Welcome to our 12th and final edition of Promissory Notes of 2022.

As we wrap up the year and look forward to 2023, we welcome any thoughts you have about this publication. Are we covering the topics you find interesting? Are there topics we could include in our research? Is our monthly schedule too often or not often enough? Are there any other improvements you would like to see? Please let us know. We value your input and opinion!

We wish you and yours a wonderful holiday season and cheers to 2023! As always, thank you for reading.



F. B. Webster Day, Chair, Banking & Finance Practice Group, and Co-Editor, Promissory Notes

and

Paul G. Papadopoulos, Co-Chair, State & Local Taxation Practice Group, and Co-Editor, Promissory Notes

“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” --- Bo Bennett

“Four U.S. senators have signed a letter to SoFi Technologies CEO Anthony Noto expressing concerns about the online personal finance company and online bank’s digital asset trading activities and asking if it is working to conform them to U.S. banking law.”

Why this is important: SoFi Technologies, Inc. is a finance company – including many nonbank activities – that allows some “deposits” or investments to be held in digital currency (including cryptocurrency). According to its own website, it is “A one-stop shop for your finances.” Its status as a nonbank allowed it to ignore in many respects U.S. bank law. In February 2022, SoFi acquired Golden Pacific Bancorp, Inc., a California bank holding company. Part of the company now holds actual bank deposits. That means that, even though the bank is held separately and, to some extent walled off from SoFi’s former nonbanking activities, the entire organization now is subject to U.S. banking law and review/examination by the Federal Reserve. Four U.S. senators (all Democrats) have questioned whether SoFi’s connection to cryptocurrency and other activities are consistent with operating a U.S. bank holding company. This will be interesting to watch, because SoFi’s former business plan previously worked well by staying out of regulatory crosshairs. This may set a sort of standard for dealing with these hybrid entities. It also may set guidelines for how far traditional banks – BOA, Chase, Truist, etc. – may go in offering non-traditional, non-bank products.  

My colleague, Brian Richardson, pointed out that SoFi had a recent unforced error that may help the regulation proponents. The company sent out an email to their full mailing list regarding clients’ mandatory IRA distributions for 2022. The problem was that it went out to all the mailing list, including people who had never set up an IRA or even an account. People who had merely submitted an inquiry on the website received the same message. This caused some confusion. A few hours later, the company sent a second email that basically said, “Whoops! We’re not phishing you, we just made a mistake! Your data is still safe with us!” That’s probably the right message, but the incident still may add fuel to the “more regulation” argument. --- Hugh B. Wellons

 “While the president boasted that he has ‘pushed banks to reduce their fees,’ the CFPB found that community banks have not increased their reliance on overdraft fees.”

Why this is important: In this article, the President of the Pennsylvania Association of Community Bankers argues against President Biden hammering banks for charging overdraft fees. He makes the case that overdraft protection plans help bank customers whose choose to use, and pay for, them. Stating that existing laws adequately address the related transparency and fairness issues, the author claims the President’s push to eliminate overdraft fees will unduly hurt community banks and their customers. --- F. B. Webster Day

“How does the FTX fallout resemble the history of bank runs?”

Why this is important: Cryptocurrency is getting bad press these days, much of it deserved. Creativity and minimal regulation contributed to the growth of these currencies. Many cryptocurrencies were lucrative to own for years. Investors began to forget that this was a risky investment. Minimal regulation creates opportunity, but it cuts both ways. That advantage appears to be under attack. This article reviews the Great Depression and discusses how something like an FDIC, with rules setting aside a percentage of capital, may stabilize these “currencies.” It considers bank runs during the Depression and how they might be analogous to what is happening now in cryptocurrency markets. It also discusses how deposit insurance, as it did for banks, might provide confidence and stability in this market. The twist is that the article proposes insurance that is, in effect, voluntary. The FDIC is a U.S. federal organization. It relies on many laws and regulations. No unregulated entity (with very narrow exceptions) can both make loans and hold deposits. The FDIC relies on the full faith and credit of the U.S. dollar. It relies on the fact that failure of any one bank is not likely to bankrupt the system. Cryptocurrencies have none of that. This would be a voluntary effort. If it was not coordinated among several currencies, a consumer would be responsible to assess that risk, including how much the so-called “insurance” ameliorated that risk. Could this be done by a joint effort of major national economies (such as the World Economic Forum or a combination of APEC, the EU, and Great Britain)? Maybe, but then that organization would pick the winners or losers in cryptocurrency, based on who gets insurance. That sort of defeats the purpose of cryptocurrency, to some extent. International insurance may be where all this goes, but we may need more pain before a cure develops, assuming that one is even needed. --- Hugh B. Wellons

“The crypto lender has initiated a cost-cutting plan that involves ‘major layoffs,’ according to Decrypt.”

Why this is important: This bankruptcy filing represents the initial ripple of what could become a wave as cryptocurrency companies reevaluate their positions in the downstream fallout from the recent FTX collapse. Multiple cryptocurrency exchanges halted transactions in mid-November during the initial fallout from the FTX bankruptcy filing. Among the “first day” motions in the BlockFi bankruptcy case was a key employee retention plan that contemplates major layoffs in an effort to reduce ongoing operating costs and streamline the business going forward. We expect to see further protective actions taken by other companies in the crypto markets, though this is not the first instance of crypto companies going through the bankruptcy process. A Virginia Beach-based bitcoin mining operation filed for chapter 11 bankruptcy in the spring of 2019. Bankruptcy courts are becoming well-equipped to address the variety of issues presented in restructurings for crypto companies. Interested parties should pay attention to these cases (FTX and BlockFi) as they may lay some foundation and precedent for how other crypto businesses may be restructured through the courts in future cases. --- Brian H. Richardson

“The pandemic triggered a whipsaw effect on consumers that resulted in a substantially different experience compared to previous recessions.”

Why this is important: This is a deep dive into the economy before and after 2020, including the effects of the government payments. It demonstrates with graphs and charts how the federal payments substantially shortened the term of the recession and allowed the economy to recover more quickly. It raises a question about future delinquencies and charge-offs, and it considers credit card use and debt, and its effect going forward. This is not an easy read, but you will know more after reading it. --- Hugh B. Wellons

“The report warned that any weaknesses in the three core areas it outlined could open the door to fraud.”

Why this is important: The American Bankers Association has been seeking to address innovations to combat scammers for years, and this recent report outlines what it views as best practices for the near-term focus. Focusing on the three core areas of identity proofing, authentication, and transaction authorization, the report details how strengthening digital identity can benefit financial institutions across the industry. This vision sets out much more than a step-by-step “to-do” list. It dives into the market and regulatory forces at play across the full financial service ecosystem, and how scammers take advantage of those forces – to the detriment of clients, customers, and companies. Indeed, findings indicate that synthetic identity fraud results in an annual cost to the financial services industry in the U.S. of $20 billion. This product of the collaboration between the ABA and the team at Oliver Wyman is well worth the time to read and review. A link to the full report is included in the Banking Exchange article. --- Brian H. Richardson