On Nov. 21, Senate called on bank regulators to review SoFi's crypto.
Senator Brown and colleagues sent letter to the Fed, FDIC, and OCC urging them to review crypto trading activities of SoFi Technologies Inc.’s, a bank holding company.
Over the past year, several meltdowns in the crypto market have wiped out trillions in value, including another huge crash last week, and Senators concerned about SoFi.
Specifically, the Senators are concerned that SoFi’s continued nonbank digital asset trading activities pose risks to consumers and safety and soundness risks.
Follows Nov. 11, 2022 FTX and affiliates filing of Chapter 11 bankruptcy, see #153248.
SoFi Conversion to Bank Holding Company
In Feb. 2022, SoFi completed its acquisition of Golden Pacific Bancorp, a bank holding company (BHC) and its subsidiary Golden Pacific Bank, a national bank.
As part of transaction, Fed approved SoFi becoming a BHC, which elected to be treated as a financial holding company (FHC) subject to consolidated supervision by the Fed.
Also OCC gave SoFi conditional approval to create full-service national bank subsidiary insured by FDIC, while it continues to operate a nonbank subsidiary, SoFi Digital Assets
SoFI Digital Assets is an exchange for retail investors to buy and sell digital assets.
SoFi Crypto-Asset Activities
In its letter of Jan. 2022, granting approval, Fed noted that SoFi is currently engaged in crypto-asset related activities that Fed has found not to be permissible for a BHC.
Under the Jan. 2022 letter, SoFi has 2 years to either divest SoFi Digital Assets or conform its activities to the law, with the potential for up to 3 one-year extensions.
Further, OCC’s conditional approval restricts any SoFi’s national bank subsidiary from conducting any crypto-asset activities or services” without prior regulatory approval.
SoFi’s most recent annual report states these impermissible activities are conducted by SoFi Digital Assets; showing a failure to take seriously its regulatory commitments.
SoFi Appearing to Increase Crypto Activity
SoFi’s apparent expansion of its digital asset services raises questions about progress towards meeting conformance commitments by the January 2024 deadline.
Two months after its approval to become BHC, SoFi launched a new service for clients of national bank to invest part of every direct deposit into digital assets with no fees.
The company publicly advertised this new service offering as the latest expansion of SoFi’s offerings to make it simpler to get started with cryptocurrency investing.
Risk of Digital Assets to Meet Capital Requirements
Further, SoFi’s facilitation of customer digital asset trading and holding digital assets on-balance sheet raises questions about the proper calculation of capital requirements.
Under current capital rules, the capital treatment of these digital assets follows their accounting treatment, not capital standards tailored to risks of this asset class.
While digital assets can pose the same risks as traditional financial assets, the recent market crash has highlighted concerning credit, market, liquidity, operational risks.
Poses Liquidity, Bail Out Risk
Capital treatment is key, as taxpayers may be on the hook if crypto exposures at SoFi Digital Assets ultimately require its parent BHC or affiliated national bank to seek emergency liquidity or other financial assistance from the Federal Reserve or FDIC.
SoFi Offering Crypto Pump-and-Dump Hazard
SoFi’s own investor protection materials posted on its website warn customers that at least one token listed on SoFi Digital Assets is a crypto pump-and-dump hazard.
The posting goes on to say that the tokens have no special use case or features, and that they might be among the most high-risk endeavors an investor can take.
This even though according to SoFi’s website, the company’s policy is to list assets that align with SoFi’s values, such as promoting financial inclusion and economic freedom.
Therefore, SoFi’s standards for choosing which digital assets to offer its customers for trading raises investor protection concerns; SoFi is still offering the hazardous tokens.
Facilitating retail sales of an investment product that SoFi has identified as a fraud and subject to market manipulation is incompatible with basic investor protection, safety.
Senate Request of Banking Regulators
Senators asked agencies to reply to the questions listed in the letter no later than Dec. 8, 2022, including regarding SoFi’s digital assets policies and procedures (PPs).
Specifically PPs for determining which digital assets to offer and sell through subsidiary
PPs for ensuring that digital asset purchases and sales are conducted in compliance with applicable laws and regulations; and identifying any potential conflicts of interest.
How SoFi determine credit, market, operational risk capital requirements for digital asset exposures; and plans to conform its digital asset trading to BHC Act by Jan. 2024
Does SoFi Digital Assets offer any securities for purchase or sale, and if so, how do its existing licenses provide authorization to operate platform for buying and selling them.
How does its service allowing customers to invest part of their direct deposit in digital assets meet SoFi’s conformance commitments to the Fed and the OCC’s restrictions.