Destruction Proliferators Sanctions Regulations. The final rule amends certain requirements related to the provision of legal services to sanctioned persons. Among other things, OFAC removes specific licensing requirements for covered payments, and authorized certain payments from funds originating outside of the United States. These amendments bring the Weapons of Mass Destruction Proliferators Sanctions Regulations in line with similar provisions contained in other sanctions regulations.
Real-Time Reporting Commences for Securities-Based-Swaps
In a public statement, SEC Chair Gary Gensler marked the commencement of real-time reporting for securities-based-swap transactions.
Under Regulation SBSR, each registered security-based swap data repository (or “SBSDR”) is required to begin publicly disseminating security-based swap data, including the key economic terms, price and notional value. Chair Gensler applauded this new requirement as strengthening market transparency. Mr. Gensler stated that “this development strengthens post-trade transparency and efficiency in the security-based swaps market, which historically has operated in the dark.”
Firms Settle SEC Charges Alleging Failure to Meet Form CRS Obligations
Twelve financial firms, six broker-dealers and six investment advisers agreed to pay penalties ranging from $10,000 to $97,523 to settle SEC charges alleging that the firms failed to meet Form CRS obligations. These Orders are the second batch of enforcement actions against brokers and advisers for failing to timely comply with Form CRS obligations.
SEC-registered broker-dealers and investment advisers were required to file the Form CRS with the Commission and post it to their website by June 30, 2020. In addition, all brokers and advisers were required to deliver their Forms CRS to new customers by June 30, 2020, and to existing customers by July 30, 2020. The SEC Orders stated that those 12 firms all failed to file and deliver client or customer relationship summaries to their retail investors by the required deadlines and, in some cases, failed to include all information necessary to satisfy Form CRS requirements. The investment advisers were found to have violated IAA Section 204 (“Reports by IAs”) and Advisers Act Rule 204-1 (“Amendments to Form ADV”) and Rule 204-5 (“Delivery of Form CRS”), and that the broker-dealers were found to have violated SEA Section 17(a)(1) (“Records and Reports”) and Exchange Act Rule 17a-14 (“Form CRS, for preparation, filing and delivery of Form CRS”).
In addition to agreeing to pay civil penalties, the firms agreed (i) to be censured and (ii) to cease and desist from violating the charged provisions.
© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 48
Read More: Cadwalader Cabinet | What's in Your Wallet?