FinTech Global FS Regulatory Round-up – w/e 27 April 2023

BCBS: Speech on work programme and strategic priorities

The Basel Committee on Banking Supervision (BCBS) has published a speech delivered by its Chair Pablo Hernández de Cos,Governor of the Bank of Spain, at the Eurofi High-level Seminar 2023 in Stockholm. De Cos opened with some remarks about the recent banking turmoil, noting some of the short- to medium-term risks for the global banking system. Against that background, he proceeded to outline the work programme and strategic priorities for the BCBS in 2023/24. Among these is the 'digitalisation of finance'; under this priority, the BCBS will:

• undertake analysis to determine the supervisory implications of the ongoing digitalisation of finance, reviewing a wide range of technological developments, including the emergence of new entrants/suppliers in the banking system, the use of artificial intelligence (AI) and machine learning, big data, governance arrangements, and banking as a service; and
• continue its work on cryptoassets across two strands - one focusing on monitoring bank-related developments in the crypto markets (such as the role of banks as custodians, banks as issuers of stablecoins, and the interconnections between banks and cryto ecosystem) and another strand focusing on the implementation of the standards on the prudential treatment of banks' cryptoasset exposures.  [28 Apr 2023]

#Cryptoassets

#AI

#BigData

#BankingAsAService

BIS: Green Swan Conference 2023

The Bank for International Settlements (BIS) will host its third annual Green Swan conference  virtually on 31 May to 1 June. Green Swan 2023 is co-hosted by BIS, the Central Bank of Chile, the Network for Greening the Financial Sector (NGFS) and the South African Reserve Bank; it will be live streamed on the BIS website. Day 1 of the conference includes a session on developing new technologies. [26 Apr 2023]

#GreenSwan2023

BIS: Working paper on mobile payments and interoperability

BIS has published a working paper: Mobile payments and interoperability: Insights from the academic literature. The paper focuses on:

• the balance between competition and cooperation between service providers;
• the governance of key infrastructures in mobile payments; and
• the welfare implications of making mobile payment systems interoperable. [25 Apr 2023]

LSB: Business Plan & Budget 2023/24

The Lending Standards Board (LSB) has released its 2023/24 Business Plan & Budget which outlines that its areas of focus for the coming year will include financial resilience and digital journeys. This is alongside the LSB's ongoing work on the prevention of authorised push payment (APP) scams. [27 Apr 2023]

FSSC report on skills needed in the financial services industry

The Financial Services Skills Commission (FSSC) has published a report: Reskilling Everywhere All At Once, Skills for the future of financial services 2023. The report highlights the increasing demand for future skills, including data analytics, cyber security, software development and coaching. These have been identified by financial services firms over the last 12 months as critical for the sector's sustainable growth. [27 Apr 2023]

FCA speech: How regulation can help the UK lead in fintech

The FCA has published the speech delivered by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, at City Week 2023. Ms Shepperd outlined how the FCA has helped firms foster innovation through its Sandboxes, Innovation Pathways and Early and High Growth Oversight scheme. [26 Apr 2023]

#Innovation 

HMT: Asset Management Taskforce re-established

HM Treasury (HMT) has issued a press release announcing the re-establishment of the Asset Management Taskforce and a new Technology Working Group to run alongside the Taskforce.

The Technology Working Group will examine the impact of new technology on the asset management sector, work to articulate the benefits of that technology and identify the main opportunities presented by technologies including tokenisation, artificial intelligence (AI) and distributed ledger technology (DLT). It will hold a series of meetings over the next year and subsequently produce a final report to the Taskforce. The report will explain the group’s findings and contain guidance and recommendations for policy makers and the industry. [26 Apr 2023]

#DLT

#AssetManagement 

Digital Markets, Competition and Consumers Bill 

The Digital Markets, Competition and Consumers Bill has had its first reading in the House of Commons. The Bill includes provisions which:

• create a new regime to increase competition in digital markets by conferring powers and duties on the Competition and Markets Authority (CMA) to regulate competition in these markets;
• update powers to investigate and enforce competition law;
• update and enhance powers to investigate and enforce consumer protection law and resolve consumer disputes; and
• give consumers protections in respect of unfair commercial practices, subscription traps and prepayments to savings schemes.

The second reading date is to be announced. [26 Apr 2023]

FCA: Speech on regulation of digital assets in the UK 

The FCA has published a speech delivered by Sarah Pritchard, Executive Director of Markets, and Executive Director of International, at City Week 2023. Ms Pritchard explained that regulation may be able to mitigate some of the harm, but it will not be able to stop all risk in relation to crypto - in particular, the risk of financial loss. Once HMG legislates to bring crypto financial promotions within its remit, the FCA expects crypto promotions will be treated on a par with other high-risk investments; firms are to have four months to implement the changes. [25 Apr 2023]

TSC: Correspondence with the BoE on stablecoins, CBDCs, digital £

The TSC has published the response received from the Chair of BoE to its letter of 20 March regarding the cryptoasset industry. The BoE letter covers:

• the options for compensation protection for holders of regulated stablecoins;
• how privacy concerns associated with a digital £ may be effectively managed;
• the regulation of private sector wallet providers;
• the resilience of a central bank digital currency (CBDC); and
• cost estimates for 'running' a digital £. [25 Apr 2023]

#Stablecoins

#CBDCs 

ECB announces that the Eurosystem will explore DLT for wholesale central bank money settlement

The ECB has announced that the Eurosystem is exploring how wholesale financial transactions recorded on distributed ledger technology (DLT) platforms could be settled in central bank money. The purpose of the initiative is to: consolidate and further develop the ongoing work of Eurosystem central banks in this area; and gain insight into how different solutions could facilitate interaction between TARGET (the Trans-European Automated Real-time Gross settlement Express Transfer system) and DLT platforms.

A dedicated market contact group will be set up to support the Eurosystem’s exploratory work. This group will provide expert input and keep the Eurosystem abreast of advances in the use of DLT and other new technologies in wholesale financial markets. [28 Apr 2023]

#Settlement

ECB: Presentation on the digital euro

The ECB has published the presentation materials on the digital euro used by Fabio Panetta at the meeting of the European Association of Co-operative Banks (EACB). The presentation sets out the possible rationale for a digital euro, key features, financial stability concerns, use cases, and development milestones. [28 Apr 2023]

EDPS: Annual report

The European Data Protection Supervisor (EDPS) has published its 2022 Annual Report which provides an overview of EDPS activities over the preceding financial year. The report also summarises plans for 2023 under four priorities: effective enforcement of data protection in a new regulatory landscape; interoperability as a challenge requiring an overhauled supervisory approach; international cooperation to promote global common approaches on privacy and data protection challenges; and rethinking EDPS processes to ensure efficiency in a fast-changing environment.  Against these priorities, the EDPS highlights a number of areas relevant to financial services, including: EDPS' potential supervisory role with respect to artificial intelligence (AI); its engagement with the Digital Euro project; and scrutiny of the open finance framework proposal. [27 Apr 2023]

#DigitalEuro

ECB: Progress report on digital euro and study on possible features of a digital wallet 

The European Central Bank (ECB) has published a progress report on digital euro. The progress report presents a third set of design and distribution options, endorsed by the ECB’s Governing Council, that would feed into the overall design of a digital euro.

The ECB has also published the findings of its study on possible features of a digital wallet. The study involved focus groups to evaluate people’s views on specific features of a potential digital wallet. It found that most participants were interested in trying some of the digital wallet features presented. [24 Apr 2023]

#DigitalWallet 

SFC CEO discusses regulator's priorities and ongoing initiatives at Bloomberg Policy Series

The SFC has published a synopsis of a one-on-one discussion between Bloomberg and Ms Julia Leung (CEO of the SFC) on 27 April 2023.  Ms Leung discussed the SFC's regulatory priorities and ongoing initiatives in relation to fostering resilience and market integrity, enhancing Hong Kong's competitiveness as an international finance centre, and embracing sustainability and innovation.  She suggested that capital market players should 'go tech, go green and stay resilient'.

The following are some of the SFC's initiatives:

• The SFC has received more than 150 responses to the consultation on the proposed regulatory requirements for licensed virtual asset trading platform operators and will issue its conclusions and final guidelines in May before the new regime takes effect on 1 June 2023.  Whilst Ms Leung believes that distributed ledger technology will bring enormous benefits to the financial industry in terms of efficiency, robustness and user experience, she warns of associated risks and the need to manage them properly.  The SFC is discussing with the Insurance Authority on addressing the costs of insuring client assets.
• The SFC has taken the lead in key international work both at the International Organisation of Securities Commissions (IOSCO) and the Financial Stability Board.  The SFC participates in the crypto and digital assets and decentralised finance workstreams under IOSCO’s Board-level Fintech Task Force.  In order to mitigate regulatory arbitrage, the SFC is working with global counterparts to set baseline standards to regulate centralised virtual asset exchanges for adoption in major markets.
• The listing regime has been adjusted to facilitate listing of biotech, weighted-voting rights companies and, more recently, specialist tech companies. Together, this new economy sector has accounted for 40% of total market capitalisation.  [27 Apr 2023]

#VirtualAssets

#Crypto

#Innovation

HKMA requests card-issuing AIs to strengthen security controls over binding of payment cards to contactless mobile payment services

The HKMA has issued a circular to require authorised institutions (AIs) to strengthen security controls over the binding of payment cards to contactless mobile payment services (such as Apple Pay, Google Pay and Samsung Pay), in view of the increase in the number of fraud cases relating to such means of payment.

Having discussed with the industry, the HKMA considers that there is a need for card-issuing AIs to strengthen security controls over the binding of payment cards to new mobile payment services.  Specifically, card-issuing AIs are required to conduct additional authentication (on top of the input of correct card data and the one-time password) to confirm that the cardholders have indeed given the instructions to bind their cards with new payment services.  This is required to be implemented as soon as practicable and in any case no later than 31 May 2023.

Examples of additional authentication measures include:

• Additional confirmation from cardholders before the binding takes effect, through 2-way SMS, in-App confirmation, call back or other effective means;
• Requiring cardholders to perform additional authentication (through measures similar to the above) before the first mobile payment transaction is conducted through newly bound payment services; and
• Requiring cardholders to activate the newly bound payment services after performing two-factor authentication on the internet or mobile bank applications.

Should AIs wish to implement other authentication measures (such as biometric authentication), they are welcome to discuss with the HKMA prior to implementation.  [25 Apr 2023]

HKMA and Police jointly host sharing session with banking industry on innovative approaches to enhancing response to fraud

The HKMA and the Hong Kong Police Force (Police) have co-hosted a high-level sharing session with the banking industry on new and innovative approaches to enhancing the ecosystem response to fraud.

The session highlighted the common purpose of both public and private sectors in addressing the elevated threats especially from digital fraud.  There was also strong support among stakeholders for further joint efforts in the fight against deception to collectively prevent the use of the financial system for scams and to chase and intercept the illicit proceeds.

The HKMA has been working closely with the Police and the banking industry through public-private partnerships.  Among others, the Fraud and Money Laundering Intelligence Taskforce (FMLIT) was established in 2017, with 23 retail banks (including all virtual banks), currently participating.  The FMLIT has facilitated information sharing and data analytics, which helped increase the number of intelligence-led suspicious transaction reports by 319% in 2022 compared with 2021, leading to an increase of 113% in criminal proceeds restrained or confiscated.

The participants are committed to working closely with all stakeholders to promote public awareness of evolving modus operandi of deception cases and support innovative ways of anti-deception efforts.  They include:

• enhancement of Scameter alerts to customers for payment transactions (see our previous update on the launch of Scameter);
• encouraging more banks to adopt data analytics through AMLab (see our previous update) and other innovative approaches to real time monitoring of suspicious accounts;
• launching a sharing platform of corporate mule account information among banks; and
• enhancing banks’ contribution to the 24/7 stop-payment mechanism and assistance to the Police's investigation work.

The HKMA has also recently commenced an AML Suptech pilot on mule account network analytics, testing the use of multi-bank data and technology to help further manage the risks of mule account networks at the systemic level.  [21 Apr 2023]

#Fraud

MAS consults on enhanced safeguards for prospecting and marketing of financial products

MAS has published two consultation papers (CPs) which propose enhanced safeguards for prospecting and marketing of financial products through both physical and digital means. The enhancements would require additional controls to be in place, including:

• for physical prospecting at public places – the mandatory disclosure of the representatives' identities and the financial institutions they represent; prospecting to only be allowed at commercial premises; provision of extra time to customers to allow them to consider whether to make a purchase; and limitation of use of gift offers which may influence decision-making; and
• for digital marketing – stronger controls over online advertisements to avoid disseminating misleading content; and tightening practices when appointing third party service providers to generate leads online.

Mr Lim Tuang Lee, Assistant Managing Director (Capital Markets) at MAS, said: 'We want consumers to receive accurate information, professional advice, and be given sufficient time and space to consider their financial decisions. The proposals to strengthen responsible prospecting and marketing activities by financial institutions will support these goals, and better protect consumers’ interests.'

Feedback to both CPs is requested by 30 June 2023.  [25 Apr 2023]

BOT postpones the release of Virtual Bank Licensing Regulations

The Bank of Thailand (BOT) has announced that it is postponing the release of the Virtual Bank Licensing Regulations. The BOT consulted on the licensing framework earlier in 2023. Having received substantial feedback, it has decided to take additional actions:

• to clarify the conditions within the licensing regulations and clearly elaborate further details in the application manual – the BOT  reopen public consultation on the parts where significant details or conditions are to be added; and
• to refine the application and selection process to ensure that all applicants receive information and opportunities in an equal and transparent manner.

The BOT expects to submit final licensing regulations to the Ministry of Finance for consideration by July 2023. [27 Apr 2023]

RBI: Speech delivered at the Global Conference on Financial Resilience

The Reserve Bank of India (RBI) has published a Speech by Shri Shaktikanta Das, RBI Governor, delivered at the Global Conference on Financial Resilience in Mumbai. The Governor spoke about financial and operational resilience – noting that cyber risk is a growing concern. He also explained the RBI's work in this area, which involves the use of advanced analytical and surveillance tools along with techniques like phishing simulation and cyber reconnaissance exercises to push for enhanced IT and cyber security governance processes in banks and other supervised entities. [27 Apr 2023]

#IT

DoJ: Man sentenced for stealing over 712 bitcoin subject to forfeiture

The Department of Justice (DoJ) has announced that an Ohio man was sentenced to four years and three months in prison for stealing over 712 bitcoin that were the proceeds of the darknet bitcoin mixer Helix and subject to forfeiture in a then-pending criminal case. According to court documents, Gary James Harmon perpetrated a scheme to steal cryptocurrency that was the subject of pending criminal forfeiture proceedings in the case of Larry Dean Harmon, Gary Harmon’s brother. Knowing that the government was seeking to recover the bitcoin stored on the seized device for forfeiture in Larry Harmon’s criminal case, Gary Harmon used his brother’s credentials to recreate the bitcoin wallets stored on the device and covertly transfer more than 712 bitcoin, valued at approximately $4.8 million at the time, to his own wallets – stealing those funds and obstructing the pending criminal forfeiture proceeding. Gary Harmon further laundered the proceeds through two online bitcoin mixer services before using the laundered bitcoins to finance large purchases and other expenditures.

Gary Harmon agreed to the forfeiture of cryptocurrencies and other properties derived from the fraudulently taken proceeds, including more than 647.41 Bitcoin (BTC), 2.14 Ethereum (ETH), and 17,404,400.64 Dogecoin (DOGE). [27 Apr 2023]

#DarkNet

CFTC: Speech on illicit finance and key risks of digital assets at City Week 2023

The CFTC has published a speech by its Commissioner, Christy Goldsmith Romero, on illicit finance and key risks of digital assets delivered at City Week 2023 in London. In the speech, Commissioner Romero noted the following:

• crypto markets are used to facilitate illicit financing of drugs, human trafficking, ransomware, terrorism, and malicious state sponsored activity posing national security risks;
• digital asset technologies pose a significant risk of customer loss through cybercrime;
• fraud has become a hallmark of digital asset markets, the human toll of which may be overlooked; and
• digital assets pose non-bank financial stability risk.

Commissioner Romero also highlighted how some of these risks can be better managed, explaining the roles of both the public and private sector. [25 Apr 2023]

#Crypto

#CyberCrime 

CFPB and Federal Partners issue joint statement on automation and AI, CFPB launches whistleblowing arrangements for tech workers

The Consumer Financial Protection Bureau (CFPB), alongside the Civil Rights Division of the US DoJ, the Federal Trade Commission (FTC), and the US Equal Employment Opportunity Commission, has released a joint statement outlining a commitment to enforce their respective laws and regulations in respect of automation and artificial intelligence (AI). The CFPB has also published the remarks of Director Rohit Chopra following publication of the statement. Director Chopra explains: 'the CFPB will work with its partner enforcement agencies to root out discrimination caused by any tool or system that enables unlawful decision making.'

In addition, the CFPB has launched a way for tech workers to blow the whistle. The CFPB encourages engineers, data scientists and others who have detailed knowledge of the algorithms and technologies used by companies and who know of potential discrimination or other misconduct within the CFPB’s authority to report it. The CFPB will also release a white paper this spring discussing the current chatbot market and the technology’s limitations, its integration by financial institutions, and the ways the CFPB is already seeing chatbots interfere with consumers’ ability to interact with financial institutions. [25 Apr 2023]

#AI

#Whistleblowing

DoJ: Five individuals charged in $2 million virtual asset and securities manipulation scheme

The DoJ has announced that an indictment was unsealed in Miami charging two US citizens and a South African national with conspiring to manipulate the market for HYDRO, a virtual asset created by the Hydrogen Technology Corporation. Two other individuals were also charged in separate charging documents for their roles in the scheme filed in the Southern District of Florida.

According to court documents, from around June 2018 through to April 2019, Michael Kane of Miami; Shane Hampton of Philadelphia; and George Wolvaardt of Johannesburg allegedly conspired to manipulate the market for HYDRO, a token on the Ethereum blockchain platform, and defraud market participants by creating the false appearance of supply and demand for HYDRO to induce other market participants to trade at prices, quantities, and times that they otherwise would not have traded. The defendants allegedly used a trading bot to place thousands of orders that they did not intend to execute, or 'spoof orders', and thousands of orders where the bot bought and sold tokens to itself through the same account, or 'wash trades'. The co-conspirators allegedly reaped $2 million in profit through their sales of HYDRO at artificially inflated prices.

Kane, Hampton, and Wolvaardt are each charged with one count of conspiracy to commit securities price manipulation, one count of conspiracy to commit wire fraud, and two counts of wire fraud. [24 Apr 2023]

DoJ: North Korean Foreign Trade Bank representative charged in crypto laundering conspiracies

The DoJ has announced that two federal indictments were unsealed in the District of Columbia charging a North Korean Foreign Trade Bank (FTB) representative for his role in separate money laundering conspiracies designed to generate revenue for the Democratic People’s Republic of Korea through the use of cryptocurrency. According to court documents, Sim Hyon Sop is charged with allegedly conspiring with over-the-counter (OTC) cryptocurrency traders to use stolen funds to buy goods for North Korea and for conspiring with North Korean IT workers to generate revenue through illegal employment at blockchain development companies in the US. [24 Apr 2023]

#Laundering