Author: Chamber

Your Firm’s Success Depends On An Effective Data Quality Model

by Chamber

Your Firm’s Success Depends On An Effective Data Quality Model

A guest blog from Chamber Member PeerNova
June 7, 2021

To learn more about this important topic, be sure to download our Data Quality White Paper.

The success of a business relies on its data quality. Data must be correct, consistent, complete, and timely for it to be useful and fit-for-purpose. However, achieving high-quality data has been a significant challenge within today’s financial firms. Low-quality data can quickly trickle down the pipeline, causing a variety of issues for firms of all sizes. For example, a single low quality datum can result in business leaders making uninformed decisions and submitting inaccurate regulatory reports. This can lead to missed opportunities, client dissatisfaction, and heavy regulatory fines. Firms must also use additional resources to fix any errors or resolve exceptions, increasing their overall operational costs. It becomes critical that businesses implement an effective data quality tool or data quality platform to meet their goals, and ultimately, succeed.

What is a Data Quality Tool?

A data quality tool identifies, parses, and corrects flawed data to support effective information governance and data management. It applies rules and automates manual processes to ensure that firms have high-quality data throughout their organization. High-quality data that is ingested or integrated into the firm’s systems still undergoes various transformations that could compromise its quality. Therefore, catching any inaccuracies is vital at all touchpoints of a business. Data quality tools typically address four core areas:

    1. Data cleansing
    2. Data integration
    3. Master data management
    4. Metadata management

Data quality tools create rules to correct data that streamline processes, reduce operational costs, and improve the accuracy of downstream analytics and insights. Modern solutions can now also provide data mapping, consolidation; ESL (extract, transform, load); and more. Additionally, reconciliation functions are also performed by most of today’s data quality tools.

 

What are the Challenges with Today’s Data Quality Platforms? 

Ensuring end-to-end (E2E) data quality across the firm is laborious and costly, due to the inherent complexity of business processes and the heterogeneous nature of IT applications.  Many data quality platforms on the market have significant limitations due to their static nature. These solutions often perform data quality checks as a last step in the pipeline, instead of perpetually checking the data throughout the data’s lifecycle. Additionally, most are batch-oriented and bilateral, which means that to perform data quality checks on entire business flows, multiple bilateral checks must occur. As a result, firms must increase their operational resources to hire teams to manually fix errors and unify siloed systems, applications, and workflows.

 

What Benefits Can an Effective Data Quality Tool Provide?

There are a variety of benefits that firms can experience by implementing an effective data quality tool. 

Better Decision-Making and More Opportunities
Firms have continuous, high-quality data, resulting in more accurate analytics, clearer insights, and accurate data-driven decisions. Institutions can then monetize their data for direct top-line growth.

Reduced Risk and Regulatory Fines
Firms can be confident in the data they are submitting to regulators, reducing their regulatory risk and avoiding hefty fines. 

Increased Operational Efficiency and Reduced Costs
Firms no longer have to manually comb through and verify large volumes of data manually. They can use fewer resources, and avoid false or duplicate investigations. 

 

What is the Ideal Data Quality Platform?

The ideal data quality solution provides the following:

Continuous, E2E Data Quality
An effective solution provides continuous data quality by performing data quality checks and applying data quality rules across siloed systems, applications, and workflows. Additionally, the tool should automate the process of acquiring data, connecting datasets, running data quality checks, generating relevant reports, and fixing errors in real-time.

 

Faster Exception Management and Root-Cause Analysis
Using an effective data quality tool, firms can perform faster exception management and root-cause analysis to manage, prioritize, and resolve errors as they occur. This also reduces resolution times for data quality, SLAs, and timeliness metrics, ultimately leading to better operational efficiency and faster time to market.

 

Zero-Code Automation
With a zero-code platform, business users can easily create, reconfigure, and implement a variety of applications and workflows themselves through a self-serve graphical user interface (GUI).

 

Enterprise-Scalability
It is vital that the tool achieves continuous data quality at scale, through stream-based execution and auto-scaling to handle any volume spikes. By implementing an effective data quality tool, firms increase their operational efficiency, reduce risk, and make better decisions. At its core, the PeerNova Cuneiform Platform is a zero-code platform that provides continuous data quality and simplifies exception resolution across internal and external data sources. For more information, please visit peernova.com or contact us. 

Treasury Adopts Chamber Proposals into Tax Compliance Agenda

by Chamber

Information reporting guidance is critical to enabling taxpayers to comply with their tax obligations, and we support the Treasury Department in finally considering this much needed guidance. For too long the cryptocurrency industry has been cast as failing its tax compliance obligations. However, a lack of guidance has hindered tax professionals and taxpayers from meeting those expectations. In its American Families Plan Tax Compliance Agenda published today, the Treasury Department proposes coverage of foreign financial institutions and cryptoasset exchanges and custodians in its plan to close the tax gap by increasing information reporting. This is welcome news.

Last year, the Chamber of Digital Commerce urged the Treasury Department and the IRS to release much needed information reporting guidance to support just this. Last week, we proactively identified for the IRS and Treasury a Tax Policy Framework where clarity and guidance must be provided this year for cryptoasset transactions, including information reporting. Anticipating that the IRS is considering the application of the Foreign Account Tax Compliance Act (FATCA) to cryptoassets held offshore, we also provided detailed input to ensure better outcomes for the industry. We look forward to working with the IRS and Treasury on their proposals in an advanced notice of proposed rulemaking – which would enable time for industry input before finalizing a rule in this complex space.

We are concerned, however, with how cryptocurrency is characterized in the Compliance Agenda. The Treasury Department asserts cryptocurrency possesses a “significant detection problem by facilitating illegal activity broadly including tax evasion” and cites to a report from 2013 – a year before the IRS released taxpayer guidance for cryptocurrency – to support its claim. Not only does this negative characterization harm the reputation of an industry that supports compliance efforts and law enforcement objectives, but it relies on outdated information from almost a decade ago to back up its statement. As we said in our Framework, “published tax guidance relating to digital asset transactions has not kept pace” with the significant growth of these markets. “This disparity creates risk for taxpayers seeking to comply, wastes IRS audit resources, dampens commercial activity and economic recovery, and stifles U.S. innovation,” noting that the IRS has not released meaningful guidance since Notice 2014-21, published seven years ago. The GAO also noted that the IRS suffers from a significant lack of data to support an understanding of the extent of any underreporting, and information reporting is designed to do just that.

The Chamber has maintained a proactive focus on cryptoasset-related tax policy issues and welcomes the opportunity to serve as a continued resource for the Treasury and IRS.

New York’s Proposed Ban on Cryptocurrency Mining Takes Two Steps Back – Freezing Innovation and Undermining U.S. National Security

by Chamber

The Chamber of Digital Commerce strongly opposes legislation introduced in New York –– NY S. 6486 and NY A. 7389 –– to establish a three-year ban on cryptocurrency mining. This legislation is harmful to the cryptocurrency mining industry. The ban pushes businesses out of the state, hurting jobs and revenue growth. And it freezes innovation –– in an area where the United States is already lagging behind other countries, such as China –– threatening our national security. It’s a significant concern, given the two trillion dollar market capitalization of cryptocurrency today, which is growing exponentially.

Background

Cryptocurrency mining is a mathematical process that confirms transactions on a blockchain and rewards miners with small amounts of cryptocurrency for performing these complex cryptographic calculations. This type of computing uses electricity, which has raised questions among some environmental activists and legislators. Research is still being conducted on how much electricity is used and how mining is powered. Some miners rely on hydro, wind, and solar power while others rely on electricity derived from natural gas and coal.

What is NY State’s Cryptocurrency Mining Ban?

On Monday, May 3, New York State Senator Kevin Parker, Chair of the Committee on Energy and Telecommunications, introduced a bill to establish a three-year ban on cryptocurrency mining. Companies can continue operations after the ban if they pass an examination by the NY State Department of Environmental Conservation (DEC). Assemblywoman Anna Kelles introduced a companion bill in the Assembly on Thursday, May 6. With the legislation making its way through both the Senate and the Assembly, the proposed punitive measures could pass and be sent to the Governor’s desk before the legislative session ends next month. June also happens to be the month when a large cryptocurrency mining company plans to expand its operations in New York, which has been met with resistance from environmental groups.

What is the Impact?

The proposed ban would require mining centers in New York to cease operations for three years. They may resume mining only after they’ve undergone a “generic environmental impact statement” (EIS) review conducted by the DEC. A generic EIS involves an examination of a site or project’s environmental impact. Findings from the EIS will determine whether a mining company is able to obtain permits needed to operate.

If a mining center is determined to be adversely impacting the State’s greenhouse gas emission targets based on the Climate Leadership and Community Protection Act of 2019, (which requires 40% carbon emissions reduction by 2030 and 85% by 2050), then the mining center cannot obtain permits needed to operate in the state and construct facilities.

A three-year ban in New York would devastate the mining industry in the Empire State, including, ironically, the operations of mining companies that are using renewable energy. And it would have broader consequences that would damage U.S. competitiveness in blockchain and cryptocurrency.

Not only would New York be deprived of the jobs and economic benefits that come from mining, the State would also be responsible for weakening the United States’ national security interests against other countries that are engaged in mining activity. The United States is competing against China, Canada, Russia, Kazakhstan, and Norway, whose governments and businesses have been capitalizing on mining activity. And a three-year gap could set U.S. competitiveness back potentially by a decade, given the breakneck speed of innovation in this sector.

Conclusion and Recommendations

The Chamber does not support legislation designed to stifle a growing industry and destroy lawful mining activity that creates good jobs and drives economic growth. Instead, we suggest that policymakers work together with the industry to incentivize the use of green, environmentally friendly technologies in this industry. Banning the mining industry only hurts New York’s and the United States’ competitive position in this industry globally. We would rather see New York become a center for innovation, including mining, and use of renewable energy sources can be a key component of that strategy.

For more information, please contact: policy@digitalchamber.org

Clear Rules of the Road Sought as Members of Congressional Blockchain Caucus Pen Letter to U.S. Accounting Standards Organization on Need for Digital Asset Accounting Standards

by Chamber

Chamber Encourages the Commodity Futures Trading Commission and the Consumer Financial Protection Bureau to Foster Blockchain Innovation

In comments submitted this week to the Commodity Futures Trading Commission (CFTC) and the Consumer Financial Protection Bureau (CFPB) in separate proceedings, the Chamber encouraged both agencies to foster blockchain innovation and permit the introduction of new financial products based on blockchain technologies.

Our comments to the CFPB on their proposed policy on no-action letters and the product sandbox recognized the potential of both tools to bridge the gap between the deliberate pace of regulation and the rapid pace of innovation, while upholding the principle to first do no harm.  We expressed our broad support for the policy and our strong support for regulatory efforts in the United States that: (i) eliminate unnecessary burdens to apply for access to these tools; (ii) enhance the reliability and practicality of these tools; and (iii) promote coordination among regulators.

Likewise, in our comments to the CFTC, we expressed our broad support for the agency’s efforts with respect to financial products involving virtual currencies through the LabCFTC and a variety of other mechanisms.  While we do not advocate for any particular blockchain technology, we supported the agency’s efforts to learn more about Ether and the Ethereum network as well as the Commission’s self-certification process as the appropriate framework for the introduction of new derivatives, such as those based on Ether.

In comments to both agencies, we stressed the need for enhanced coordination among regulators, particularly in light of the byzantine structure of U.S. financial services regulation.  We encourage all financial regulators to collaborate on effective and efficient approaches to achieve regulatory goals while promoting investment and growth.

The Chamber’s comments to the CFPB are available here, and our comments to the CFTC are available here.

 

Chamber to IRS: Tax Payers Need Guidance on Crypto Tax Rules

by Chamber

Chamber to IRS: Tax Payers Need Guidance on Crypto Tax Rules

May 17, 2021

Over the past five years, the Internal Revenue Service (IRS) has significantly increased enforcement actions against taxpayers who transact in digital assets. But, while ratcheting up its enforcement, the IRS has not provided meaningful guidance on how to comply with tax rules since 2014.

“This disparity creates risk for taxpayers seeking to comply with the laws, wastes IRS audit resources, dampens commercial activity and economic recovery, and stifles U.S. innovation,” according to Amy Davine Kim, Chief Policy Officer at the Chamber of Digital Commerce.

This week, the Chamber published a policy position that identifies key areas where the agency must issue more guidance for taxpayers this year –– lending, information reporting, foreign bank account reporting, characterization of digital assets, and proof of stake protocols. It also sent a letter to the IRS on the application of the Foreign Account Tax Compliance Act (FATCA) to digital assets.

Background: 

Since 2016, when the IRS issued a “John Doe” summons to Coinbase seeking information on customers who engaged in transactions at or above $20,000, the digital assets community has seen growing enforcement-related activity as the IRS began focusing on identifying taxpayers who may have tripped up by lack of clarity.

In 2020, the agency added a question relating to cryptocurrency on its Form 1040 for individual taxpayers. “At any time during 2019,” the IRS asked, “did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” And for the 2020 tax season, the agency moved the question right to the top of the form, displayed prominently just below the request for personal information. The IRS also sent over 10,000 taxpayers “soft letters” suggesting they may not have complied with tax reporting requirements and threatening an audit if the taxpayers did not respond to the agency’s inquiry. These letters were criticized as violating the Taxpayers Bill of Rights by the IRS’ own Taxpayer Advocate.

Recently, at a hearing before the Senate Committee on Finance, IRS Commissioner Chuck Rettig identified the need for clarity on information reporting for cryptocurrency transactions. Information reporting requires companies to report to the IRS wage and non-wage income that relate to a trade or business. Information reporting guidance would result in increased tax compliance and decreased enforcement actions. The Chamber brought this to the IRS’ attention in a letter last year describing the need for guidance regarding information reporting – a key tool to assist taxpayers in providing accurate income information –  but the agency has yet to release such guidance. In addition to the Taxpayer Advocate, the IRS has been criticized repeatedly for not providing guidance by the Treasury Inspector for General Tax Administration and the Government Accountability Office.

Highlights of the Tax Policy Framework: 

The Chamber’s policy framework identifies key areas in which the IRS must provide clarity and guidance for digital asset transactions in 2021. The goal of these recommendations is to ensure that digital asset tax policies are adopted to assist compliance and encourage innovation, economic activity, entrepreneurship, investment, and collaboration in the areas of:

      • Digital asset lending;
      • Information reporting;
      • Foreign bank account reporting;
      • Characterization of digital assets; and
      • Proof of stake protocols.

In addition to its policy framework, the Chamber separately wrote a letter to the IRS on the potential application of the Foreign Account Tax Compliance Act to digital assets. The law requires foreign financial institutions to report foreign accounts held by U.S. persons. Currently, the law does not apply to digital assets. Nevertheless, anticipating that the IRS is considering the application of FATCA to digital assets held offshore, we provide guidance to ensure better outcomes for the industry before they are published.

Our letter raises key factors the IRS must take into account, such as:

        • The need for public notice and comment if the IRS decides to apply FATCA to digital assets.
        • What is a “foreign” account in the digital asset industry?
        • Are digital assets financial assets? 
        • What types of accounts (custodial, non-custodial) should be subject to FATCA reporting? 

The policy framework and letter regarding FATCA’s application will enable better compliance with tax obligations by taxpayers and avoid unnecessary punitive measures by the IRS. 

Proof of Reserves – Establishing Best Practices to Build Trust in the Digital Assets Industry

by Chamber

Proof of Reserves – Establishing Best Practices  to Build Trust in the Digital Assets Industry

Download the Chamber’s Proof of Reserves Report

Background: As the digital assets industry has developed, both consumers and institutional investors have relied on large custodians, exchanges, and other intermediaries to custody their assets.  These intermediaries are entrusted with maintaining adequate digital asset reserves to meet customer liabilities (those digital assets the exchange or custodian holds for its customers).

The Problem: The growth of the industry has resulted in uneven and inconsistent methods for proving the existence of reserves to meet customer liabilities. Investors and customers need assurance that their funds are properly managed. Digital assets by their very nature offer built-in transparency but, until now, the innate cryptographic auditability of these assets has been woefully underutilized, despite the low technical barriers to doing so.

Bottom Line: At the end of the day, this is a very simple concept, that custodians need to be able to prove that they are indeed holding the assets that their clients have entrusted to their care. This is called Proof of Reserves (PoR).

PoR involves comparing on-chain assets held in reserve to off-chain liabilities. In other words, it empowers consumers to audit digital asset reserves held by a custodian on demand. But, despite a flurry of interest in 2015 in the wake of the failure of Mt. Gox, Proof of Reserves has failed to gain widespread adoption. Why would such a valuable practice be so infrequently and inconsistently applied, despite its benefits in promoting and maintaining industry trust and growth?

Our Proposed Solution: Here at the Chamber of Digital Commerce, we’ve been working to frame a consistent, industry-wide standard for Proof of Reserves to increase the confidence level of consumers, policymakers, and regulators that exchanges and custodians are managing their assets appropriately. We have created a comprehensive Best Practices resource to serve the industry with practical guidance on the core concepts of Proof of Reserves and implementation. The Best Practices, documented in this robust Practitioner’s Guide, brings together a diverse group of key industry stakeholders and subject matter experts, including digital asset custodians, exchanges, and legal and auditing professionals. This marks the first time the industry has an actionable rubric for adopting this important standard.

The Impact: Proof of Reserves is a profoundly self-regulatory measure. Using this framework, firms holding digital assets on behalf of third parties can use this trust-generating procedure. Ultimately, if the industry takes advantage of the transparency afforded by digital assets, consumers will be better protected, intermediaries will benefit from transparent practices, and regulators will appreciate these proactive measures. Put simply, it’s a win-win situation all around, for consumers, industry, and government.

Conclusion: As the industry continues to mature, it logically follows that building Proof of Reserves into custodians’ core practices will result in greater market share as well as customer, institutional, and governmental trust. If these Best Practices are adopted, for the first time, digital asset firms will benefit from the actionable intelligence specifically tailored to their needs. This effort is an important first step to bringing Proof of Reserves the attention it deserves, creating further industry engagement around trust models, and advancing our shared stewardship of the digital and decentralized future.

We are grateful to the authors and contributors who worked tirelessly to develop these comprehensive best practices with respect to creating Proof of Platform Reserves, including Members of the Leadership Committee: Noah Buxton, Armanino LLP; Nic Carter, Castle Island Ventures and Coin Metrics; Patrick South, TRM Labs; and Salvatore Ternullo, KPMG.

For More Information: 

Please contact: policy@digitalchamber.org.

House Passes Bill to Create SEC – CFTC Working Group to Foster Digital Asset Innovation in the United States

by Chamber

House Passes Bill to Create SEC – CFTC Working Group to Foster Digital Asset Innovation in the United States

April 21, 2021
By Amy Davine Kim, Chief Policy Officer, Chamber of Digital Commerce

Yesterday, the U.S. House of Representatives passed H.R. 1602: “Eliminate Barriers to Innovation Act of 2021,” an important milestone for the digital assets industry in the United States. The historic bipartisan legislation would create a working group on digital assets between the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), the two leading agencies that oversee digital asset markets in the United States, as well as key stakeholders, including industry groups, to eliminate barriers and promote innovation through competition. 

Specifically, the digital asset working group is tasked with analyzing the U.S. legal framework for digital asset markets to identify areas where further clarity is needed and comparing it to other jurisdictions to determine U.S. competitiveness in these emerging markets. The group must also make policy recommendations to resolve the issues it identifies, including through development of standards and best practices. 

The bill will now proceed to the U.S. Senate, where it is likely to be introduced in the Committee on Banking, Housing, and Urban Affairs. This legislation is an important step forward to obtain much needed clarity in the digital asset markets.  Over the years, many legislators have tried to increase clarity – and we have supported these efforts.  The bill enables a balanced review of the issues impacting digital assets and digital asset securities by all stakeholders – the SEC, CFTC, industry, consumer groups, and others – to ensure that appropriate guardrails are created to enable efficient growth in the marketplace.  

The bipartisan nature of the legislation reflects the growing recognition in the U.S. Congress of both the rapid growth of the digital asset industry and the need to build and maintain a clear and uniform regulatory framework across agencies to position our industries for success in the coming decades. This is an urgent issue.  The SEC’s recent enforcement actions against blockchain companies for distributing digital tokens as unlicensed securities offerings plainly illustrates the serious and market-moving consequences of ongoing regulatory confusion and opacity. In other words, the industry needs more guidance specific to the unique characteristics of digital assets and their markets. The legislation gives the  working group a year to come together and identify how to resolve regulatory issues surrounding digital assets, and to provide recommendations to relevant Congressional committees. 

H.R. 1602  was introduced in the House on March 7, 2021 and referred to the Committee on Financial Services and Committee on Agriculture. For more information, see our blog post.

The Growing Regulatory Spotlight on Digital Assets’ Role in Funds Transfers and Payments

by Chamber

The Growing Regulatory Spotlight on Digital Assets’ Role in Funds Transfers and Payments


An obscure but powerful task force, simply known as the FATF, holds the key.

April 21, 2021
By Amy Davine Kim

Over the past two decades, the advent of the global digital banking and financial services system has revolutionized electronic funds transfers and payments and adoption of digital asset technologies. Blockchain and distributed ledger technologies will transform the way in which we buy and sell goods and services, and even the goods and services that we buy.  With this opportunity has come an increased global governmental scrutiny of implementing policies to address anti-money laundering and counter-financing of terrorism (AML/CFT) risks, and ongoing concerns about how best to put in place such policies while addressing privacy concerns.

Two years ago, the Financial Action Task Force (FATF), a powerful intergovernmental organization founded in 1989, amended its anti-money laundering Recommendations to include virtual assets and so-called Virtual Asset Service Providers (VASPs). The FATF is viewed as a crucial standards-setter for anti-money laundering and anti-terrorist financing policies; failure to adopt and enforce its Guidance is noted in the FATF’s audits, which can lead to countries being “grey-listed” and causing financial institutions to no longer do business within those countries.

The Guidance prompts countries to establish regulatory frameworks globally to address AML/CFT concerns involving virtual assets, typically including the development of compliance programs that require customer due diligence and implementation of the so-called “Travel Rule” provisions.  Now, two years later, the FATF has again proposed “updates” to its Guidance in an attempt to develop greater clarity around the requirements.

The Guidance was open to comment for 30 days by financial regulatory bodies around the world, as well as industry players, such as the Chamber of Digital Commerce. The FATF intends to release a final form of the Guidance this June.

The Chamber has long supported such standard-setting bodies and processes as undertaken by the FATF, including through its work to develop data messaging standards for the Travel Rule.  Nevertheless, this recently updated Guidance takes an overly broad, cookie-cutter approach that, for a quickly evolving industry like digital assets and blockchain technology, creates both uncertainty and unintended consequences for legitimate players in the marketplace, as well as the regulators and policy makers overseeing them.  Over the past month, since the FATF Guidance was opened up for comment, the Chamber spent countless hours evaluating the Guidance and discussing it with our Members and submitted our comments on Tuesday. We would like to highlight several points of concern that we recommend the governing body address during this consultative process.

First, the FATF’s effort to define what a Virtual Asset Service Provider is and isn’t is overly broad and seeks to capture all virtual assets as well as multiple businesses in the ecosystem – even those not typically subject to AML obligations as financial institutions.  This sweeping perspective brings all virtual assets within the purview of anti-money laundering obligations, even those not used as a “currency” or method of payment.  Not all virtual assets create the same risks nor require the same regulation at the same points, yet that nuance is absent from the Guidance.

The FATF Guidance generally treats virtual assets and peer-to-peer transactions as higher risk for illicit activities, stating in no uncertain terms that Virtual Assets or “VAs” are becoming increasingly mainstream for criminal activity more broadly” without additional evidence or support for this statement, dismissing the distinctions between different types of virtual assets, and ignoring evidence to the contrary. Further, the Guidance does not address whether current and developing controls sufficiently mitigate the risk. With higher risk typically comes the imposition of additional compliance requirements, and such regulatory hurdles often disincentivize some financial institutions from participating or innovating within the digital currency marketplace. 

Second, the Guidance expands the concept of VASP to include those that merely “facilitate” the activity of exchange, administration, and safekeeping.  For example, this includes those that develop software and engage in business development.  To be clear, we support the application of anti-money laundering compliance obligations on those financial institutions that directly provide money transfer and safekeeping services.  Yet, there are many businesses and individuals engaged in supporting these services that do not directly provide them nor are appropriate to conduct things like customer due diligence or KYC, nor should they be sharing personally identifiable information (PII) with counterparts pursuant to the Travel Rule.

Finally, updates to the Guidance concerning submission of PII between financial institutions engaged in cross-border wire transfers, colloquially known as the “Travel Rule,” expand the scope of this requirement to include not only domestic wire transfers but also transfers involving a self-hosted wallet – a unique expansion of the rule beyond what is required in the traditional fiat currency space.  While intended to address anti-money laundering challenges and help law enforcement agencies better track criminals – the expanded scope changes the goal posts at a time when industry and governments are working diligently to quickly develop a secure, global information exchange system.  The transfer of PII is a very sensitive issue, one that must be handled carefully and appropriately.  In our view, we should complete the work already underway to ensure it effectively and efficiently achieves law enforcement goals before making adjustments and additions to the requirements midstream.   

Just as important as preventing anti-money laundering violations and enabling law enforcement to better track such illegal activities, is not only understanding the scope of such threats, but also confirming the progress that all countries engaged in the digital currency marketplace have made in adopting the “Travel Rule” guidelines already adopted in 2019.  It’s important for the FATF to encourage global adoption of the current “Travel Rule” with the understanding that some States may come online with their regulations at different times than others.  This uneven progress, often called the “Sunrise Issue”, greatly impacts when a financial institution must share sensitive PII. 

The Chamber of Digital Commerce will continue its active and constructive engagement, working with all players to develop a strong understanding of this rapidly evolving space. The Financial Action Task Force’s efforts – as well as those of the many jurisdictions and regulatory bodies that are implementing them – have contributed to increased adoption and certainty in the digital asset and blockchain ecosystem. Data shows that the coordinated efforts of our industry, regulators, and law enforcement have reduced the risk of AML abuse, maintained security, and protected privacy. Data would also help track areas of increasing or decreasing risk, so that further efforts are focused on those areas of high risk in the global money laundering landscape.

While there is more to be done, the Chamber believes it is important in this highly innovative and evolving industry for the Financial Action Task Force to work collaboratively in setting Guidance that not only focuses clearly on those institutions that engage directly in the provision of financial services to customers but leverages risk-based data and the potential benefits of the underlying technologies. Our goal is to prevent illicit activity from utilizing the virtual asset system while not hindering the advancement of cutting-edge blockchain and digital assets technology that will be the cornerstones of the new age of financial services.

Chamber Submits Comments to SEC on Proposed Safe Harbor for Broker-Dealer Custody of Digital Asset Securities Highlighting Concerns on Bifurcated Treatment of Broker-Dealers Based Purely on Technology

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Chamber Submits Comments to SEC on Proposed Safe Harbor for Broker-Dealer Custody of Digital Asset Securities Highlighting Concerns on Bifurcated Treatment of Broker-Dealers Based Purely on Technology

April 9, 2021

On Monday, April 5, we filed a letter in response to the Securities and Exchange Commission (the “Commission”) Statement and Request for Comment regarding “Custody of Digital Asset Securities by Special Purpose Broker-Dealers” (the “Statement”), which was originally issued by the Commission on December 23, 2020.  While the safe harbor indicates an important willingness to enable this industry to grow, its narrow focus on a single technology, limiting broker-dealer custody to digital asset securities only, without sufficient basis, creates an unworkable framework that creates enhanced, yet inaccurate, perceptions of risk.

The Statement sets forth a five-year temporary safe harbor for broker-dealers seeking to custody “digital asset securities.”  The temporary safe harbor becomes automatically effective April 27, 2021. In the Statement, the Commission establishes, and solicits input on, a bifurcated regulatory structure for broker-dealers seeking the ability to custody securities based on whether the broker-dealer operates in the traditional securities space or in the digital asset securities space.

The Statement requires a broker-dealer seeking to custody digital asset securities to limit its business to digital asset securities only in order to isolate certain perceived risk.  The Commission also establishes, and solicits input on, a range of unique policies and procedures that a special purpose broker-dealer would be required to adopt.

The Chamber supports the Commission’s issuance of the Statement as a positive and constructive step toward grappling with the complex requirements of federal securities laws, and the Customer Protection Rule in particular, as they apply to digital asset securities and transactions in those securities.

We also, however, note our concern that the Commission is imposing a bifurcated and relatively onerous regulatory framework on broker-dealers without providing a compelling basis for doing so.  Specifically:

    • It is unrealistic for a broker-dealer to operate successfully if its business is limited to operating in the digital asset securities space should they seek to self-custody even one digital asset security – We note that the temporary safe harbor would create a significant hardship for existing or future broker-dealers operating under this model;
    • Digital asset securities do not impose greater investor risk than traditional securities – Digital asset securities intentionally created in connection with the issuance of debt or equity by a traditional issuer may differ significantly from non-security digital assets and “inadvertent” digital asset securities when it comes to risk of theft or loss of keys. In addition, we discuss why blockchain is actually a far superior option for complying with recordkeeping and reporting obligations under the securities laws and have characteristics that make them particularly well suited to serving as the source of truth;
    • Broker-dealers cannot operate successfully with self-custodied digital asset securities without also custodying non-security digital assets – We strongly support allowing broker-dealers to self-custody these non-security digital assets to promote more efficient settlement processes around the secondary trading of digital asset securities;
    • The temporary safe harbor is not technology neutral – The Commission is imposing a bifurcated regulatory structure on broker-dealers, and potentially significantly limiting their business model, based solely on an issuer’s choice of technology representing its securities and regardless of whether the broker-dealer can meet the current regulatory requirements related to the custody of traditional book-entry securities;
    • The scope of the temporary safe harbor should be clarified – The Commission should clarify that the provisions of the temporary safe harbor apply only to broker-dealers seeking to self-custody digital assets securities for customers in order to provide certainty that other broker-dealers operating in the digital asset security space may continue to operate under existing regulations;
    • The definition of “digital asset security” is extremely broad and should be narrowed – The Commission should clarify that securities that have non-controlling blockchain components do not fall within the definition of “digital asset securities and should consider how applicable state law provides for “possession or control” to occur;
    • Broker-Dealers need clarity that they can use third-party custody providers – The Commission should clarify that broker-dealers can satisfy the Customer Protection Rule by maintaining digital asset securities at a good control location, such as a bank, transfer agent or other regulated entity, and that the Commission provide additional clarity on what is deemed a “good control location” for digital asset securities; and
    • The Commission should seek customary industry input prior to implementation of the temporary safe harbor – The Commission is implementing the temporary safe harbor without soliciting prior public comment or providing a cost/benefit analysis around the enumerated requirements which is reflected in many of the problematic aspects of the Statement.

While we welcome the Statement as a move in the right direction to provide the digital asset industry with a much-needed framework for broker-dealers seeking to custody digital asset securities, we encourage the Commission to address the concerns enumerated in our letter prior to implementation of the temporary safe harbor to ensure it achieves its intended purpose to enable this industry to grow in a safe manner.

We are grateful for the tireless effort and countless hours expended by our Members in addressing the issues raised by the Statement.

Chamber Addresses Extraordinary Financial Privacy Concerns, Proposes Solutions in Response to Treasury

by Chamber

Chamber Addresses Extraordinary Financial Privacy Concerns, Proposes Solutions in Response to Treasury

Chamber submits comments to FinCEN on Proposed Rule on Digital Assets

March 31, 2021

On Monday, we filed our response to FinCEN’s Notice of Proposed Rulemaking (NPRM) “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.”  This supplemental letter is in response to a series of NPRM’s on self-hosted wallets, including those published on December 23, 2020; January 15, 2021; and January 28, 2021.

As we highlighted in an earlier blog on this proposal, it is critical to highlight the unprecedented scope of information FinCEN would collect regarding nearly every convertible virtual currency (CVC) transaction.

The proposed verification requirements would create a new standard for this technology that rises above existing know-your-customer (KYC) obligations. Providing this level of detailed information about non-customers (the counterparties to transactions) to the government for lawful transactions would erode financial privacy for lawful transactions of all amounts – even those not conducted through banks or MSBs and its repercussions cannot be understated.

Building on our initial comments, filed January 4, our supplemental letter enhances our original points and addresses the additional information that FinCEN provided through its somewhat extraordinary series of NPRMs over a short period.  Here, we honed in on some of the specific proposals, including:

  1. A recordkeeping requirement for banks and MSBs for transactions of $3,000 and above, which included verification of customers and counterparties to the transaction; and
  2. A reporting requirement for transactions of $10,000 and above to include customer and counterparty information on a new “Value Transaction Report,” which requires personally identifiable information and publicly available information on a blockchain. The proposal also included a new “Foreign Jurisdictions List” of countries with which U.S. entities are prohibited from engaging in virtual currency transactions.

By combining information contained in CVC transaction reports, including personally identifiable information and a blockchain address of the customer and all counterparties, the government will be able to track every transaction those wallet owners make, past, present, or future, at any transaction level and at any time.  

To spell this out more clearly, this means that a counterparty to a transaction, who never had an account relationship with the bank or MSB, will have its entire wallet history and future transactions exposed to both that financial institution and the government.  This is an extraordinary expansion of the amount of information provided to third parties about non-customers.

While there are good reasons to report certain transactions to the government, such as when suspicious or illegal activity is detected, enabling such granular tracking of individuals’ lawful, everyday financial activities is beyond common principles of government oversight.

The Chamber believes that the very significant compliance and privacy questions raised by this proposed rule, as well as potential for much broader implications for people and businesses, demand significantly more evaluation and time for comment from multiple stakeholders.

As a result, we made the following Recommendations:

Recordkeeping Requirement.

    • We are supportive of a recordkeeping requirement for transactions above $3,000 that is limited to bank and money services businesses (MSB) customers only and does not include collecting counterparty information.
    • Compliance with this requirement should become effective at least 180 days after the final rule’s issuance due to the process for implementing the required changes.

Reporting Requirement.

    • The recently enacted Anti-Money Laundering Act of 2020 requires FinCEN to review as part of a year-long study requirements for currency transaction reports (CTRs) and suspicious activity reports (SARs). The proposed Value Transaction Reports for transactions at or exceeding $10,000 should be delayed until after FinCEN completes its study to reduce unnecessarily burdensome requirements.

Implications for Self-Hosted Wallets.

      • Self-hosted wallets play a critical role across the blockchain and digital asset industry. Thus, FinCEN should exempt from the final rule decentralized finance (DeFi), consider the privacy implications for including LTDA within the rule’s scope, and contemplate how the rule will harm financial inclusion efforts through de-risking caused by the disincentivization and stigmatization of self-hosted wallet use.

Towards a Risk-Based Approach.

      • FinCEN should promote a risk-based approach generally, and specifically with respect to anonymity-enhanced cryptocurrencies.

We are grateful for the tireless effort and countless hours expended by our Members in addressing these extraordinary proposals, as well as our counsel at Steptoe – Jason Weinstein, Alan Cohn, Shannen Coffin, and Evan Abrams.

Read the Chamber’s comment letter to FinCEN here.