FinTech Global FS Regulatory Round-up – w/e 2 December 2022

OECD: Report on environmental impact of digital assets - crypto-asset mining and DLT consensus mechanisms

The Organisation for Economic Co-operation and Development (OECD) has published a report on environmental impact of digital assets which focuses on crypto-asset mining and distributed ledger technology (DLT) consensus mechanisms. The report explores the growing environmental impact of crypto-assets due to increasing institutional and retail participation in these markets. The use of energy-intensive transaction validation through Proof-of-Work consensus mechanisms and the corresponding carbon footprint create climate transition risks for market participants. The report concludes that policy considerations and action are necessary given the carbon footprint and associated climate transition risks of certain digital assets when combined with negative externalities extending to the wider society. [2 Dec 2022]

#DLT

The Wolfsberg Group: Principles for AI and ML in financial crime compliance 

The Wolfsberg Group has published Principles for Using Artificial Intelligence (AI) and Machine Learning (ML) in Financial Crime Compliance. The principles consist of five elements that support the responsible use of AI/ML in financial crime compliance: legitimate purpose; proportionate use; design and technical expertise; accountability and oversight; as well as openness and transparency. [1 Dec 2022]

#ML

#FinancialCrime

CPMI/IOSCO: Report on FMI cyber resilience

The Committee on Payments and Market Infrastructures (CPMI) and the the International Organization of Securities Commissions (IOSCO) have published a report on financial market infrastructures' (FMI) cyber resilience. The report finds reasonably high adoption of the Guidance on cyber resilience for financial market infrastructures by FMIs. However, it identifies a serious issue of concern related to a small number of FMIs not fully meeting expectations regarding the development of cyber response and recovery plans to meet the two-hour recovery time objective (2hRTO). Four additional issues of concern relate to shortcomings in established response and recovery plans to meet the 2hRTO under extreme cyber-attack scenarios; lack of cyber resilience testing after major system changes; lack of comprehensive scenario-based testing; and inadequate involvement of relevant stakeholders in testing. [29 Nov 2022]

IMF: New DGI workplan to address climate change, inclusion and financial innovation 

The International Monetary Fund (IMF) has announced that, in cooperation with the Financial Stability Board (FSB) and the Inter-Agency Group on Economic and Financial Statistics (IAG), it has developed a high-level workplan for a new Data Gaps Initiative (DGI).

The workplan covers 14 recommendations addressing priority policy needs in the areas of: (i) climate change; (ii) distribution of household income and wealth; (iii) fintech and financial inclusion; and (iv) access to private sources of data and administrative data, and data sharing to improve the timeliness and granularity of official statistics.

The recommendations are expected to be implemented within five years after the launch. As with previous phases, implementation will be monitored and published on the DGI Website beginning in 2023. [29 Dec 2022]

Lords written question & answer: Blockchain and NFTs

For HMT, Baroness Penn has responded to a question put by Lord Kennedy of Southwark. Lord Kennedy asked, 'what assessment [HMT has] made of the (1) operation, (2) benefits, and (3) risks, of (a) Non-Fungible Tokens (NFTs), and (b) the wider blockchain'.  The response advises:

• that a Financial Market Infrastructure (FMI) Sandbox is being established to enable firms to experiment with the use of new technologies like distributed ledger technology (DLT) in providing the services that underpin financial markets;
• HM Government (HMG) is also exploring the possible use of DLT in the issuance and lifecycle of a sovereign debt instrument and further details of this research programme will be set out in due course; and
• that most NFTs are not currently subject to financial services regulation and HMG has proposed to exclude them from the financial promotions regime, but HMG is closely monitoring how NFTs are used in financial services. [2 Dec 2022]

#NFTs

FCA webinar: Financial promotions for firms in the early and high growth oversight cohort

The FCA has released the recording of its webinar for firms in its early and high growth oversight cohort on financial promotions which was held on 16 November 2022.  A transcript of the webinar is also available. [30 Nov 2022]

FCA: Speech on culture in financial services

The FCA has published a speech delivered by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, at City and Financial Global's 8th Annual Culture and Conduct Forum. With regard to crypto firms, Ms Shepperd noted that only 5% of crypto firms who applied to the FCA for registration showed that they understood anti-money laundering (AML) rules and a further 30% of applicants needed material extra work; half of that 30% who engaged seriously with the regulator became registered. [29 Nov 2022]

BoE: Transforming data collection communication to firms

The BoE has published an update on the progress of the joint transformation programme led by the BoE and FCA, to transform data collection from the UK financial sector. The communication covers:

• the progress of the programme and the phase two use cases;
• the plans and timetable for implementing the phase one recommendations;
• an update on the Data Standards Review which is due to report findings in early 2023; and
• information about the BoE's Town Hall event taking place on 29 November 2022.

The update also provides information on the launch of the PRA’s Banking Data Review, which is a separate, but complementary initiative. The PRA will host a dedicated launch event early in 2023. [28 Nov 2022]

Council of the EU adopts DORA

The Council of the EU has adopted the Digital Operational Resilience Act (DORA), marking the final step in the legislative process. DORA creates a regulatory framework on digital operational resilience whereby financial entities, including banks, insurers and investment firms need to ensure they can withstand, respond to and recover from all types of ICT-related disruptions and threats.

The next step is national transposition whereby DORA will be passed into law by each EU Member State. At the same time, the European Supervisory Authorities (ESAs) will develop technical standards. [28 Nov 2022]

Credit Reference Platform begins operation with three credit reference agencies selected; revised SPM IC-6 takes effect  

The banking industry associations (namely, the Hong Kong Association of Banks, the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies, and the Hong Kong S.A.R. Licensed Money Lenders Association Limited) have announced the launch of the Credit Reference Platform.  The HKMA welcomes the launch.

The platform facilitates the transmission of consumer credit information in encrypted form between the participating credit providers (such as banks and money lenders) and the credit reference agencies using the latest technologies (including distributed ledger technology, big data architecture and application programming interface).  The centralised database of the platform is stored in Hong Kong, and the credit reference agencies are not allowed to transfer the consumer credit data outside Hong Kong for storage and processing.

Three credit reference agencies (namely, Nova Credit Limited, PingAn OneConnect Credit Reference Services Agency (HK) Limited, and TransUnion Credit Information Services Limited) have been selected following an assessment by a third-party consultant of their compliance with requirements for information security, system administration and data management.  The multiple credit reference agency model promotes competition and enhances the governance of credit reference service providers and the protection of consumer credit data.  Selected credit reference agencies and credit providers are required to comply with a code of practice.

The HKMA reminds authorised institutions to take timely action for participation in the initial data load and data validation processes as scheduled, in accordance with the advice of the industry associations, platform operator and business operator.  The selected credit reference agencies will then download the data from the platform in preparation for their provision of consumer credit reference services.

The HKMA has also confirmed 28 November 2022 as the effective date of the revised Supervisory Policy Manual (SPM) module IC-6 "The Sharing and Use of Consumer Credit Data through Credit reference Agencies" (see our previous update regarding the finalisation of module IC-6).  [28 Nov 2022]

#BigData

HKMA Research Department publishes findings from event study on May 2022 stablecoin market crash

The HKMA Research Department has published a memorandum titled "An Event Study on the May 2022 Stablecoin Market Crash", which looks at the possible attributes of stablecoins that may explain the differences in redemption pressure experienced in the crypto-asset price collapse in May 2022.  The study appears to be the first to systematically compare the strength of asset backing across stablecoin projects.

The following are some of the key findings from the study, which considered a sample of 18 stablecoins as of May 2022:

• There is strong evidence that the presence of quality reserve assets is the most important determinant of the run pressures on a stablecoin.  Stablecoins backed by a larger amount of high-quality (ie, low-volatility) reserve assets tended to face less severe run pressure.  The lack of reserve assets and the presence of endogenous backing design contribute to the fragility of algorithmic stablecoins and, together with external causes, led to the crash of Terra.  The crash evidently spilled over to its neighbours in the stablecoin space, the wider decentralised finance (DeFi) ecosystem, digital assets and crypto-oriented firms.
• Crypto-collateralised stablecoins were the major shock receivers of the May 2022 crash, conceivably given their role as crypto leverage providers.  Those with more restrictive lending requirements (ie, higher collateralisation ratios) were better shielded from run pressure in May 2022, highlighting the importance of having sufficient margin of safety.
• A hit to confidence in the stablecoin sector could trigger DeFi deleveraging.

The research paper notes that there are a few caveats to the findings, including the fact that pervasive data gap issues and complex token holdings require a large number of assumptions and adjustments to compute the necessary data points for the regression.  [24 Nov 2022]

MAS responses to Parliamentary questions - Crypto, digital Singapore dollar

MAS has published the written replies to Parliamentary questions on:

• the bankruptcy of the cryptocurrency trading platform FTX - in this response, among other matters, MAS: outlines its overall approach to digital assets; confirms that it will introduce some basic investor protection measures for digital payment token (DPT) providers; and comments on MAS' use of the Investor Alert List;
• prudential treatment of Singapore banks' crypto asset exposure - this response MAS advises that Singapore-incorporated banks' exposure to cryptoassets contribute less than 0.05% of their total risk weighted assets (RWAs) and that *(pending finalisation of a prudential framework by the Basel Committee on Banking Supervision (BCBS)) MAS currently requires Singapore-incorporated banks to apply a 1250% risk weight for exposures to 'risker' cryptoassets; and
• the proposed trial of a digital Singapore dollar. [28 to 30 Nov 2022]

#CBDC

UK and Singapore deepen FinTech collaboration and strengthen financial cooperation

The UK and Singapore held the 7th UK-Singapore Financial Dialogue in Singapore. Both countries renewed their commitment to deepening the UK-Singapore Financial Partnership that was agreed in 2021, discussed mutual priorities such as sustainable finance (touching on transition finance, disclosure standards, greenwashing, natural capital and biodiversity), FinTech and innovation (prioritising crypto assets, e-wallets and digital banking), and agreed on further cooperation in these areas.  The UK and Singapore agreed on a Memorandum of Understanding (MoU) on the UK-Singapore FinTech Bridge.  Two industry-led UK-Singapore business roundtables on sustainable finance and FinTech took place on 24 November 2022. [25 Nov 2022]

#Cryptoassets

#DigitalBanking

SECT consultation on rules on the allocation of foreign currency transactions for Digital Asset Fund Managers

The Securities and Exchange Commission of Thailand (SECT) has published a consultation (Thai language) on proposals to extend its rules on the allocation of foreign currency transaction limits to Digital Asset Fund Managers.  Responses are sought by 14 December 2022.  [29 Nov 2022]

#FundManagers

OIC: Launch of the Thailand Insurance Symposium Forum 2022

The Office of the Insurance Commission (OIC) launched the Thailand Insurance Symposium Forum 2022 on "Thai Insurance Industry at Crossroads: Digitalization, Cyber Risk and Sustainable Growth" with the aim of enhancing knowledge and understanding of insurance, innovative insurance products and new technologies throughout the various risk management areas from the current and future insurance business circumstances and future trends. Awards were made to ten students for their research, including in respect of a paper on "Insurance and Cyber Risk management of Government Agencies".  [26 Nov 2022]

#Digitalisation

#CyberRisk

RBI: operationalisation of CBDC – Retail (e₹-R) Pilot

The RBI announced the launch of the first pilot for retail digital Rupee (e₹-R) on December 01, 2022. The pilot will cover select locations in a closed user group (CUG) comprising participating customers and merchants. The e₹-R will be in the form of a digital token that represents legal tender. It will be issued in the same denominations that paper currency and coins are currently issued, and distributed through intermediaries, ie banks.

Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones / devices. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations. The e₹-R would offer features of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.

Eight banks have been identified for phase-wise participation in this pilot. The first phase will begin with four banks, viz State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country. Four more banks, viz Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently.  Different features and applications of the e₹-R token and architecture will be tested in future pilots, based on the learnings from this pilot. [29 Nov 2022]

BSP and PPMI Launch "Bills Pay PH"

The Bangko Sentral ng Pilipinas (BSP) and the Philippine Payments Management, Inc. (PPMI) have launched “Bills Pay PH”, which facilitates digital transactions between accounts from different payment service providers (PSPs). Transactions can be performed by scanning or uploading the QR Ph Person-to-Biller (P2B) code, or by manually inputting payment details for the non-QR mode of payment. QR Ph is the national standard for quick response codes. There are no charges or fees incurred when using Bills Pay PH.  Through Bills Pay PH, customers who have accounts with participating banks can now make digital payments to almost 50 onboarded billers and participating billers that maintain accounts with participating banks are able to receive online payments from a wider set of customers.  The list of participating billers will grow as billers are onboarded. [28 Nov 2022]

#Digital

CFTC: Individual to pay more than $2.8 Million in restitution for virtual currency fraud

The Commodity Futures Trading Commission (CFTC) has announced that the US District Court for the Southern District of New York entered a consent order on 29 November 2022 for a permanent injunction, restitution, and equitable relief against a Rhode Island man. The consent order resolves a CFTC action filed against the individual on 26 January 2021 alleging that he operated a virtual currency Ponzi scheme in which he fraudulently solicited individuals to invest in digital assets such as bitcoin and ether.

The order states that, from approximately December 2017 through to April 2019, the individual and at times his company, operated a Ponzi scheme in which he fraudulently solicited and obtained more than $5 million of digital assets such as bitcoin and ether from customers.

The order requires the individual to pay $2,847,743 in restitution to victims of the fraudulent scheme. The order also permanently prohibits him from engaging in further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged, and imposes permanent registration and trading bans. [1 Dec 2022]