FinTech Global FS Regulatory Round-up – w/e 20 January 2023

PSR summary of digital payments roundtable discussion

The Payment Systems Regulator (PSR) has published a summary of the discussion at its 29 November 2022 roundtable on the Digital Payments Initiative. The roundtable was particularly focused on barriers to using digital payments, examining why people rely on cash, the role that prepaid cards could play in meeting the needs of the cash-reliant, and ways to provide access for cash-reliant customers.

Alongside the summary, the PSR's Head of Policy Kate Fitzgerald has written a short thought piece on barriers to using digital payments. Ms Fitzgerald writes that protecting access to cash is a priority for the PSR, and then outlines the Digital Payments Initiative, the PSR's work on this theme, and the roundtable discussion.[19 Jan 2023]

#Payments

FSCP: Response to FCA DP22/5 on the competition impacts of Big Tech entry and expansion in retail financial services

The Financial Services Consumer Panel (one of the independent statutory panels consulted by the FCA when developing policy) has published its response to Discussion Paper 22/5: The potential competition impacts of Big Tech entry and expansion in retail financial services (DP22/5). The FSCP's comments cover:

• how the FCA should approach its consideration of the changes in the market, in particular that the FCA should start by looking at potential harms to end users of financial services and then 'work backwards';
• how current regulatory gaps could lead to embedded anti-competitive practices;
• the potential for disruption to markets, impacting on consumer choice and protection;
• use of personal data; and
• financial exclusion and/or barriers to access. [19 Jan 2023]

LawTech UK releases DP on AI in legal services

LawtechUK has released a discussion paper (DP) on the adoption and development of AI in legal services. The questions in the paper focus on understanding the risks, risk management techniques, and the areas of legal services regulation that may require clarity to support the responsible use of machine learning.  Feedback is requested by 5 February 2023. [18 Jan 2023]

EIOPA Consumer Trends Report 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has released its Consumer Trends Report 2022 which focuses on the financial health of consumers and small businesses through their use of insurance and pension savings products. Among EIOPA's findings are that digitalisation and technology are gradually transforming the pension value chain, lowering costs and improving members' and beneficiaries' engagement with their pensions.

The report is accompanied by a video, a heatmap of key findings, and several Eurobarometer reports, some covering the full EU-27 and others with extracts for specific EU Member States. [18 Jan 2023]

EC: Indicative agenda for forthcoming college meetings – Financial services policies

The European Commission (EC) has published its indicative list of agenda items for college meetings over the period 25 January to 28 June 2023. With respect to financial services regulation, the following dates are relevant:

• 8 March: Banking crisis and deposit insurance package – reviews of the Bank Recovery and Resolution Directive (BRRD), the Deposit Guarantee Schemes Directive (DGSD), and the Single Resolution Mechanism Regulation (SRMR);
• 5 April: Investment package – improving the retail investment framework, and the retail investment strategy;
• 24 May: Strengthening the role of the euro – digital euro, and the scope and effects of legal tender of euro banknotes and coins;
• 13 June: Regulation on ESG ratings; and
• 28 June: Data access in financial services – open finance framework and revision of the EU rules on payment services. [18 Jan 2023]

#Data

HKMA launches consultation on proposed amendments to AML/CFT Guideline for authorised institutions

The HKMA has launched a consultation on proposed amendments to its Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Authorised Institutions) (AML/CFT Guideline).  Feedback on the proposals is required by 8 March 2023.

The proposed amendments are to provide guidance in light of the recent enhancements to AML/CFT requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (see our previous update).  The areas which have been amended include (among others):

• When customer due diligence measures should be carried out, including in the context of virtual asset transfers and third-party cash transactions;
• Identification and verification of identity – Further guidance has been proposed in relation to beneficial owners, including those that are natural persons, and trusts or similar legal arrangements;
• Enhanced due diligence;
• Politically exposed persons (PEPs) – Guidance is added on treatment of former non-Hong Kong PEPs and updated in relation to treatment of former Hong Kong or international organisation PEPs;
• Customer not physically present for identification purposes – Further guidance is provided, including on the use of a recognised digital identification system;
• Prohibition on anonymous accounts;
• Ordering institutions in relation to wire transfers.  [18 Jan 2023]

SECT issues rules on management of digital wallets for custody of digital assets and keys

The Securities and Exchange Commission of Thailand (SECT) has issued regulations requiring digital asset business operators that provide custody to establish a digital wallet management system to accommodate efficient and secure custody of clients' digital assets and keys. The regulations cover the following requirements:

• policy and guidelines for overseeing risk management and management of digital wallets and keys as well as communication to clarify such policy, action plans and procedures, work supervision and internal control to ensure compliance with the policy;
• policy and procedures for designing, developing and managing digital wallets as well as creating, maintaining and accessing keys or other related information appropriately, securely and safely; and
• contingency plan in case of the occurrence of any event that may affect the management system of digital wallets and keys. This includes laying out and testing action procedures, designating responsible persons and reporting the event. An audit of system security is also required as well as digital forensic investigation in case of any event affecting the security of systems related to digital asset custody.

The regulations are with effect from 16 January 2023. [17 Jan 2023]

BSP Replaces Unfit Currency with Digital Cash in Tagbilaran

The Bangko Sentral ng Pilipinas (BSP)  has announced that its Visayas Regional Office (VRO) offered currency exchange services in Tagbilaran City to encourage the public to replace their unfit banknotes and coins with digital cash. The 'BSP Piso Caravan' currency exchange program was conducted for the first time in Visayas to replace unfit money by depositing the equivalent amount to clients’ e-wallets. The BSP VRO staff also assisted those without e-wallets in setting them up. The BSP Piso Caravan is in line with the central bank’s commitment to preserve the integrity of Philippine currency and promote digital payments to bolster financial inclusion. [16 Jan 2023]

SEC: Nexo agrees to pay $45 million in penalties and cease unregistered offering of crypto asset lending product

The Securities and Exchange Commission (SEC) has charged Nexo Capital Inc. with failing to register the offer and sale of its retail crypto asset lending product, the Earn Interest Product (EIP).

According to the SEC’s order, in or around June 2020, Nexo began to offer and sell the EIP in the US. The EIP allowed US investors to tender their crypto assets to Nexo in exchange for Nexo’s promise to pay interest. The order states that Nexo marketed the EIP as a means for investors to earn interest on their crypto assets, and Nexo exercised its discretion to use investors’ crypto assets in various ways to generate income for its own business and to fund interest payments to EIP investors. The order finds that the EIP is a security and that the offer and sale of the EIP did not qualify for an exemption from SEC registration. Therefore, Nexo was required to register its offer and sale of the EIP, which it failed to do.

To settle the SEC’s charges, Nexo agreed to pay a $22.5 million penalty and cease its unregistered offer and sale of the EIP to US investors. In parallel actions, Nexo agreed to pay an additional $22.5 million in fines to settle similar charges by state regulatory authorities. [19 Jan 2023]

CFTC: Keynote address by Commissioner on lessons learned from FTX's collapse

The Commodity Futures Trading Commission (CFTC) has published a keynote address by Commissioner Christy Goldsmith Romero, at The Wharton School and the University of Pennsylvania Carey Law School. In her address, Ms Goldsmith Romero sets out her assessment of the lessons to be learned from FTX's collapse, including:

• Financial markets are heavily dependent on public trust, and while crypto originated as a trustless system, investors and customers have come to trust centralized exchanges for access to crypto markets;
• FTX sought to build public trust by positioning both itself and its founder as trustworthy, including by using celebrity endorsements and social media to.;
• good corporate governance, starting with tone-at-the-top, is necessary to establish and keep trust. [18 Jan 2023]

#FTX

DoJ: Founder of cryptocurrency exchange charged with processing over $700 million of illicit funds

The Department of Justice (DoJ) has announced that the founder and majority owner of a cryptocurrency exchange, Bitzlato Ltd, has been arrested for his alleged operation of a money transmitting business that transported and transmitted illicit funds and that failed to meet US regulatory safeguards, including anti-money laundering (AML) requirements.

The defendant is alleged to have helped operate a cryptocurrency exchange that failed to implement required AML safeguards and enabled criminals to profit from their wrongdoing, including ransomware and drug trafficking. The individual is alleged to have knowingly allowed Bitzlato to become a perceived safe haven for funds used for and resulting from a variety of criminal activities,

French authorities and the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) are taking concurrent enforcement actions. [18 Jan 2023]