FinTech Global FS Regulatory Round-up – w/e 15 July 2022

IOSCO: Final report – use of innovation facilitators in growth and emerging markets

The International Organization of Securities Commissions (IOSCO) Growth and Emerging Markets Committee (GEMC) has published a report on The Use of Innovation Facilitators in Growth and Emerging Markets with four recommendations for emerging market member jurisdictions to consider when establishing innovation facilitators - innovation hubs, regulatory sandboxes, and regulatory accelerators. The report was prepared during Covid-19, which reinforced the use of technology around the globe, notably due to social distancing restrictions. The report found that a regulatory response to financial innovation requires a balanced approach between the potential opportunities of innovation against the risks for investors, the integrity of markets and the stability of the financial system. [14 Jul 2022]

#Sandboxes

FSB Chair writes to G20 on the outlook for financial stability - Covid response, crypto and climate

The Chair of the Financial Stability Board (FSB) Klaas Knot has written to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 15-16 July. The letter sets out the current outlook for financial stability, warning that combination of lower growth, rising inflation and tighter global financial conditions may crystallise pre-existing vulnerabilities in the global financial system or give rise to new ones. Mr Knot explains that the FSB is progressing work to bolster financial system resilience, and sets out updates on this work in three areas: Covid-19 response; climate; and crypto-assets.

On crypto-assets, the letter flags the FSB’s 11 July communication, which clarified that so-called stablecoins and other crypto-assets do not operate in a regulation-free space and that crypto-asset providers must not commence operations in any jurisdiction unless they meet all applicable regulatory, supervisory and oversight requirements. The FSB will report to the G20 Finance Ministers and Central Bank Governors meeting in October on regulatory and supervisory approaches to stablecoins and other crypto-assets. [13 Jul 2022]

#Cryptoassets

CPMI and IOSCO publish final guidance on stablecoin arrangements

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published final guidance confirming that stablecoin arrangements should observe international standards for payment, clearing and settlement systems. Specifically, the guidance confirms that the Principles for Financial Market Infrastructures (PFMI) apply to systemically important stablecoin arrangements that transfer stablecoins.

CPMI and IOSCO note that, given the novelty and complexity of stablecoin arrangements, the guidance elaborates aspects related to: governance; the framework for comprehensive risk management; settlement finality and money settlements. The guidance also provides considerations to assist authorities in determining whether a stablecoin arrangement is systemically important. [13 Jul 2022]

FSB: Statement on international regulation and supervision of crypto-asset activities 

The Financial Stability Board (FSB) has published a statement on international regulation and supervision of crypto-asset activities. The statement notes that crypto-assets and markets must be subject to effective regulation and oversight commensurate to the risks they pose, both at the domestic and international level. It calls for adherence of stablecoins and crypto-assets to relevant existing requirements where regulations apply to address the risks these assets pose. It also calls for crypto-asset service providers to ensure compliance with existing legal obligations in the jurisdictions in which they operate at all times. Finally, it highlights the work that the FSB will be taking forward on the regulation and supervision of unbacked crypto-assets and stablecoins, as well as on analysing the financial stability implications of decentralised finance. [11 Jul 2022]

IOSCO: Final report on operational resilience of trading venues and market intermediaries

The International Organization of Securities Commissions (IOSCO) has published its final report on the operational resilience of trading venues and market intermediaries during Covid-19. The report:

• summarises some of the existing operational resilience work by IOSCO and other international organisations;
• outlines how Covid-19 impacted regulated entities;
• examines the key operational risks and challenges that regulated entities faced during the Covid-19; and
• builds on existing IOSCO and other international organisations’ principles and guidance on operational resilience by providing additional observations and identifying lessons learned from Covid-19. [11 Jul 2022]

CPMI/Innovation Hub/IMF/World Bank: Report on options for access to and interoperability of CBDCs for cross-border payments

The Committee on Payments and Market Infrastructures (CPMI), the Innovation Hub of the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the World Bank have published a Report to the G20 on options for access to and interoperability of central bank digital currencies (CBDCs) for cross-border payments. The report highlights that CBDCs currently provide a key benefit in being able to consider cross-border functionality already during the initial development phase. It also sets out: criteria for analysing cross-border CBDC arrangements; potential options for access to and interoperability of CBDCs; implementation challenges; and considerations for future work. [11 Jul 2022]

#CBDCs

FCA: Speech on how the UK will regulate for the future

The FCA has published a speech by Nikhil Rathi,Chief Executive, delivered at the Peterson Institute for International Economics. The highlights of his speech are as follows:

• Intensive dialogue between all nations is essential to ensure that consistent outcomes are delivered;
• having departed from the EU, the UK now has a vital opportunity to adapt its regulatory system to respond to today’s challenges and to bolster the global reach of our wholesale markets;
• the FCA has invested heavily in data and technology and scan 100,000 websites for fraud every day; and
• the US and UK will deepen ties on crypto-asset regulation and market developments – including in relation to stablecoins and the exploration of central bank digital currencies. [14 Jul 2022]

#Technology

#Cryptoassets

#CBDCs

TSC launches inquiry into crypto-assets in the UK

The Treasury Committee (TSC) has launched an inquiry into crypto-assets and issued a call for written evidence.  The TSC intends to explore: the role of crypto-assets in the UK, as well as the opportunities and risks they bring to consumers and businesses; the potential impact of distributed ledger technology (DLT) on financial institutions, including the central bank, and financial infrastructure; and the regulatory response to crypto-assets from HM Government (HMG), the FCA and the Bank of England (BoE).

Evidence submissions are requested by 12 September 2022. [13 Jul 2022]

BoE: Speech on lessons from the crypto winter

The Bank of England (BoE) has published the speech delivered by Sir Jon Cunliffe, Deputy Governor, Financial Stability at the British High Commissioner's residence in Singapore. In his speech, Mr Cunliffe sets out what he thinks are the lessons from the recent instability and losses in crypto markets – also called the ‘crypto winter’. He discusses how:

• technology cannot remove all financial risks;
• regulators should continue and speed up their work;
• future regulation should be designed on the principle of ‘same risk, same regulation’; and
• appropriate regulation will support innovation. [12 Jul 2022]

ECB speech – Using AI to fight financial crime

The European Central Bank (ECB) has published a speech delivered by Elizabeth McCaul, Member of the Supervisory Board, at the conference on Use of artificial intelligence (AI) to fight financial crime, organised by Intesa Sanpaolo. Ms McCaul discussed the implications of technology for anti-money laundering (AML) and countering the financing of terrorism (CFT) supervision. In her concluding remarks, Ms McCaul observed, 'New technologies such as AI and machine learning offer tremendous opportunities for both banks and supervisors. However, to use these technologies safely and soundly, [requires] an adequate regulatory framework, proper supervisory oversight and an understanding by all users – banks and supervisors alike – of not just the potential but also the limitations and risks of these technologies.' [13 Jul 2022]

#AML/CFT

EC extends transitional period for crowdfunding services provided under national law

The European Commission (EC) has adopted a delegated regulation which will extend the transitional period for continuing to provide crowdfunding services in accordance with national law as referred to in Article 48(1) of the European Crowdfunding Service Provider Regulation (ECSPR) until 10 November 2023. [13 Jul 2022]

ESMA: CP on Guidelines on application for permission under DLTR

The European Securities and Markets Authority (ESMA) has published Consultation Paper (CP) on Guidelines on standard forms, formats and templates to apply for permission to operate a distributed ledger technology (DLT) market infrastructure (MI) under Regulation No 858/2022 on a pilot regime for market infrastructures based on distributed ledger technology (DLTR). The Guidelines set out  the standard forms, formats, and templates, to be used to submit information to apply for any specific permission to operate a DLT MI, namely: a DLT multilateral trading facility (DLT MTF), a DLT settlement system (DLT SS) and a DLT trading and settlement system (DLT TSS), as required by Articles 8 to 10 of the DLTR respectively.

Feedback is requested by 9 September 2022. ESMA will finalise the Guidelines ahead of the application date of the DLTR on 23 March 2023. [11 Jul 2022]

HKMA Executive Director delivers keynote speech on innovative ways of working in AML and counter terrorist financing

Ms Carmen Chu (the HKMA's Executive Director (Enforcement and AML)) delivered an opening keynote speech at the Fraud and Financial Crime Asia 2022 Conference on 13 July 2022.  The following are some of the key issues she discussed:

• Unprecedented challenges brought about by the pandemic and developments in geopolitics have led to the proliferation of financial crime, especially fraud and cyber-crime.  The HKMA welcomes the announcement by the Financial Action Task Force that it would build on the current work on digital transformation to further explore contemporary money laundering and terrorist-financing risks associated with cross-border, cyber-enabled crimes, including those concerning virtual assets.

• One area that the HKMA is keen to explore further is how the policy and regulatory framework can enable capacity in the system to be released from low-value activities, and refocussed where it can have the greatest impact against priority threats.  Information and intelligence sharing partnerships are hugely important in this context.
• The HKMA has been working with the banking sector to encourage wider use of technology in anti-money laundering (AML) work. The first AML Regtech Lab (AMLab), launched in November 2021, was on the use of network analytics techniques in identifying fraud mule account networks (see our previous update).  The second AMLab, to be held later this month, will focus on areas such as tools that allow staff without sophisticated coding skills to automate repetitive parts of processes.

Ms Chu also mentioned that the HKMA will work on two new initiatives in the next 12 to 18 months:

• AML Suptech – The HKMA will soon conduct a pilot on the application of data analytics, using granular data from multiple banks to assess sectoral money laundering risks to help inform more timely supervisory response aimed at reducing and preventing serious harm.
• Bank-to-bank information sharing – The HKMA is supporting a number of "champion" banks to develop an appropriate framework and capability for detecting and sharing early signs of suspicion.  This new private-private partnership aims to complement the existing public-private partnership as well as public sector initiatives to enhance the preventive and detection powers of the AML eco-system.  [13 Jul 2022]

#AML/CFT

Treasury issues request for comment on responsible development of digital assets 

The US Department of the Treasury has released a notice seeking public comment regarding potential opportunities and risks presented by developments and adoption of digital assets as part of its work under President Joe Biden’s digital assets Executive Order. Section 5 of Executive Order 14067, “Ensuring Responsible Development of Digital Assets,” directs Treasury, in consultation with the Secretary of Labor and other relevant agencies, to report to the President on the implications of development and adoption of digital assets and changes in financial market and payment infrastructures for US consumers, investors, businesses.

Comments are requested by 8 August 2022.  [14 Jul 2022] 

Treasury: Framework for international engagement on digital assets

The US Department of the Treasury has announced the delivery to President Biden of a framework for interagency engagement with foreign counterparts and in international fora on digital assets. The President's digital assets Executive Order outlined an interagency approach to address the risks and harness the potential benefits of digital assets and their underlying technology, including through international engagement to adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted. The framework is intended to ensure that, with respect to digital assets: the US's core democratic values are respected; consumers, investors, and businesses are protected; appropriate global financial system connectivity and platform and architecture interoperability are preserved; and the safety and soundness of the global financial system and international monetary system are maintained. [7 Jul 2022]