1. SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX / SEC

On December 13, 2022, The Securities and Exchange Commission (SEC) charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder. Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

According to the SEC’s complaint, since at least May 2019, FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 U.S.-based investors. In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets. The complaint alleges that, in reality, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens. The complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

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 2. Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Payward, Inc. (“Kraken”) / OFAC

On November 28, 2022, The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement with Payward, Inc. d/b/a Kraken (“Kraken”), a Delaware-incorporated virtual currency exchange with operations in the United States and elsewhere.  Kraken agreed to remit $362,158.70 to settle its potential civil liability for apparent violations of sanctions against Iran.  As part of its settlement with OFAC, Kraken also has agreed to invest an additional $100,000 in certain sanctions compliance controls.  Due to Kraken’s failure to timely implement appropriate geolocation tools, including an automated internet protocol (I.P.) address blocking system, Kraken exported services to users who appeared to be in Iran when they engaged in virtual currency transactions on Kraken’s platform.

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 3. SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments / SEC

On November 28, 2022, The Securities and Exchange Commission (“SEC”) charged Goldman Sachs Asset Management, L.P. (GSAM) for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance (ESG) investments. To settle the charges, GSAM agreed to pay a $4 million penalty.

The SEC’s order finds that, from April 2017 until February 2020, GSAM had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities. From April 2017 until June 2018, the company failed to have any written policies and procedures for ESG research in one product, and once policies and procedures were established, it failed to follow them consistently prior to February 2020. For example, the order finds that GSAM’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection; however, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds’ board of trustees.

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4.  New Treasury Report Shows Fintech Industry Requires Additional Oversight to Close Gaps, Prevent Abuses and Protect Consumers / OFAC

The U.S. Department of the Treasury, in consultation with the White House Competition Council, has released a report entitled “Assessing Impacts of New Entrant Non-bank Firms on Competition in Consumer Finance Markets.”  The report finds that, while concentration among federally insured banks is growing, new entrant non-bank firms, in particular “fintech” firms, are adding significantly to the number of firms and business models competing in core consumer finance markets and appear to be contributing to competitive pressure. While these fintech firms are enabling new capabilities, they are also creating new risks to consumer protection and market integrity, such as risks related to data privacy and regulatory arbitrage. To protect consumers in these rapidly changing markets and enable sustainable competition, among other recommendations, the report calls for enhanced oversight of the consumer financial activities of non-bank firms.

The report recommends a series of steps to encourage fair and responsible competition that benefits consumers and their financial well-being:
•    To address market integrity and safety and soundness concerns, regulators should provide a clear and consistently applied supervisory framework for bank-fintech relationships. A bank-fintech relationship that delivers consumer financial services provided by an insured depository institution (IDI) must operate in compliance with the laws, regulations, and risk management standards applicable to the IDI;
•    To protect consumers, regulators should robustly supervise bank-fintech lending relationships for compliance with consumer protection laws and their impact on consumers’ financial well-being;
•    To encourage consumer-beneficial innovation, regulators should support innovations in consumer credit underwriting designed to increase credit visibility, reduce bias, and prudently expand credit to underserved consumers.

For more information & the full report click here 

5.  Developing the Implementation Approach for the Cross-Border Payments Targets: Final report / FSB

The G20 made enhancing cross-border payments a priority during the Saudi Arabian Presidency in 2020. The targets define the Roadmap’s ambition and create accountability. In November 2020, the G20 endorsed the roadmap for enhancing cross-border payments, which the FSB developed in coordination with the Committee on Payments and Market Infrastructures (CPMI) and other international organizations and standard-setting bodies. A foundational step in the Roadmap was the setting of quantitative global targets for addressing the four the challenges faced by cross-border payments: cost, speed, transparency and access. To create accountability and maintain momentum, the FSB committed to develop a framework for monitoring progress toward the targets using key performance indicators (KPIs) against which future progress would be measured.

The report provides an update on the FSB’s development of this framework, initially set out in an interim report, published in July 2022. Developing a monitoring approach in line with the principles has been challenging. The cross-border payments ecosystem is complex, multi-layered and made up of a wide variety of end-users, payment service providers, and infrastructures, all of which leads to fragmented and heterogeneous potential data sources. As such, comprehensive data sources do not already exist that would support the calculation of global KPIs that are representative of the overall market and that also provide regional or corridor-level granularit.

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6.    MAS Launches Expanded Initiative to Advance Cross-Border Connectivity in Wholesale CBDCs  / MAS

On November 3, 2022, The Monetary Authority of Singapore (MAS) launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (F.X.) settlement using wholesale central bank digital currency (CBDC). 

Ubin+ will focus on the following:
•    Study business models and governance structures for cross-border foreign exchange (F.X.) settlement, where atomic settlement, based on digital currencies, can improve efficiencies and reduce settlement risks compared to existing payment and settlement rails.
•    Develop technical standards and infrastructure to support cross-border connectivity, interoperability and atomic settlement of currency transactions across platforms using distributed ledger technology (DLT), and non-DLT based financial market infrastructures.
•    Establish policy guidelines for the connectivity of digital currency infrastructure across borders, for better access and participation. This includes policy relating to governance, access and compliance issues for such linkages.
Ubin+ will strengthen Singapore’s capabilities to use digital currency-based infrastructure for cross-border transactions. The initiative builds on the foundation started with Project Ubin (2016-2020) and learnings from MAS’ participation in Project Dunbar.

For more information click here

The Financial Regulation practice at Shibolet accompanies and assists many enterprises in the world of Fintech and Finances in regulatory and operational processes in Israel and around the world

Financial Regulation Practice,
Shibolet & Co. 

This update is provided as general information only and may not be relied upon in any individual case without additional legal advice.

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