FinTech Global FS Regulatory Round-up – w/e 26 May 2023

Global

BIS Innovation Hub: Ongoing policy perspectives on CBDCs

The Bank of International Settlements (BIS) Innovation Hub has published a report  providing perspectives on central bank digital currencies (CBDCs). A group of central banks, together with BIS are collaborating to explore CBDCs for the public - referred to as 'general purpose' or 'retail' CBDCs. Since publishing a report in October 2020 setting out the common foundational principles and core features of a CBDC, and other detailed reports, the group has continued to share ideas and perspectives on similar themes that are summarised in this report. Key conclusions are:

• development of CBDC work requires careful consideration and engagement with a wide range of stakeholders, including the private sector and legislators;
• to successfully meet its public policy objectives, a CBDC ecosystem should allow a wide range of private and public stakeholders to participate and, in doing so, deliver services which benefit end users;
• the complex design questions and the potential risks arising from the implementation of any CBDC require careful consideration; and
• the evolving payments landscape requires central banks to give some consideration to how CBDCs may be used for wholesale and cross-border use cases.

The report also shares perspectives on how central banks can best engage industry and the public, the key legal issues, what tools may be needed to manage stressed conditions, and the potential implications for blockchain technology. [25 May 2023]

The International Organisation of Securities Commissions (IOSCO) has published a  consultation paper (CP) on Policy Recommendations for Crypto and Digital Asset Markets. IOSCO sets out 18 policy recommendations covering six key areas, consistent with IOSCO Standards:

• conflicts of interest arising from vertical integration of activities and functions;
• market manipulation, insider trading and fraud;
• cross-border risks and regulatory cooperation;
• custody and client asset protection;
• operational and technological risk; and
• retail access, suitability, and distribution.

Feedback is requested by 31 July 2023. IOSCO aims to finalise the recommendations by the end of 2023; member jurisdiction will then be expected to review their current regulatory framework to ensure they are in compliance with the standards. [23 May 2023]

IAIS: Issues Paper on Insurance Sector Operational Resilience

The International Association of Insurance Supervisors (IAIS) has published its Issues Paper on Insurance Sector Operational Resilience, which identifies issues impacting operational resilience in the insurance sector and provides examples of how supervisors are approaching these developments. The paper addresses the following three topics:

• cyber resilience;
• third-party outsourcing; and
• business continuity management.

A public discussion session will be held via webinar on 31 May at 15.30 – 16.30 CEST to present the Issues Paper and answer any questions from stakeholders. [23 May 2023]

#outsourcing

#cyber

UNIDROIT Governing Council adopts Principles on Digital Assets and Private Law

The Governing Council of the International Institute for the Unification of Private Law (UNIDRIOT) has adopted the UNIDROIT Principles on Digital Assets and Private Law. The principles provide clear rules for transactions in certain types of digital assets commonly used in commerce, in order to increase efficiency and reduce costs. It is intended that these principles will help to reduce the legal uncertainty for those involved in such transactions. The principles provide guidance on issues related to private international law, control and transfer, custody, secured transactions, procedural law including enforcement, and insolvency. [22 May 2023]

UK

FSCP publishes responses on asset management and PSRs consultations

The Financial Services Consumer Panel (FSCP), one of the statutory panels, has published responses to the following consultations:

• FCA Discussion Paper 23/2 on the UK regime for asset management (DP23/2) – The FSCP sets out four key themes which run through its responses to the questions posed in DP23/2: (1) ensuring that consideration of consumer protection and consumer benefit inform how regulatory change is prioritised; (2) the need for consumer testing to determine the effectiveness of approaches; (3) the importance of future proofing regulation to match the evolution of the industry; and (4) concern about moves towards tokenised funds and cryptoasset options.
• HM Treasury's (HMT's) call for evidence on the Payment Services Regulations (PSRs) – The FSCP stresses the need for the payments sector to serve everyone, 'whether or not they are financially, legally or digitally literate', and comments that 'strict regulation and supervision must underpin […] participation in the payments market'. [24 May 2023]

#payments

HoC written question and answer – Processing cryptoasset businesses' applications for registration under the MLRs  

For HMT, Economic Secretary Andrew Griffith MP has responded to questions from Alun Cairns MP about the registration of cryptoasset businesses under the Money Laundering Regulations (MLRs). Mr Griffith shared that the FCA had received more than 300 applications, and had approved and registered 41 firms. He stated that 223 were either refused or withdrew their application, 29 submissions were rejected and 23 applications remained under assessment as at 28 April 2023. Mr Griffith explained that cryptoasset firms which had been refused were determined by the FCA to be unable to meet the required anti-money laundering (AML) and countering the financing of terrorism (CFT) standards.

The Economic Secretary went on to explain that the FCA has a statutory deadline of three months to determine an application, but that the average processing time can vary. He noted that the regulator 'strives to be fair to firms that are close to meeting the standards', and does not expend 'disproportionate effort' on those which are far from meeting requirements. He added that HMT and the FCA are in regular contact to discuss any challenges with the application process. [24 May 2023]

EU

ESMA updates Q&As on ECSPR

The European Securities and Markets Authority (ESMA) has published updated questions and answers (Q&As) on the European Crowdfunding Service Providers Regulation (ECSPR). The sections on use of special purpose vehicles (SPVs) and authorisation and supervision of CSPs have been updated.  [26 May 2023]

ESMA warns of the risks arising from the provision of unregulated products and/or services by investment firms

ESMA has issued a public statement to warn of risks that arise when investment firms offer both regulated and unregulated products and/or services. ESMA comments that investment firms have been observed offering products and/or services in the EU to investors as alternatives to financial instruments (which are defined and regulated under the Markets in Financial Instruments Directive (MiFID 2)). As examples of these alternatives, ESMA cites cryptoassets, gold, raw materials, and more.

Specifically on cryptoassets, ESMA comments that while the Markets in Cryptoassets Regulation (MiCA) is close to being finalised, cryptoassets offered by investment firms will continue to be unregulated in most jurisdictions until MiCA applies.

ESMA says that it is concerned that the practice of investment firms offering both regulated and unregulated products and services gives rise to both investor protection and prudential risks. The purpose of the Statement, therefore, is to set out some of the risks that may arise and the issues that investment firms should pay particular attention to when providing unregulated products and/or services.  [25 May 2023]

#MICA

ESRB report on cryptoassets and DeFi

The European Systemic Risk Board (ESRB) has published a report outlining the systemic implications of cryptoasset markets and proposing policy options to address the risks stemming from cryptoassets and decentralised finance (DeFi). The ESRB comments that while the past year has been turbulent, the impact on the financial system was limited. However, given the exponential growth and high volatility of cryptoassets, they need to be closely monitored as they may pose systemic risks in the future.

The ESRB proposes three areas on which to focus:

• improving capacity to monitor potential contagion channels between the cryptoasset sector and the traditional financial sector, and within the crypto-asset sector;
• completing assessments of risks posed by (a) crypto-asset conglomerates and (b) leverage using crypto-assets, and identifying potential additional actions to mitigate observed risks; and
• promoting EU-level knowledge exchange and monitoring of market developments, focusing on (a) operational resilience, (b) DeFi, and (c) cryptoasset staking and lending. [25 May 2023]

#DeFi

Council agrees its position on the instant payments proposal

In a press release, the Council of the EU has announced that it has agreed its position on the instant payments proposal. The aim of the proposal is to improve the availability of instant payment options in euro to everyone who owns a bank account in the EU and EEA. Under the proposed rules, payment service providers such as banks which provide standard credit transfers in euro will be required to also offer the service of sending and receiving instant payments in euro. The charges they apply (if any) must not be higher than the charges they apply for standard credit transfers.

As the Council has agreed its position, it is now ready to start negotiations with the European Parliament (EP) in order to agree on a final version of the text. [22 May 2023]

Hong Kong

Regulatory requirements for VATP licensing regime finalised for implementation on 1 June 2023, together with enhanced AML/CFT requirements for various sectors regulated under AMLO

The SFC has published its conclusions to the consultation on proposed licensing regime and regulatory requirements for operators of virtual asset trading platforms (VATPs) (see our previous update in relation to the consultation paper).  The new regime will be implemented on 1 June 2023, under the legal framework set out in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).

During the consultation period, the SFC received 152 written submissions from a wide range of respondents.  The respondents generally supported the proposed regulatory requirements.  Many of the comments sought clarification of the technical and implementation details (which the SFC has taken into account and revised the proposed requirements where appropriate), such as:

• retail access to licensed VA trading platforms;
• the criteria for token admission;
• compensation arrangements for the risks associated with custody of client assets,
• trading in virtual asset derivatives;
• implementation details and the transitional arrangements.

The new and revised SFC guidelines include:

• (New) Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines);
• (Revised) Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) (AML Guideline)
• (Revised) Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities of Licensed Corporations and SFC-licensed Virtual Asset Service Providers (AE AML Guideline)
• (New) Disciplinary Fining Guidelines – Part 5B of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance Considerations relevant to the level of a disciplinary fine

The marked-up texts of the guidelines can be found in Appendices A, B and C to the consultation conclusions.  No amendments were made to the proposed Disciplinary Fining Guidelines which can be found in Appendix D.  The guidelines as well as VATP licence application forms and other documentation have been published in the Gazette.  The SFC has also updated the relevant FAQs.

Apart from providing for a new VATP licensing regime, the AMLO has been amended concurrently to update other anti-money laundering and counter-terrorist financing (AML/CFT) requirements and align them with international standards.  See:

• SFC circular with summary of key amendments to the AML Guideline and AE AML Guideline;
• HKMA circular to authorised institutions attaching consultation conclusions and marked-up guideline on AML/CFT (see our previous update) and circular to stored value facility licensees attaching marked-up guideline on AML/CFT;
• Insurance Authority circular attaching marked-up guideline on AML/CFT (English and Chinese versions) and summary of key amendments.

#VTAPs

Singapore

MAS launches initiative to enhance AI and data analytics skills in the financial sector

The Monetary Authority of Singapore (MAS) has launched the Financial Sector Artificial Intelligence and Data Analytics (AIDA) Talent Development Programme. The initiative, which is part of the National AI Programme in Finance, aims to increase the supply of AIDA talent to build deep AI capabilities in the financial sector. The launch event was officiated by Mr Tan Kiat How, Senior Minister of State, Ministry of Communications and Information. An AIDA Talent Consortium has been set up for key financial institutions (FIs) and training institutions to collaborate on the talent development programme.  [22 May 2023]

#DataAnalytics

MAS and NYIC report on experiment in DLT for cross-border multi-currency payments and settlement

MAS and the Federal Reserve Bank of New York’s New York Innovation Centre (NYIC) have published a research report detailing the results of the joint Project Cedar Phase II x Ubin+ (Cedar x Ubin+) experiment. The Cedar x Ubin+ experiment demonstrated that distributed ledger technology (DLT) could support enhancements to cross-border multi-currency payments and settlements. The findings addressed three key pain points related to network interoperability and autonomy, settlement, and speed:

• Interoperability and Autonomy: The experiment interlinked the distinct central bank currency ledgers, providing flexibility in the design and operation of each ledger to the respective central bank. This enabled payments to be safely executed across multiple ledgers without the need for a central clearing authority or the establishment of a shared central network.
• Atomic Settlement: The simulated payments were settled atomically, meaning transactions were only settled if all legs in the cross-currency payment chains were executed successfully. This improved the certainty of settlement, addressing existing pain points such as counterparty risks.
• Near Real-Time Settlement: Each simulated payment scenario achieved end-to-end settlement in under thirty seconds on average. This enabled participants to be notified of a payment’s success in a matter of seconds.  [19 May 2023]

#payments

#atomicsettlement

Malaysia

SCM takes action against DAX operating in Malaysia without registration

The Securities Commission Malaysia (SCM) has taken enforcement action against a company and its CEO for operating a digital asset exchange (DAX) in Malaysia without registration. The SCM has: issued a public reprimand, ordered the company to stop operating in Malaysia and it to disable its website and mobile application on several platforms; and directed the company to cease advertising whether in email or social media platforms to Malaysian investors.  [22 May 2023]

#digitalassetexchange

Vietnam

SBV report of the Digital Transformation of the Banking Sector event

The State Bank of Vietnam (SBV) has published a report of its 'Digital Transformation Day of the Banking Sector' event which took place on 18 May 2023. The event included the following activities: a thematic conference on 'Application of population data in the banking operations - momentum for digital transformation'; an exhibition displaying simulations of outstanding and typical products and services in digital transformation; and an Awarding Ceremony of the SBV Governor’s Certificates of Merit to organizations and individuals who have made extraordinary contributions to the digital transformation of the banking sector.

The event was attended by Deputy Prime Minister Le Minh Khai; Mr. Nguyen Manh Hung, Minister of Information and Communications; Lieutenant General Nguyen Duy Ngoc, Deputy Minister of the Ministry of Public Security; and representatives of the Committees of the National Assembly, the Government’s Office, other ministries and agencies. On the side of the banking sector, there was SBV Governor Nguyen Thi Hong and other members of the SBV Board of Management; members of the Steering Committee and the Working Group for Digital Transformation of the Banking Sector; and representatives from the credit institutions, Vietnam Banks’ Association, and the international institutions.

In her opening speech at the event, SBV Governor Nguyen Thi Hong emphasized that digital transformation is an inevitable and irreversible trend in the development process of most countries around the world. Deputy Prime Minister Le Minh Khai said that the finance and banking industry is identified as one of the eight priority sectors for digital transformation, because it can help change people’s awareness the fastest, save costs and bring about social efficiency.  [19 May 2023]

USA

DOJ Announces that Man Charged for Alleged Participation in $45M CoinDeal Investment Fraud Scheme Involving Over 10,000 Victims

The US Department of Justice (DOJ) has charged a Nevada man for his alleged participation in an investment fraud scheme that defrauded more than 10,000 victims of over $45 million.

According to court documents, the defendant allegedly conspired with Neil Chandran and others to defraud investors in companies that Chandran controlled. The companies were supposedly developing virtual-world technologies, including their own cryptocurrency, for use in a metaverse. Chandran allegedly misled investors by falsely promising extremely high returns on the premise that his companies were about to be acquired by a consortium of wealthy buyers. As further alleged, the defendant was the nominee owner and director of the company, and took direction from Chandran for how to disburse investor funds received into the company’s bank accounts. The defendant and Chandran allegedly misappropriated millions of dollars of investor funds and spent it on luxury cars and real estate.

The defendant is charged by indictment with one count of conspiracy, two counts of mail fraud, one count of wire fraud, and three counts of engaging in monetary transactions in criminally derived property. If convicted, he faces up to 20 years in prison for each of the wire fraud, mail fraud, and conspiracy counts, and up to 10 years in prison for each count of engaging in unlawful monetary transactions.  [19 May 2023]

#crypto

#metaverse