FinTech Global FS Regulatory Round-up – w/e 1 July 2022

BCBS: Consultation on the prudential treatment of crypto-asset exposures 

The Basel Committee on Banking Supervision (BCBS) has published its second consultation on the prudential treatment of crypto-asset exposures. The consultation builds on the preliminary proposals set out in a June 2021 consultation. The updated proposals provide more detail on the proposed standard and include new elements such as an infrastructure risk add-on to cover the new and evolving risks of distributed ledger technologies (DLT); adjustments to increase risk sensitivity; and an overall gross limit on Group 2 crypto-assets. Group 2 crypto-assets are those which fail to meet any of the classification conditions required for identification as Group 1 crypto-assets (for example, stablecoins are in Group 1) and as such represent a greater risk.

Feedback is requested by 30 September 2022. The BCBS aims to finalise the standards by the end of 2022, but these may be tightened if it is identified that there are shortcomings in the consultation proposals or if new risks emerge. [30 Jun 2022]

#Stablecoins

FATF: Targeted update on implementation of the FATF standards on virtual assets and VASPs

The Financial Action Task Force (FATF) has published a targeted update on the implementation of the FATF standards on virtual assets and virtual asset service provider (VASPs).

The report builds on the FATF’s previous two reviews on implementation by providing a short update on the latest country compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15). The report places a specific focus on FATF’s Travel Rule to respond to FATF’s June 2021 findings that countries and the private sector face particular challenges in this area. Further, the report covers relevant emerging risks and market developments, including on decentralized finance (DeFi), non fungible tokens (NFTs) and unhosted wallets. [30 Jun 2022]

#VASPs

HMT: Joint Statement on US-UK Financial Innovation Partnership

HM Treasury (HMT) has published a joint statement by participants in the US-UK Financial Innovation Partnership (FIP) following a Regulatory Pillar meeting on 29 June 2022. In the meeting, participants discussed views on crypto and digital asset ecosystems, and also the deepening ties between US and UK financial authorities on financial innovation. [1 Jul 2022]

#DigitalAssets

FCA resolves HC proceedings on unauthorised deposit taking

The FCA has published a statement noting that it has resolved the High Court (HC) proceedings in relation to an unauthorised deposit taking scheme operated by a firm. The FCA began court proceedings in December 2019 against the firm and six defendants for taking money from the public for different projects, including forex and crypto-asset trading, without the required FCA authorisation. The FCA also alleged misleading statements and marketing about the nature of the investments the firm was offering. In early 2021, five of the defendants in the case accepted the FCA's claim in its entirety; the final defendant has now accepted the claims against him. [30 Jun 2022]

#Trading

FCA: Updated webpage - CryptoSprint outputs 

The FCA has published an update on its CryptoSprint outputs. The update provides some detail on the FCA's first policy-focused CryptoSprint events in May and June 2022. There were around 184 participants at the events. The FCA has also published a transcript of the May event. [30 Jun 2022] 

HMT publishes Economic Secretary's remarks on the UK financial services sector

HM Treasury has published the remarks delivered by Economic Secretary to the Treasury, John Glen MP, at TheCityUK Annual Conference.  During his address, Mr Glen first highlighted the contribution made by the financial services sector the UK economy. He then explained the significance of the Financial Services and Markets Bill, remarking that far from a post-Brexit 'bonfire of regulation', the approach has been to strengthen regulatory standards 'in a way that supports the UK's position as a global financial centre.'  He then moved to speak about engagement with the EU, the UK's equivalence framework, and encouraging the growth of the UK FinTech sector. [30 Jun 2022]

BoE speech: Enhancing cross-border payments

The BoE has published the remarks delivered by Victoria Cleland, Executive Director for Banking, Payments and Innovation at the Central Bank Payments Conference. Ms Cleland provided an update on the progress made under the G20's Roadmap for Enhancing Cross Border Payments, drawing out a number of recent steps, for example:

• with regard to Building block 9, the Committee on Payment and Market Infrastructure (CPMI) received multiple responses to its October 2021 call for ideas on expanding payment-versus-payment (PvP) for foreign exchange (FX) transactions; a consultative report will be published in the summer; and
• with regard to Building block 12, the US Federal Reserve extended Fedwire operating hours in 2021 to be operational for 22 hours per day, 5 days per week and the European Central Bank (ECB) plans to extend operating hours as part of the go-live of the consolidation project in November 2022.

She also spoke about the BoE's work on renewing the real-time gross settlement (RTGS) service – a multi-year project to update the domestic infrastructure which also provides opportunities to support work on enhancing cross-border payments.

Ms Cleland concluded her remarks by emphasising the need for central banks, industry and public authorities across the world to work together to deliver the roadmap. [29 Jun 2022]

#FX

#Innovation

APPGs publish response from HMT on cryptoasset financial promotions

The All Party Parliamentary Groups (APPG) on FinTech and on Crypto & Digital Assets have published a letter received from John Glen, Economic Secretary to HM Treasury (HMT) regarding cryptoasset financial promotions.  Mr Glen was responding to the APPGs' letter of 10 June which set out concerns around proposals to bring certain cryptoassets into the financial promotions regime; specifically, the APPGs were concerned that the majority of crypto firms in the UK would not be able to approve their own financial promotions because they do not hold Part 4A permission under the Financial Services and Markets Act (FSMA). Mr Glen explains that it is not the intention of legislation and the FCA's rules to impose a 'marketing ban' on cryptoasset financial promotions, and says that he has asked officials to look into the APPGs' concerns to ensure that the regime provides sufficient scope for firms to have crypto promotions, which comply with FCA rules, approved. [29 Jun 2022] 

#DigitalAssets

FCA: Open Banking Joint Regulatory Oversight Committee - new webpage with terms of reference

The FCA published a new webpage the terms of reference for the Open Banking Joint Regulatory Oversight Committee. The page covers:

• an introduction to the committee, including a link to its terms of reference;
• the plans to convene a strategic working group (more information will be released on this soon); and
• the discussions and actions at committee meetings on 12 May and 14 June 2022 [27 Jun 2022]

EC/EP/Council: Political agreement on MiCA

The EC, EP and the Council of the EU have reached political agreement on the Markets in Crypto-Assets Regulation (MiCA). The announcements highlight the following points of agreement.

• Crypto-asset service providers (CASPs) will need to be authorised to operate within the EU. National authorities will be required to issue authorisations within a timeframe of three months and transmit relevant information regularly to ESMA concerning the largest CASPs. Significant CASPs will also be required to disclose their energy consumption.
• Non-fungible tokens (NFTs) will be excluded from the scope of MiCA unless they fall under existing crypto-asset categories. The EC will assess this point within 18 months and, if necessary, adopt a legislative proposal to create a regime for NFTs.

The political agreement is subject to the approval of the Council and EP before going through the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published. [1 Jul 2022]

#Cryptoassets

#CASPs

#NFTs

Council/EP: Agreement on proposed Regulation on information accompanying transfers of funds and certain cryptoassets

The Council of the EU and the EP have reached a provisional political agreement on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets. The proposed Regulation will introduce an obligation for cryptoasset service providers to collect and make accessible certain information about the originator and the beneficiary of the transfers of cryptoassets they operate. The proposed Regulation is intended to recast the revised Wire Transfer Regulation.

The Council, EP and EC are now working on the technical aspects of the text; the next step will be for the Council and the EP to approve the provisional agreement before formal adoption. [30 Jun 2022] 

Council: Note on AMLA Regulation

The Council of the EU has published a note on the Regulation establishing the AML Authority (AMLA Regulation). The note sets out the proposal for the AMLA Regulation. In its proposal, the Council gives the Authority the power to directly supervise certain types of credit and financial institutions, including CASPs, if they are considered risky. It also entrusts the Authority to supervise up to 40 groups and entities (at least in the first selection process) and to ensure a complete coverage of the internal market under its supervision. [30 Jun 2022] 

#CASPs 

EP: Digital operational resilience for the financial sector 

The EP has updated the procedure file in relation to digital operational resilience for the financial sector - also referred to as the Digital Operational Resilience Act or DORA. The update sets out an indicative plenary sitting date of 17 October 2022. The plenary sitting will involve a discussion of the legislative work done in this area. It is also the forum in which the EP will formally vote on legislation and adopt its position on political issues. [28 Jun 2022] 

#OpRes

ASIC calls on industry to continue to improve resilience during market outages

ASIC is calling on market operators and participants to continue to implement its expectations, set out in Report 708, to improve the resilience of the Australian equity market during outages, including by facilitating trading on alternative markets. ASIC’s market outage expectations coincide with other important changes in the industry, including CHESS replacement, Cboe’s technology upgrade and the implementation of new market integrity rules.  [28 Jun 2022]

MAS: Thematic review – AI and machine learning

The Monetary Authority of Singapore (MAS) has published a report following its thematic review on selected financial institutions’ (FIs) implementation of Fairness Principles in their use of artificial intelligence (AI) and machine learning. The paper highlights observations from the review of the FIs’ policies and governance frameworks to meet the Fairness objectives under the Fairness Principles, and their implementation effectiveness in actual AI and machine learning use cases. It sets out MAS’ recommendations, good practices and illustrative examples observed from the review.  [30 Jun 2022]

#MachineLearning

RBI encourages cardholders to tokenise; extension to timeline for storing CoF data

In a press release, the RBI has encouraged cardholders to tokenise their cards as a step towards preventing fraud.  The RBI explains that many entities, including merchants, involved in an online card transaction chain may store card data (such as the card number, expiry date, etc.) and while this may offer some convenience to customers, the availability of card details with multiple entities increases the risk of card data being stolen/misused.

The RBI had initially mandated that after December 31, 2021, entities other than card networks and card issuers cannot store card data. This timeline was subsequently extended to June 30, 2022 and has again been extended to September 30, 2022.

A framework for Card-on-File Tokenisation (CoFT) services has also issued. Under this framework, cardholders can create 'tokens' (a unique alternate code) in lieu of card details; these tokens can then be stored by the merchants for processing transactions in future. As such, CoFT obviates the need to store card details with merchants and provides the same level of convenience to cardholders.  [24 Jun 2022]

BSP urges adoption of measures to mitigate cyber attacks

The Bangko Sentral ng Pilipinas (BSP) has issued a press release highlighting the importance of BSP-supervised financial institutions (BSFIs) adopting robust control measures against cyber fraud and attacks on retail electronic payments and financial services (EPFS). The BSP refers to its Memorandum No. M-2022-015 of 22 March 2022 which reads: 'BSFIs should regularly conduct risk assessments of their product features, business rules, as well as application controls, and enforce appropriate enhancements and mitigation measures.'

In addition, the BSP advises that BSFIs are advised to remove clickable links in communications sent to customers via electronic mail (email) and short message service (SMS) or text messages, and to send notifications through registered mobile numbers or email addresses when requesting changes to customer information. BSFIs should also implement mandatory notifications for fund transfers exceeding a predefined amount, delays in activating new soft tokens or new device registrations, and a cooling-off period for key account changes.  [28 Jun 2022]

Owner of technology companies arrested for alleged $45 million investment fraud scheme involving over 10,000 victims

The Department of Justice (DoJ) has announced that a Nevada man was arrested for an alleged investment fraud scheme that defrauded more than 10,000 victims of over $45 million. According to the indictment, the defendant owned a group of technology companies that he used in a scheme to defraud investors by falsely promising extremely high returns on the premise that one or more of his companies was about to be acquired by a consortium of wealthy buyers.

The defendant’s companies developed virtual-world technologies, including their own cryptocurrency, for use in the companies’ own metaverse. The indictment alleges that the defendant caused other individuals to make various materially false and misleading representations to investors, including that: (a) investors in the defendant’s companies would soon receive extremely high returns when one or more of those companies was purchased by a group of wealthy buyers; (b) investor funds would be used for normal expenses to keep the companies operating until they were purchased; and (c) prominent business figures, including two billionaires, were involved in the purchase. In fact, according to the indictment, there was no such buyer group that was about to purchase the companies for the claimed returns; a substantial portion of the funds were misappropriated for other business ventures and the personal benefit of the defendant and others, including the purchase of luxury cars and real estate; and there were no prominent billionaires involved in purchasing the defendant’s companies.

The defendant is charged with three counts of wire fraud and two counts of engaging in monetary transactions in criminally derived property. [29 Jun 2022]

#Metaverse