Category: finance

Crossing the Wires of Energy and Cryptocurrency Policy: U.S. Congress Investigates the Environmental Impact of Crypto Mining

The rapid adoption of cryptocurrency and other popular blockchain applications has captured our global economy’s attention. Even as the value of cryptocurrencies slid from their all-time highs, the promise of these digital assets and the infrastructure being developed to support them has been transformative.

As with most emerging technologies, policymakers are still exploring the best approaches to regulating these new digital assets and business models. Questions about consumer protection, security, and the applicability of existing laws are to be expected; however, the environmental impact of these energy-intensive business practices has prompted considerable study and regulatory activity across the globe, including attention in the United States.

To understand the increasing energy demands associated with major cryptocurrencies – predominantly, Bitcoin and Ethereum – it is important to understand how many cryptocurrencies are generated in the first instance. Many countries, including China, have banned cryptocurrency mining, and, with the United States becoming the largest source of cryptocurrency mining activity, Congress began active investigations and hearings into the energy demands and environmental impacts in January 2022.

Proof of What? Why certain cryptocurrencies create high energy demands. 

Not all cryptocurrencies – or blockchain platforms, for that matter – are created equal in their energy demands. The goal of most major cryptocurrency platforms is to create a decentralized, distributed ledger, meaning that there is no one authority to verify the authenticity of transactions and ensure that assets are not spent twice, for example. There needs to be a trustworthy mechanism – a consensus system – to verify new transactions, add those transactions to the blockchain, and to confirm the creation of new tokens. Bitcoin alone has well over 200,000 transactions per day,[1] so it should not come as a surprise that these platforms take an enormous amount of processing power to maintain.

There are currently two primary ways that network participants lend their processing power, which are framing part of the modern energy policy debates around cryptocurrency. The first form is “proof of work,” which is the original method that Bitcoin and Ethereum 1.0 employ. When a group of transactions (a block) needs to be verified, all of the “mining” computers race to solve a complex math puzzle, and whoever wins gets to add the block to the chain and is rewarded in coins. The competitive nature of proof of work consensus systems has led to substantial increases in computing power provided by institutional cryptocurrency mining operations and, with that, higher energy demands.

The second form is “proof of stake,” which newer platforms like Cardano and ETH2 use, promises to require considerably less energy to operate. With this method, validators “stake” their currency for a chance at verifying new transactions and updating the blockchain. This method rewards long-term investment in a particular blockchain, rather than raw computing power. A validator is picked based on how much currency they have staked and how long it has been staked for. Once the block is verified, other validators must review and accept the data before it’s added to the blockchain. Then, everyone who participated in validating the block is rewarded with coins.

While proof of stake consensus systems are becoming more common, the dominant – and most valuable – cryptocurrencies are still generated through energy-intensive proof of work systems.

Turning out the lights on Crypto: China bans domestic mining and other countries follow.

China has been incredibly influential in the modern cryptocurrency debate around energy use. For several years, China was the cryptocurrency mining capital of the world, providing an average of two-thirds of the world’s processing power dedicated to Bitcoin mining through early 2021.[2] In June 2021, however, China banned all domestic cryptocurrency mining operations, citing the environmental impacts of Bitcoin mining energy demands among its concerns.[3]

As Bitcoin miners fled China, many relocated to neighboring countries, such as Kazakhstan, and the United States became the largest source of mining activity – an estimated 35.1% of global mining power.[4] The surge in Bitcoin mining activity in Kazakhstan has not been without its controversy. Many Kazakhstan-based crypto mining operations are powered by coal plants, and there has been considerable unrest sparked by rising fuel costs.[5]

With some countries experiencing negative impacts from cryptocurrency mining operations, several countries have followed China’s lead in banning cryptocurrencies. According to a 2021 report prepared by the Law Library of Congress, at least eight other countries – Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, and Bangladesh – have banned cryptocurrencies.[6] Many other countries have impliedly banned cryptocurrency or cryptocurrency exchanges, as well.[7]

U.S. Congress shines its spotlight on the energy demands of cryptocurrency mining.

Now home to over a third of the global computing power dedicated to mining bitcoin, the United States has turned its attention to domestic miners and their impacts on the environment and local economies.

In June 2021, U.S. policymakers were still predominantly focused on the consumer protection and security concerns raised by digital currencies; however, Senator Elizabeth Warren alluded to her growing concerns about the environmental costs of, particularly, proof of work mining.[8] On December 2, 2021, Senator Warren sent a letter requesting information on the environmental footprint of New York-based Bitcoin miner Greenridge Generation.[9] The letter observed that, “[g]iven the extraordinarily high energy usage and carbon emissions associated with Bitcoin mining, mining operations at Greenridge and other plants raise concerns about their impacts on the global environment, on local ecosystems, and on consumer electricity costs.”[10] Senator Warren’s concerns sparked several rounds of congressional oversight and inquiries into the environmental impacts of, particularly, proof of work cryptocurrencies, over the past month.

Committee Hearing on “Cleaning up Cryptocurrency” begins oversight and investigation into the energy impacts of blockchains.

On January 20, 2022, the U.S. House of Representatives Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations held a hearing, where the externalities of cryptocurrency mining were the focus of the agenda. An early indicator of the Subcommittee’s views on the issue, the title for the hearing was “Cleaning up Cryptocurrency: The Energy Impacts of Blockchains.”[11]

The hearing focused heavily on the amount of energy used to power proof of work cryptocurrency mining. Bitcoin Mining has been widely criticized for the massive amounts of power it consumes – globally, more than 204 terawatt-hours as of January 2022. Although some operations are attempting to utilize renewable energy, the machines executing these algorithms consume enormous amounts of energy primarily sourced from fossil fuels.

The five industry experts testifying before the House Energy and Commerce Oversight Subcommittee had competing views on how regulators should address the energy consumption of cryptocurrencies—with some experts opining that the computational demands were a “feature, not a bug.”[12] Two of the experts – Brian Brooks, CEO of Bitfury Group, and Professor Ari Juels, Faculty member at Cornell Tech – debated the technical merits between proof of work and proof of stake systems, described earlier in this article.[13] Similarly, Gregory Zerzan, an attorney with Jordan Ramis, P.C. who previously held senior positions in the United States Government, encouraged the Subcommittee not to lose sight of the fact that cryptocurrencies are but “one aspect of a larger innovation, blockchain.”[14] Although the viewpoints of the experts varied considerably, there was a clear consensus among the experts: energy-efficient alternatives should guide the path forward.

John Belizaire, the founder and CEO of Soluna Computing, said that cryptocurrency mining could further accelerate the transition to renewable energy sources from an energy perspective.[15] Renewables currently suffer from one significant deficiency – intermittency. An example of this challenge is the so-called “duck curve,” which illustrates major differences between the demands for electricity as compared to the amount of renewable energy sources available throughout the day. For example, when the sun is shining, there is significantly more power than consumers need for a few hours per day; however, solar energy does not provide nearly enough energy when demand spikes in the late afternoon and evening.[16] While there has been progress in the development of lithium battery storage – a critical piece in solving the issues mentioned above– for the time being, deploying these batteries at scale is still too expensive.

In addressing gaps in battery storage, Belizaire testified that “Computing is a better battery.”[17] Computing, he states, “is an immediately deployable solution that can allow renewables to scale to their full potential today.”[18] Belizaire highlighted that, unlike other industrial consumers, cryptocurrency miners can turn their systems off when necessary, giving miners the ability to absorb excess energy from a given area’s electrical grid rather than straining it. This ability to start and stop or pause computing processes can increase grid resilience by absorbing excess energy from renewable resources that provide more power than the grid can handle. Brooks shared similar hopes for how Bitcoin mining could help stabilize electric grids, support the viability of renewable energy projects, and drive innovation in computing and cooling technology.[19]

Steve Wright, the former general manager of the Chelan County Public Utility District in Washington, testified that “the portability of cryptocurrency operations could be a benefit in terms of locating operations based on underutilized transmission and distribution capacity availability.”[20] Still, with ambitious goals to expand transmission and increase and integrate large amounts of carbon-free emitting generation, Wright testified that “substantial collaboration and coordination will be necessary to avoid cryptocurrency mining exacerbating an already very difficult problem.”[21]

Congressional Democrats continue the investigation into domestic mining operations and the Cryptomining Industry response.

The January 20, 2022 Hearing made clear that policymakers are doing their due diligence into the impact that the United States could experience as the number of domestic cryptocurrency mining operations increase. Commentary from the Hearing forecasted that scrutinizing the sources and costs of energy used in cryptocurrency mining would be a priority for Democrat members of Congress.

To that end, on January 27, 2022, eight Democrat members of Congress led by Senator Elizabeth Warren “sent letters to six cryptomining companies raising concerns over their extraordinarily high energy uses.”[22] Citing the same concerns raised in her December 2021 letter to Greenridge, Senator Warren and her colleagues observed that “Bitcoin mining’s power consumption has more than tripled from 2019 to 2021, rivaling the energy consumption of Washington state, and of entire countries like Denmark, Chile, and Argentina.”[23] To assist Congress in its investigation, Riot Blockchain, Marathon Digital Holdings, Stronghold Digital Mining, Bitdeer, Bitfury Group, and Bit Digital were all asked for information related to their mining operations, energy consumption, possible impacts on the climate and local environments, and the impact of electricity costs for American consumers.[24] Senator Warren and her colleagues requested written responses by no later than February 10, 2022, so this increased oversight will likely continue.

Even with increased oversight, current trends in crypto mining and renewables could soon make such inquiries a moot point. Amid the heated debate over the environmental impact of cryptocurrencies, miners are increasingly committed to changing the negative reputation that it has built over the years – especially as these operations move to the United States. In November of last year, Houston-based tech company Lancium announced that it raised $150 million to build bitcoin mines across Texas that will run on renewable energy.[25] In 2022, the company plans to launch over 2,000 megawatts of capacity across its multiple sites.[26] Bitcoin mining company Argo Blockchain, a company listed on the London Stock Exchange, secured a $25 million loan to fund its “green” mining operation.[27] The 320-acre site will only use renewable energy, the majority being hydroelectric.[28] This deal is set to transform Argo’s mining capacity and is expected to be completed in the first half of 2022.[29]

Capital Markets also appear to have a growing appetite for the development of green crypto mining. In April of last year, Gryphon Digital Mining raised $14 Million Series A to launch a zero-carbon footprint Bitcoin mining operation powered exclusively by renewables.[30] In a raise that closed in just over two weeks, institutional investors – who were significantly oversubscribed – accounted for over thirty percent of the round.[31]

As congressional, social, and economic pressures grow, it is evident that there is going to be a big focus on the sustainability of Bitcoin mining. As such, we may very well see announcements, like the deals mentioned above, well into 2022 and beyond.

FOOTNOTES

[1] Bitcoin Transactions Per Day, YCharts, https://ycharts.com/indicators/bitcoin_transactions_per_day (last visited Jan. 29, 2022).

[2] Bitcoin Mining Map, Cambridge Centre for Alternative Finance, https://ccaf.io/cbeci/mining_map (last visited Jan. 29, 2022) [“Bitcoin Mining Map”].

[3] Samuel Shen & Andrew Galbraith, China’s ban forces some bitcoin miners to flee overseas, others sell out, Reuters, June 25, 2021, https://www.reuters.com/technology/chinas-ban-forces-some-bitcoin-miners-flee-overseas-others-sell-out-2021-06-25/ (last visited Jan. 29, 2022).

[4] See Bitcoin Mining Map.

[5] Tom Wilson, Bitcoin network power slumps as Kazakhstan crackdown hits crypto miners, Reuters, Jan. 7, 2022, https://www.reuters.com/markets/europe/bitcoin-network-power-slumps-kazakhstan-crackdown-hits-crypto-miners-2022-01-06/ (last visited Jan. 29, 2022).

[6] Regulation of Cryptocurrency Around the World: November 2021 Update, Global Legal Research Directorate, The Law Library of Congress, available at https://tile.loc.gov/storage-services/service/ll/llglrd/2021687419/2021687419.pdf (last visited Jan. 29, 2022).

[7] Id.

[8] Press Release, United States Senate Committee on Banking, Housing, and Urban Affairs, At Hearing, Warren Delivers Remarks on Digital Currencies (June 9, 2021), https://www.banking.senate.gov/newsroom/majority/at-hearing-warren-delivers-remarks-on-digital-currency (last visited Jan. 29, 2022).

[9] Elizabeth Warren, Letter to Greenridge Generation on Crypto, Dec. 2, 2021, available at https://www.warren.senate.gov/imo/media/doc/2021.12.2.%20Letter%20to%20Greenidge%20Generation%20on%20Crypto.pdf (last visited Jan. 29, 2022).

[10] Id. at p.2.

[11] Hearing Notice, United States House Committee on Energy & Commerce, Hearing on “Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains” (Jan. 20, 2022), https://energycommerce.house.gov/committee-activity/hearings/hearing-on-cleaning-up-cryptocurrency-the-energy-impacts-of-blockchains (last visited Jan. 29, 2022) [the “January 20 Hearing”].

[12] January 20 Hearing Testimony. See also Statement of Brian P. Brooks before House Committee (Jan. 20, 2022), available at https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Witness%20Testimony_Brooks_OI_2022.01.20_0.pdf  (last visited Jan. 29, 2022) [the “Brooks Statement”].

[13] See, e.g., Brooks Statement; Statement of Prof. Ari Juels before House Committee (Jan. 20, 2022), available at https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Witness%20Testimony_Juels_OI_2022.01.20.pdf (last visited Jan. 29, 2022) [the “Juels Statement”].

[14] Statement of Gregory Zerzan before House Committee (Jan. 20, 2022), available at https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Witness%20Testimony_Zerzan_OI_2022.01.20.pdf (last visited Jan. 29, 2022).

[15] See, e.g., Statement of John Belizaire before House Committee (Jan. 20, 2022), available at https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Witness%20Testimony_Belizaire_OI_2022.01.20_0.pdf (last visited Jan. 29, 2022) [the “Belizaire Statement”].

[16] Office of Energy Efficiency & Renewable Energy, Confronting the Duck Curve: How to Address Over-Generation of Solar Energy (October 12, 2017)

https://www.energy.gov/eere/articles/confronting-duck-curve-how-address-over-generation-solar-energy (last visited Jan. 29, 2022).

[17] See, e.g., Belizaire Statement, p.4.

[18] Id.

[19] See generally Brooks Statement, pp.8-10.

[20] See, e.g., Statement of Steve Wright before House Committee, p.5 (January 20, 2022) available at https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/Witness%20Testimony_Wright_OI_2022.01.20.pdf (last visited Jan. 29, 2022) [the “Wright Statement”].

[21] Id. p.9.

[22] Press Release, Office of Senator Elizabeth Warren, Warren, Colleagues Press Six Cryptomining Companies on Extraordinarily High Energy Use and Climate Impacts (Jan. 27, 2022), available at https://www.warren.senate.gov/newsroom/press-releases/warren-colleagues-press-six-cryptomining-companies-on-extraordinarily-high-energy-use-and-climate-impacts (last visited Jan. 29, 2022).

[23] Id.

[24] Id.

[25] MacKenzie Sigalos, This Houston Tech Company wants to build renewable energy-run bitcoin mines across Texas CNBC (November 23, 2021), https://www.cnbc.com/2021/11/23/lancium-raises-150-million-for-renewable-run-bitcoin-mines-in-texas.html (last visited Jan 31, 2022).

[26] Id.

[27] Namcios Bitcoin Magazine, Argo blockchain buys Hydro data centers to realize Green Bitcoin Mining Vision, (May 13, 2021), https://www.nasdaq.com/articles/argo-blockchain-buys-hydro-data-centers-to-realize-green-bitcoin-mining-vision-2021-05-13 (last visited Jan 31, 2022).

[28] Id.

[29] Id.

[30] GlobeNewswire News Room, Gryphon Digital Mining raises $14 million to launch bitcoin mining operation with zero carbon footprint, (April 13, 2021), https://www.globenewswire.com/newsrelease/2021/04/13/2209346/0/en/Gryphon-Digital-Mining-Raises-14-Million-to-Launch-Bitcoin-Mining-Operation-with-Zero-Carbon-Footprint.html (last visited Jan 31, 2022).

[31] Id.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP
For more articles about cryptocurrency, visit the NLR Financial Securities & Banking section.

Filing Tax Returns and Making Tax Payments: Best Practices During the Pandemic and Beyond

With staffing shortages and service center closures, it should come as no surprise that the IRS has faced a number of challenges during the pandemic. A couple of the biggest challenges have been in the opening and processing of taxpayer correspondence and in the processing of tax returns. As National Taxpayer Advocate, Erin Collins, stated in her Annual Report to Congress, “Paper is the IRS’s Kryptonite, and the IRS is buried in it.”

Going into 2022, the IRS has a significant backlog of unprocessed taxpayer correspondence and unprocessed returns. The estimates are staggering.

  • Five million pieces of unprocessed taxpayer correspondence
  • Over 11 million unprocessed tax returns, including:
    • Six million individual income tax returns
    • 2.3 million amended individual tax returns
    • 2.8 million business returns (income tax and employment tax returns)

The 2022 tax filing season, which opened on Thursday, January 24 for individual income tax returns, has the potential to create even more challenges for the IRS. Below is a list of best practices taxpayers can follow to ensure timely processing of their payments, tax returns, and claims for refund. These practices apply to individuals and required filing for businesses.

  • File returns and make payments electronically.
  • If you must file a paper return or mail in a payment to the IRS, send the return or payment to the proper address via USPS Certified Mail, Return Receipt Requested. Using this method will assist in resolving timely filing and/or timely payment penalties assessed by the IRS.
  • Properly notate your tax payment and include the form number, tax period and your social security number or employer identification number.
  • Respond to notices from the IRS in a timely manner.

In addition to the above, the IRS has offered a few filing tips for individuals.

  • Fastest refunds by e-filing, avoiding paper returns: Filing electronically with direct deposit and avoiding a paper tax return is more important than ever to avoid refund delays. If you need a tax refund quickly, do not file on paper – use software, a trusted tax professional or IRS Free File.
  • Filing 2021 tax return with 2020 tax return still in process: For those whose tax returns from 2020 have not yet been processed, 2021 tax returns can still be filed. For those in this group filing electronically, here’s a critical point: taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return at time of filing. For those waiting on their 2020 tax return to be processed, make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return. Visit Validating Your Electronically Filed Tax Return for more details.

More individual filing tips from the IRS can be found here.

If you have unpaid taxes or unfiled returns, you need an experienced tax attorney to represent you in your dealings with the IRS or the Department of Justice. An accountant or enrolled agent is not protected by the attorney-client privilege.

© 2022 Varnum LLP
For more articles about tax returns, visit the NLR Tax type of law section.

District Court Declines to Dismiss 401(k) Fee Litigation Case in First Decision Post-Hughes

In the first decision since the Supreme Court’s ruling in Hughes v. Northwestern Univ., No. 19-1401, 595 U.S. ___ (U.S. Jan. 24, 2022) (discussed further here), a Georgia federal district court held in favor of plaintiffs and declined to dismiss allegations that defendant’s 401(k) plan included costly and underperforming funds and charged excessive recordkeeping fees. Specifically, plaintiffs alleged that defendants breached ERISA’s fiduciary duty of prudence by: (1) offering retail share class mutual funds despite the availability of identical lower-cost institutional share classes of these same funds; (2) including actively managed mutual funds which were more expensive than available passively managed funds; (3) selecting and maintaining underperforming funds; and (4) overpaying for recordkeeping services.

In declining to dismiss plaintiffs’ investment management fee claims, the district court relied heavily on Hughes. The court expressed its view that Hughes “suggested” that a defined contribution plan participant may state a prudence claim by merely alleging that the plan offered higher priced retail class mutual funds instead of available identical lower-cost institutional class funds. The district court also rejected defendant’s argument that plaintiffs’ claims should be dismissed in part because the plan offered a variety of investment options that participants could select, including lower-cost passive investment options. The district court explained that Hughes rejected this exact argument in holding that a fiduciary’s decisions are not insulated merely by giving participants choice over their investments and that fiduciaries have a continuing duty to monitor plan investments.

The court declined to dismiss plaintiffs’ recordkeeping claims because plaintiffs plausibly alleged that the plan paid nearly double the fees charged by similarly sized plans and that defendant failed to monitor those costs. In regards to plaintiffs’ underperformance claims, the court held that the existence and extent of the alleged underperformance was better left for summary judgment given the parties’ differing views on the issue.

Proskauer’s Perspective

While plaintiffs seemingly scored a victory in the first decision since Hughes, the decision does not indicate that this will (or should be) the trend. First, the district court issued its decision one day after Hughes was decided without the benefit of additional briefing, which would have likely included briefing on the Supreme Court’s direction that district courts give “due regard” to the reasons why a fiduciary made the challenged decisions. Second, the district court appears to have, at a minimum, over-emphasized the Supreme Court’s holding as to the plausibility of mutual fund retail share class claims; the Supreme Court did not hold directly or in dicta that a plaintiff may survive dismissal merely by alleging the availability of identical lower-cost mutual fund share classes.

The case is Goodman v. Columbus Reg’l Healthcare Sys., 2022 U.S. Dist. LEXIS 13489 (M.D. Ga. Jan. 25, 2022).

© 2022 Proskauer Rose LLP.
For more articles about 401(k) plans, visit the NLR Labor & Employment section.

CFPB to Examine College Lending Practices

On January 20, the CFPB announced that it would begin examining the operations of post-secondary schools that offer private loans directly to students and update its exam procedures to include a new section on institutional student loans.  The CFPB highlights its concern about the student borrower experience in light of alleged past abuses at schools that were previously sued by the CFPB for unfair and abusive practices in connection with their in-house private loan programs.

When examining institutions offering private education loans, in addition to looking at general lending issues, CFPB examiners will be looking at the following areas:

  • Placing enrollment or attendance restrictions on students with loan delinquencies;
  • Withholding transcripts;
  • Accelerating payments;
  • Failing to issue refunds; and
  • Maintaining improper lending relationships

This announcement was accompanied by a brief remark from CFPB Director Chopra:  “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future.  It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

Putting it Into Practice:  The CFPB’s concern with the experience of student borrowers is in line with a number of enforcement actions pursued by the Bureau against post-secondary schools.  The education loan exam procedures manual is intended for use by Bureau examiners, and is available as a resource to those subject to its exams. These procedures will be incorporated into the Bureau’s general supervision and examination manual.

Article By Moorari Shah, A.J. S. Dhaliwal, and Pouneh Almasi of Sheppard, Mullin, Richter & Hampton LLP

For more financial legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

SEC Rejects Listing of Two Bitcoin ETFs

The SEC rejected two proposals to list and trade shares in two Bitcoin exchange-traded funds (“ETFs”).

The SEC rejected a proposal from NYSE Arca, Inc. (“Arca”) to list and trade shares of the Valkyrie Bitcoin Fund. The SEC also rejected a proposal from CBOE BZX Exchange, Inc. (“BZX”) to list and trade shares of the Kryptoin Bitcoin ETF Trust.

The SEC assessed whether the exchanges (i) had a comprehensive surveillance-sharing agreement with a significant, regulated market, and (ii) could effectively prevent fraudulent and manipulative activity. In the rejected proposals, the SEC noted its concerns over the abilities of the exchanges to adequately meet the requirements under SEA Section 6(b)(5) (“Determination by Commission Requisite to Registration of Applicant as a National Securities Exchange”) in protecting investors and the public interest by preventing fraudulent and manipulative practices.

The SEC rejected Arca’s argument that (i) liquidity, (ii) price arbitrage, and (iii) frameworks to value assets would be sufficient to mitigate potential manipulation.

Similarly, the SEC rejected BZX’s proposal, concluding “that BZX has not established that it has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin,” and “that BZX has not established that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement.”

As a result, the SEC found that both exchanges had failed to prove that they could meet their burdens under SEA Section 6(b)(5).

© Copyright 2021 Cadwalader, Wickersham & Taft LLP
For more articles on cryptocurrency exchanges, visit the NLR Financial Securities & Banking.

CFPB Solicits Whistleblowers to Strengthen Enforcement of Consumer Financial Protection Laws

In its revamped whistleblower webpage, the CFPB is enlisting the help of whistleblowers to provide tips about the following issues:

  • Any discrimination related to consumer financial products or services or small businesses
  • Any use of artificial intelligence/machine learning models that is based on flawed or incomplete data sets, that uses proxies for race, gender, or other group characteristics, or that impacts particular groups or classes of people more than others;
  • Misleading or deceptive advertising of consumer financial products or services, including mortgages
  • Failure to collect, maintain, and report accurate mortgage loan application and origination data
  • Failure to provide or use accurate consumer reporting information
  • Failure to review mortgage borrowers’ loss mitigation applications in a timely manner
  • Any unfair, deceptive, or abusive act or practice with respect to any consumer financial product or service.

The CFPB has also announced that it seeks tips to help it combat the role of Artificial Intelligence in enabling intentional and unintentional discrimination in decision-making systems.  For example, a recent study of algorithmic mortgage underwriting revealed that Black and Hispanic families have been more likely to be denied a mortgage compared to similarly situated white families.

Proposed CFPB Whistleblower Reward Program

Currently, there is no whistleblower reward program at the CFPB and sanctions collected in CFPB enforcement actions do not qualify for SEC related action whistleblower awards.  In light of the success of the SEC’s Whistleblower Program as an effective tool to protect investors and strengthen capital markets, the CFPB requested that Congress establish a rewards program to strengthen the CFPB’s enforcement of consumer financial protection laws.

In September 2021, Senator Catherine Cortez Masto introduced the Financial Compensation for Consumer Financial Protection Bureau Whistleblowers Act (S. 2775), which would establish a whistleblowers rewards program at the CFPB similar to the SEC Whistleblower Program.  It would authorize the CFPB to reward whistleblowers between 10% to 30% of collected monetary sanctions in a successful enforcement action where the penalty exceeds $1 million.  And in cases involving monetary penalties of less than $1 million, the CFPB would be able to award any single whistleblower 10% of the amount collected or $50,000, whichever is greater.

The Financial Compensation for CFPB Whistleblowers Act is cosponsored by Chairman of the Senate Banking, Housing, and Urban Affairs Committee Senator Sherrod Brown and Senators Dick Durbin, Elizabeth Warren, Jeff Merkley, Richard Blumenthal, and Tina Smith. In the House, Representative Al Green introduced a companion bill (H.R. 5484).

A whistleblower reward program at the CFPB could significantly augment enforcement of consumer financial protection laws, including laws barring unfair, deceptive, or abusive acts and practices.  The CFPB has authority over a broad array of consumer financial products and services, including mortgages, deposit taking, credit cards, loan servicing, check guaranteeing, collection of consumer report data, debt collection associated with consumer financial products and services, real estate settlement, money transmitting, and financial data processing.  In addition, the CFPB is the primary consumer compliance supervisory, enforcement, and rulemaking authority over depository institutions with more than $10 billion in assets.

Hopefully, Congress will act swiftly to enact the Financial Compensation for CFPB Whistleblowers Act.

Protection for CFPB Whistleblowers

Although Congress did not establish a whistleblower reward program when it created the CFPB, it included a strong whistleblower protection provision in the Consumer Financial Protection Act of 2010 (CFPA).  The anti-retaliation provision of the Consumer Financial Protection Act provides a cause of action for corporate whistleblowers who suffer retaliation for raising concerns about potential violations of rules or regulations of the CFPC.

Workers Protected by the CFPA Anti-Retaliation Law

The term “covered employee” means “any individual performing tasks related to the offering or provision of a consumer financial product or service.”  The CFPA defines a “consumer financial product or service” to include “a wide variety of financial products or services offered or provided for use by consumers primarily for personal, family, or household purposes, and certain financial products or services that are delivered, offered, or provided in connection with a consumer financial product or service . . . Examples of these include . .. residential mortgage origination, lending, brokerage and servicing, and related products and services such as mortgage loan modification and foreclosure relief; student loans; payday loans; and other financial services such as debt collection, credit reporting, credit cards and related activities, money transmitting, check cashing and related activities, prepaid cards, and debt relief services.”

Scope of Protected Whistleblowing About Consumer Financial Protection Violations

The CFPA protects disclosures made to an employer, to the CFPB or any State, local, or Federal, government authority or law enforcement agency concerning any act or omission that the employee reasonably believes to be a violation of any CFPB regulation or any other consumer financial protection law that the Bureau enforces. This includes several federal laws regulating “unfair, deceptive, or abusive practices . . . related to the provision of consumer financial products or services.”

Some of the matters the CFPB regulates include:

  • kickbacks paid to mortgage issuers or insurers;
  • deceptive advertising;
  • discriminatory lending practices, including a violation of the Equal Credit Opportunity Act (“ECOA”);
  • excessive fees;
  • any false, deceptive, or misleading representation or means in connection with the collection of any debt; and
  • debt collection activities that violate the Fair Debt Collection Practices Act (FDCPA).

Some of the consumer financial protection laws that the CFPB enforces include:

  • Real Estate Settlement Procedures Act;
  • Home Mortgage Disclosure Act;
  • Equal Credit Opportunity Act;
  • Truth in Lending Act;
  • Truth in Savings Act;
  • Fair Credit Billing Act;
  • Fair Credit Reporting Act;
  • Electronic Fund Transfer Act;
  • Consumer Leasing Act;
  • Fair Debt Collection Practices Act;
  • Home Owners Protection Act; and
  • Secure and Fair Enforcement for Mortgage Licensing Act

Reasonable Belief Standard in Banking Whistleblower Retaliation Cases

The CFPA whistleblower protection law employs a reasonable belief standard.  As long as the plaintiff’s belief is reasonable, the whistleblower is protected, even if the whistleblower makes a mistake of law or fact about the underlying violation of a law or regulation under the CFPB’s jurisdiction.

Prohibited Retaliation

The CFPA anti-retaliation law proscribes a broad range of adverse employment actions, including terminating, “intimidating, threatening, restraining, coercing, blacklisting or disciplining, any covered employee or any authorized representative of covered employees” because of the employee’s protected whistleblowing.

Proving CFPA Whistleblower Retaliation

To prevail in a CFPA whistleblower retaliation claim, the whistleblower need only prove that his or her protected conduct was a contributing factor in the adverse employment action, i.e., that the protected activity, alone or in combination with other factors, affected in some way the outcome of the employer’s decision.

Where the employer takes the adverse employment action “shortly after” learning about the protected activity, courts may infer a causal connection between the two.  Van Asdale v. Int’l Game Tech., 577 F.3d 989, 1001 (9th Cir. 2009).

Filing a CFPA Financial Whistleblower Retaliation Claim

CFPA complaints are filed with OSHA, and the statute of limitations is 180 days from the date when the alleged violation occurs, which is the date on which the retaliatory decision has been both made and communicated to the whistleblower.

The complaint need not be in any particular form and can be filed orally with OSHA. A CFPA complaint need not meet the stringent pleading requirements that apply in federal court, and instead the administrative complaint “simply alerts OSHA to the existence of the alleged retaliation and the complainant’s desire that OSHA investigate the complaint.” If the complaint alleges each element of a CFPA whistleblower retaliation claim and the employer does not show by clear and convincing that it would have taken the same action in the absence of the alleged protected activity, OSHA will conduct an investigation.

OSHA investigates CFPA complaints to determine whether there is reasonable cause to believe that protected activity was a contributing factor in the alleged adverse action.  If OSHA finds a violation, it can order reinstatement of the whistleblower and other relief.

Article By Jason Zuckerman of Zuckerman Law

For more financial legal news, click here to visit the National Law Review.

© 2021 Zuckerman Law

Biden Administration Issues New Government-Wide Anti-Corruption Strategy

On Dec. 7, 2021, the White House published a government-wide policy document entitled “United States Strategy on Countering Corruption” (“Strategy”). The Strategy implements President Biden’s National Security Memorandum from earlier in 2021, which declared international corruption a threat to U.S. national security.

The Strategy is notable for several reasons:

First, the Strategy focuses not just on the “supply side” of foreign bribery and corruption—that is, companies acting in violation of the Foreign Corrupt Practices Act (FCPA)—but also on the “demand side” of the equation, namely corrupt foreign officials and those who assist them. It promises to pair vigorous enforcement of the FCPA with efforts to hold corrupt leaders themselves accountable, via U.S. money laundering laws, economic sanctions, and visa restrictions.

Second, the Strategy specifically calls out the role of illicit finance in facilitating and perpetuating foreign corruption, promising “aggressive enforcement” against those who facilitate the laundering of corrupt proceeds through the U.S. economy. Professional gatekeepers such as lawyers, accountants, and trust and company service providers are specifically identified as targets of future scrutiny. The Strategy also promises to institute legislative and regulatory changes to address anti-money laundering (AML) vulnerabilities in the U.S. financial system. These promised changes include:

  • Finalizing beneficial ownership regulations, and building a national database of beneficial owners, as mandated by the Anti-Money Laundering Act of 2020.

  • Promulgating regulations designed to reveal when real estate is used to hide ill-gotten gains. Contemporaneously with the White House’s issuance of the Strategy, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM), inviting public comment on its plan to apply additional scrutiny to all-cash real estate transactions.

  • Prescribing minimum reporting standards for investment advisors and other types of equity funds, which are currently not subject to same AML program requirements as other financial institutions.

Third, the Strategy calls for a coordinated, government-wide response to corruption, and it contemplates a role not only for law enforcement and regulatory agencies but also for agencies such as the Department of State and Department of Commerce, which is to establish its own new anti-corruption task force. It remains to be seen if the increased scope of anti-corruption efforts called for by the Strategy will result in new or additional penalties for persons and entities perceived as corrupt or as facilitating corruption, but the Strategy may place an additional premium on corporate anti-corruption compliance.

Individuals and entities operating in sectors traditionally associated with corruption and/or AML risk should consider taking the following steps in response to the Strategy. These considerations apply not only to U.S. persons and businesses but also to anyone who may fall within the broad purview of the FCPA, U.S. money laundering statutes, and other laws with extraterritorial reach:

  • Increase due diligence for any pending or future transactions in jurisdictions where potentially corrupt actors or their designees play a role in awarding government contracts. Ensure any payments are the result of arms-length transactions based on legitimate financial arrangements.

  • Professional gatekeepers should become familiar with the particular risks associated with the industries in which they operate. While AMLA made it clear that lawyers, accountants, and real estate professionals will come under increased scrutiny based on the risk profile of their clients, the Strategy increases the likelihood that law enforcement will devote additional resources in this sometimes-overlooked area.

  • Given the increased role the State Department will continue to play in the anticorruption space based on the National Defense Authorization Act and the Strategy, companies doing business in or with countries vital to U.S. foreign policy goals should remember that in addition to the individual leaders of these countries, government institutions and lower-level officials could create risk and will be closely watched. Though the U.S. government often talks about specific government officials, the Strategy appears to take a broader approach.

  • Businesses should continue to examine and reexamine third-party risk with an emphasis on preventing potential problems before they occur. Additional resources and increased cooperation between and among government agencies may lead to additional investigations and enforcement actions, so compliance programs should be updated where necessary.

Article By Kyle R. Freeny and Benjamin G. Greenberg of Greenberg Traurig, LLP

For more white collar crime and consumer rights legal news, click here to visit the National Law Review.

©2021 Greenberg Traurig, LLP. All rights reserved.

Ohio Votes to Legalize Sports Betting

Ohio lawmakers have reached an agreement that will legalize sports betting for those 21 and older. House Bill 29, which was passed by the Ohio House of Representatives and Senate on December 8 and is expected to be signed into law by Governor DeWine in the coming days, will allow licensed gaming operations to begin accepting wagers as soon as April 1, 2022.

Since the Supreme Court of the United States struck down federal law prohibiting state-sponsored sports betting in 2018, 33 states and Washington D.C. have passed legislation establishing regulated markets for wagering on sports. Ohio now becomes the 34th as it hopes to curb the flow of its residents’ entertainment and tourism dollars into neighboring Michigan, Pennsylvania, Indiana and West Virginia, all of whom have already legalized sports betting.

Oversight. The Ohio Casino Control Commission (“OCCC”) will be responsible for regulating and monitoring all sports gambling activity in the state. Once the bill is signed into law, the OCCC is required to establish a licensing process, consumer protections, advertising guidelines, and financial requirements for licensees. As an enforcement agency, it will also be given the authority to create other administrative rules it deems necessary to carry out its oversight duties.

Licenses. The OCCC will being accepting license applications on January 1, 2022 and can begin issuing a limited number of licenses on April 1, 2022. The law provides guidance as to how the OCCC will evaluate applicants, and establishes three classes of licenses: (1) Type A licenses for casinos, racinos and sportsbooks operating online and via mobile app; (2) Type B licenses for brick-and-mortar sportsbooks, which will be distributed throughout the state based on county population; and (3) Type C licenses for betting terminals to be placed in restaurants, bars and the like that possess D-1, D-2, or D-5 liquor permits.

Taxes.  A 10% tax will be placed on the new industry’s revenues. Combined with the fees and fines collected by the OCCC, most of this money will be earmarked for distribution by the Ohio General Assembly to public and nonpublic K-12 education programs and a state-sponsored Problem Sports Gaming and Addiction Fund. The bill also creates certain tax incentives for licensed operators beginning in 2027.

Be Ready. Businesses affected by legalization, whether pursuing a license, contracting with a license-holder or being indirectly impacted, need to stay vigilant as Ohio’s sports betting regulatory framework develops. From financial reporting to employment practices, failure to understand and implement processes to comply with the forthcoming regulations could result in significant fines or even criminal penalties.

©2021 Roetzel & Andress

Federal Regulators Issue New Cyber Incident Reporting Rule for Banks

On November 18, 2021, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency issued a new rule regarding cyber incident reporting obligations for U.S. banks and service providers.

The final rule requires a banking organization to notify its primary federal regulator “as soon as possible and no later than 36 hours after the banking organization determines that a notification incident has occurred.” The rule defines a “notification incident” as a “computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s—

  1. Ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business;
  2. Business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or
  3. Operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.”

Under the rule, a “computer-security incident” is “an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.”

Separately, the rule requires a bank service provider to notify each affected banking organization “as soon as possible when the bank service provider determines it has experienced a computer-security incident that has materially disrupted or degraded or is reasonably likely to materially disrupt or degrade, covered services provided to such banking organization for four or more hours.” For purposes of the rule, a bank service provider is one that performs “covered services” (i.e., services subject to the Bank Service Company Act (12 U.S.C. 1861–1867)).

In response to comments received on the agencies’ December 2020 proposed rule, the new rule reflects changes to key definitions and notification provisions applicable to both banks and bank service providers. These changes include, among others, narrowing the definition of a “computer security incident,” replacing the “good faith belief” notification standard for banks with a determination standard, and adding a definition of “covered services” to the bank service provider provisions. With these revisions, the agencies intend to resolve some of the ambiguities in the proposed rule and address commenters’ concerns that the rule would create an undue regulatory burden.

The final rule becomes effective April 1, 2022, and compliance is required by May 1, 2022. The regulators hope this new rule will “help promote early awareness of emerging threats to banking organizations and the broader financial system,” as well as “help the agencies react to these threats before they become systemic.”

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.
For more articles on banking regulations, visit the NLR Financial Securities & Banking section.

Don’t Use “Build Back Better” to Sabotage the False Claims Act

Congress is on the verge of setting a dangerous precedent.  As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits.   The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.

It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”).  The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.”   The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986.  During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud.  As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.

With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level.  Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs.  It is obvious why the Big Banks want the exemption from FCA liability.  As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.

Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud:  Whistleblowers and sanctions.  If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law.  The FCA’s first secret weapon is whistleblowers.  The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA.  Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability.  Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars.  Similarly, if payments are made with “reckless disregard of the truth,” liability can attach.  In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract.  Safeguards must be in place to prevent fraud.  If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.

These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act.  The tactics employed by the Big Banks are somewhat devious.  They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars.  The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments.  The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.

What language in the Build Back Better Act creates an exemption to False Claims Act liability?

Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act.  These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers.  Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion.  But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud.  It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.

How do the exemptions work?  To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers.  That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits.  The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility.  Willful ignorance would be legalized.  Reckless disregard in the handling of taxpayer monies would be permitted under this law.  Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.

Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout.  Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner.  Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.

Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons.  Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits.  For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.

Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent.  It is a devious way to undermine America’s “most effective” anti-fraud law.  Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more articles about banking and finance, visit the NLR Financial, Securities & Banking section.