1. Federal Reserve Vice Chair for Supervision Notes AI Governance and Controls Should Be Determined by Use and Materiality
On July 7, Michelle Bowman, Vice Chair for Supervision, spoke at the Financial Stability Board (FSB) Virtual Outreach Event discussing the regulatory and practical considerations related to the use of artificial intelligence (AI) by financial institutions. In her remarks, Bowman highlighted the Federal Reserve’s long-running monitoring of AI use by banks, the growing range of AI applications across institutions of different sizes, and the need to support responsible innovation while managing risks. Key themes included tailoring governance and controls to specific AI use cases, assessing whether AI use is material to business operations or legal and regulatory obligations, applying lighter oversight to lower-risk uses, and ensuring proportionality so that expectations differ appropriately between large, complex institutions and smaller ones. From her perspective, financial institutions need to be specific about how AI is used and whether its use is material to their business operations and/or legal or regulatory obligations. Such use and materiality should determine the level of regulatory scrutiny and oversight. See a copy of Bowman’s speech here.
2. Industry Group Urges CFTC To Adopt Technology-Neutral, Principles-Based Framework for Blockchain-Enabled Financial Market Infrastructure
On July 9, the Blockchain Association submitted a comment letter responding to the Commodity Futures Trading Commission’s (CFTC) Request for Information: Identifying Regulations To Facilitate Innovation and Competition to Financial Products and Services for Fintech Firms, urging the CFTC to adopt a technology-neutral, principles-based framework for blockchain-enabled financial market infrastructure rather than applying legacy intermediary categories to neutral technology providers that do not custody assets, solicit trades, operate markets, clear transactions, provide advice, or exercise discretion. The letter recommends, among other things, allowing regulated entities to use separate rulebook provisions for blockchain-enabled operations, clarifying Part 40 treatment of smart-contract and other technical changes, permitting tokenized real-world asset collateral and payment stablecoins for margin and settlement when objective risk standards are met, adapting rules for 24/7 trading and settlement, and recognizing on-chain records for books-and-records and reporting purposes where they meet regulatory objectives. It also calls for predictable CFTC review procedures; tailored KYC/AML, sanctions, cybersecurity, and operational-resilience expectations for blockchain-native systems; appropriate pathways for decentralized finance and protocol-based activity; broader guidance for front-end interfaces, self-custody wallets, APIs, and other non-custodial technology providers; and continued harmonization between the Commodity Exchange Act (CEA), federal securities laws, and CFTC regulatory definitions. The comment letter frames blockchain infrastructure as an emerging component of mainstream financial market infrastructure and argues that the CFTC can preserve customer protection, market integrity, financial stability, and oversight while enabling responsible U.S.-based innovation under the CEA. See a copy of the Blockchain Association’s letter here.
3. SEC Argues Crypto Service Agreement in Texas Case Is an Investment Contract
On July 10, the Securities and Exchange Commission (SEC) filed a Reply in Support for its Motion for Partial Summary Judgment in the U.S. District Court for the Northern District of Texas, Fort Worth Division, in part asking the court to hold that the client service agreements in question were investment contracts and therefore securities under federal law. The SEC brought the suit in 2024 claiming that the defendants, including Geosyn Mining LLC, misled investors in connection with the client service agreements offered by the defendants. Given that the defendants have already been found guilty of wire fraud, the remaining question before the court is whether the client service agreements are investment contracts and therefore securities. As argued by the SEC, investors were sold what was effectively a passive Bitcoin-mining opportunity that the defendants would procure, install, maintain, operate, and manage, and distribute mining rewards to investors. Defendants argued that investors controlled their own machines and wallets and did not rely on Geosyn’s managerial efforts to generate revenue. However, the SEC argues that in the economic reality, investors had little meaningful control. As alleged, Geosyn controlled the mining equipment, electricity arrangements, and mining reward distributions. The original complaint can be found here. The SEC’s reply brief can be viewed here.
4. FINRA Seeks Comment Regarding Proposal Modernizing Rule 2210
On July 9, the Financial Industry Regulatory Authority, Inc. (FINRA) issued a regulatory notice seeking comments in connection with FINRA’s proposal to amend Rule 2210. The proposal includes amendments regarding the supervision of broker-dealer communications by replacing the default principal pre-use approval requirement for retail communications with a more flexible, risk-based framework tailored to a firm’s business, size, and structure. The proposal would preserve FINRA’s core content standards while requiring firms that do not preapprove all retail communications to maintain procedures covering training, documentation, surveillance, follow-up, and evidence of implementation.
The proposal also would reduce the significance of the current “static” versus “interactive” social media distinction and instead assess social media communications, including activity of so-called finfluencers, under the same risk-based framework. For AI-generated communications, FINRA would not create an exemption; members would remain responsible for AI outputs, but firms could use vetted, tested, monitored AI tools as part of a reasonably designed supervisory system. The practical takeaway is that firms should inventory their communications, map them to risk categories, update supervisory procedures, and document governance for AI, social media, finfluencers, and other high-volume or automated communications before the September 11 comment deadline. See the Regulatory Notice 26-14 here.
5. Kalshi Challenges New York Federal Court’s Decision Declining Protection From State Regulators
On July 8, Kalshi filed an interlocutory appeal challenging U.S. District Judge Analisa Torres’ order that declined Kalshi’s request to prevent New York regulators from enforcing state gambling laws in connection with sports-related event contracts. Kalshi argued that its product offerings are subject to the exclusive oversight of the CFTC; however, Judge Torres ruled that Kalshi failed to demonstrate that its federal preemption claim is likely to succeed. Judge Torres also dismissed the gaming commission’s Eleventh Amendment claims of sovereign immunity, which shields states from unconsented private lawsuits. Kalshi’s interlocutory appeal brings the case before the Second Circuit at the same time several states continue to assert jurisdiction over prediction markets and the CFTC asserts its exclusive jurisdiction. See Judge Torres’ opinion and order here.
