FinTech Global Regulatory Round-up – w/e 13 August 2021

BIS Speech on CBDCs

The Bank for International Settlements (BIS) has published a speech by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, on central bank digital currencies (CBDCs). The speech touches upon:

• the definition of CBDC;
• the need for CBDCs generally and more specifically in India;
• CBDCs within the banking system;
• the effect of CBDCs on monetary policy; and
• CBDCs and cyber risk. [11 Aug 2021]

#CyberRisk 

BIS Innovation Hub & MAS propose global real-time retail payments network

The BIS Innovation Hub and Monetary Authority of Singapore (MAS) have published a proposal for enhancing global payments network connectivity via multilateral linkages of countries' national retail payment systems.

Titled Project Nexus, the blueprint outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices. The Nexus blueprint comprises two main elements:

• Nexus Gateways, to be developed and implemented by the operators of participating countries' national payment systems, will serve to coordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. These gateways will be predicated on a common set of technical standards, functionalities and operational guidelines set out within the proposal.
• An overarching Nexus Scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to coordinate and effect cross-border payments through the network.

Feedback on the proposal is invited, but there is no specified deadline for contributions. [9 Aug 2021]

#Payments

FCA portfolio letter - Mortgage TPAs

The FCA has published a template version its 'Dear Board of Directors' portfolio letter setting out the FC's expectations when outsourcing to mortgage third party administrators (TPAs). [10 Aug 2021]

Covid-19: FCA updated webpage on digital sandbox

The FCA has updated its webpage on the digital sandbox. The update concerns the opening of the application window for the sustainability cohort on 6 September, with a view to opening the sandbox to successful participants in November and access to the testing environment from January 2022. [10 Aug 2021]

HKMA publishes eighteenth issue of Complaints Watch 

The HKMA has published the eighteenth issue of its Complaints Watch.  The Complaints Watch is a periodic newsletter highlighting the latest complaint trends, emerging topical issues and good practices that authorised institutions (AIs) may find helpful. The latest issue highlights some observations and good industry practices for enhancing AIs' systems and consumer protection measures to combat investment scams and other financial crime, relating to:

• enhancement of strategies, systems of control and work planning;
• use of advanced technology such as artificial intelligence (AI) to detect signs of investment scams;
• information sharing through the Fraud and Money Laundering Intelligence Taskforce;
• customer education and raising public awareness of fraud and financial crime.  [13 Aug 2021]

#Scams

HKMA notifies AIs and SVF licensees about steps it will take to support AML/CFT innovation

The HKMA has issued circulars to authorised institutions (AIs) and stored value facility (SVF) licensees regarding its initiatives in the coming months as part of the broader "Fintech 2025" strategy (see our previous update) to advance AIs’ and SVF licensees' positive and responsible use of new technologies for anti-money laundering and counter-terrorist financing (AML/CFT).

The HKMA noted that the Financial Action Task Force has recently published the report "Opportunities and Challenges of New Technologies for AML/CFT", which identifies how new technologies, especially emerging and available solutions such as machine learning and natural language processing, can help improve the speed, quality and efficiency of AML/CFT measures.

In line with global efforts, the HKMA plans to take further steps to support AML/CFT innovation and help strengthen AIs' implementation of the risk-based approach to AML/CFT, including:

• sharing experience and success stories of AIs and SVF licensees in a webinar to be held in September 2021;
• launching a series of interactive AML and financial crime regtech lab sessions for experimenting and engaging with new technologies and emerging data analytics techniques, commencing in November 2021;
• promoting network analytics capability for tackling online fraud and associated mule account networks, by commencing a thematic review in the fourth quarter of 2021 of the progress over the past year by Fraud and Money Laundering Intelligence Task Force member AIs, and sharing observations and good practices with the wider industry in 2022;
• creating a conducive environment for inclusive AML/CFT innovation (further details to be announced in the Hong Kong Fintech Week in November 2021).

As an immediate next step, AIs should coordinate relevant functions internally to provide data to assist the HKMA present an updated overview of AML and financial crime regtech adoption. Details will be communicated with individual AIs shortly. [11 Aug 2021]

#MachineLearning

#AML/CFT

#RegTech

CFTC Obtains A Court Order Against A Cryptocurrency Exchange And Derivative Trading Platform For Illegally Operating A Cryptocurrency Trading Platform And Anti-Money Laundering Violations

The Commodity Futures Trading Commission (CFTC) has announced that a New York federal court entered a consent order against five companies charged with operating a cryptocurrency exchange and derivative trading platform. The order stems from a CFTC action filed on 1 October 2020 against the cryptocurrency exchange and derivative trading platform and their three individual founders. The CFTC complaint charged the entities and founders with operating the platform while conducting significant aspects of the platform’s business from the US and unlawfully accepting orders and funds from US customers to trade cryptocurrencies, including derivatives on bitcoin, ether, and litecoin. The order requires the platform entities to pay a $100 million civil monetary penalty, and provides that up to $50 million of the penalty may be offset by payments the platform entities make or are credited pursuant to a Consent to Assessment of Civil Monetary Penalty entered by the Financial Crimes Enforcement Network. The order also prohibits the platform from further violations of the Commodity Exchange Act and CFTC’s regulations as charged. [10 Aug 2021]  

#TradingPlatform

CFTC Obtains a Consent Order against Texas and Florida Men in a $1.75 Million in Digital Assets Scheme

The CFTC has announced that a Texas court entered consent orders against a Texas resident and a Florida resident for falsely representing to actual and potential customers that their business employed “master traders” who had years of experience trading cryptocurrency, and used 'cutting edge trading robots' to trade Bitcoin for customers. The defendants further falsely represented that customer earnings would increase based on the amount of their deposit and that they would award bonuses to customers who referred others to the business. Additionally, to conceal their fraud, the defendants caused misleading trading statements to be posted online. The orders impose a permanent injunction and permanently ban the defendants from registering with the CFTC and from trading commodity interests. The orders also require the defendants to pay restitution and a civil monetary penalty. [10 Aug 2021]

SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings

The Securities and Exchange Commission (SEC) has charged two Florida men and their Cayman Islands company for unregistered sales of more than $30 million of securities using smart contracts and so-called 'decentralized finance' (DeFi) technology, and for misleading investors concerning the operations and profitability of their business. According to the SEC’s order, the defendants offered and sold two types of digital tokens: mTokens that could be purchased using specified digital assets and that paid 6.25 percent interest; and governance tokens that purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from governance token resales in the secondary market. According to the order, in offering and selling mTokens and governance tokens, the defendants stated that their business could pay the interest and profits because it would use investor assets to buy 'real world' assets that generated income, like car loans. However, the order finds that after publicly unveiling the business, the respondents realized that it could not operate as promised because the price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal. The order finds that rather than notifying investors of this roadblock, the respondents misrepresented how the company was operating.  The SEC’s order finds that the defendants violated Sections 5(a) and 5(c) of the Securities Act of 1933 by conducting unregistered offers and sales of both types of digital assets. The SEC’s order also finds that defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Without admitting or denying the findings in the SEC’s order, defendants consented to a cease-and-desist order that includes disgorgement totaling $12,849,354 and penalties of $125,000 each. [6 Aug 2021]

#DeFiTechnology

#DigitalTokens

#DigitalAssets