FinTech Global FS Regulatory Round-up – w/e 2 June 2023

> Global

FSI executive summary of BCBS prudential standards for crypto exposures

The Financial Stability Institute (FSI) at the Bank for International Settlements (BIS) has released a three-page executive summary of the Basel Committee on Banking Supervision (BCBS) standard on the prudential treatment of cryptoasset exposures which was released in December 2022.  [2 Jun 2023]

BISIH concludes Project Aurora – combatting money laundering across institutions and borders

The BIS Innovation Hub (BISIH) has announced the conclusion of Project Aurora – a proof of concept based on the use of data, technology and collaboration to combat money laundering across institutions and borders. A report explains the project and sets out key findings, in particular noting 'the advantages and potential of using payments data in combination with privacy-enhancing technologies, machine learning models, and network analysis for the detection of complex money laundering'.  [31 May 2023]

#crypto

> UK

BoE and HMT extend deadline for responses to digital £ consultation

The Bank of England (BoE) and HM Treasury (HMT) have extended the deadline for responses to their joint consultation on the digital £ from 1 June to 30 June due to the omission of question 9 from the online response form. Question 9 reads: 'Do you have comments on our proposal that non-UK residents should have access to the digital pound, on the same basis as UK residents?'  [2 Jun 2023]

CMA response to AI White Paper

The Competition and Markets Authority (CMA) has published its response to the Government's AI White Paper.  The CMA says that it supports the approach of building on existing regulatory regimes while also establishing a coordination function and of putting AI principles on a non-statutory basis in the first instance.  The response sets out the CMA's key considerations for approaching the regulation of AI.  [2 Jun 2023]

TSC: Chancellor commits to introducing primary legislation before launching a digital £

The Treasury Select Committee (TSC) has published a letter from the Chancellor which provides an update on the Government's and the BoE's work on the digital £, a central bank digital currency (CBDC). The Chancellor refers to the Government's commitment to 'fully engage Parliament' on any proposals related to the introduction of a digital £, including with regard to any possible legislation. Noting the early stage of this development, the Chancellor remarks that it remains unclear whether, should the Government decide to proceed with a digital £, primary legislation would be required. 'However,' he continues, 'in recognition of the potential significance … the Government commits to introducing primary legislation before launching a digital [£].'   [2 Jun 2023]

#Digital£

Lords written question and answer: Banking services for companies – consultation on the MLRs

For HMT, Baroness Penn has responded to a question asked by Lord Hannan of Kingsclere about the impact of regulation on the ease with which companies can open bank accounts.  In her response, Baroness Penn comments that the provision of banking services is a commercial decision.  She then refers to the 2022 review of the Money Laundering Regulations (MLRs), in which 'the Government committed to consult on options aiming to address the difficulties for businesses in accessing pooled client accounts, including broadening the range of low-risk circumstances in which these accounts may be provided without checks being required on the clients whose funds are held in the account'.  Baroness Penn explains that the consultation on changes to the MLRs will begin by the end of 2023.  [2 Jun 2023]

> EU

ESMA publishes updated Q&As on the DLT  pilot regime

The European Securities and Markets Authority (ESMA) has published updated several questions and answers (Q&As) on the pilot regime for market infrastructures based on distributed ledger technology (DLT). The updates are to questions in the following sections: section 7 – DLT financial instruments; section 8 – DLT market infrastructures; section 9 – cash settlement; and section 10 – exemptions from the Central Securities Depositories Regulation (CSDR).  [2 Jun 2023]

EBA: CP on extending ML/TF Guidelines to CASPs

The European Banking Authority (EBA) has launched a public consultation on amendments to its Guidelines on money laundering and terrorist financing (ML/TF) risk factors. The proposed changes extend the scope of these Guidelines to crypto-asset service providers (CASPs). The consultation runs until 31 August 2023. The EBA will hold a virtual public hearing on the consultation on 7 June 2023; registration by 5 June 2023 is required to attend the public hearing.  [31 May 2023]

ESAs launch discussion paper on DORA

The ESAs (EBA, the European Insurance and Occupational Pensions Authority (EIOPA) and ESMA) have published a joint Discussion Paper (DP) on aspects of the Digital Operational Resilience Act (DORA). The DP follows the European Commission's (EC's) request for technical advice on the criteria for critical ICT third-party providers (CTPPs) and the oversight fees to be levied on them.

The DP is separated into two parts:

• proposals covering the criteria to be considered by the ESAs when assessing the critical nature of ICT third-party service providers, in particular, a number of relevant quantitative and qualitative indicators for each of the criticality criteria, along with the necessary information to construct such indicators; and
• proposals in relation to the amount of fees to be levied on CTPPs and the way in which they are to be paid, in particular the types of expenditure that shall be covered by fees as well as the appropriate method, basis and information for determining the applicable turnover of the CTPPs, which will form the basis of fee calculation.

Feedback is requested by 23 June 2023. [30 May 2023]

> Hong Kong

SFC issues circulars on transitional arrangements and guidance for new VATP licensing regime which came into effect on 1 June 2023

The new licensing regime for virtual asset trading platforms (VATPs) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) came into effect on 1 June 2023 (see our previous update). Under the regime, all VATPs carrying on the business of operating a virtual asset exchange in Hong Kong, or actively marketing their services to Hong Kong investors, will need to be licensed by the SFC.

The SFC has published (1) a circular detailing the transitional arrangements for the new licensing regime under the AMLO (attaching a timeline), and (2) a second circular highlighting various guidance documents and information which are intended to assist licence applicants.

(1) Transitional arrangements

The transitional arrangements apply only to pre-existing VATPs providing trading services in non-security tokens.  There is no transitional arrangement for compliance with the Securities and Futures Ordinance (SFO).  VATPs which intend to provide trading services in security tokens will be subject to the securities laws of Hong Kong and should commence their businesses in providing trading in security tokens only upon obtaining the relevant licence under the SFO.

The circular (attaching a timeline) sets out in detail the eligibility for the transitional arrangements, the deeming arrangement for pre-existing VATPs and their proposed licensed individuals, points to note in relation to licence applications, and the dual licensing regime.

(2) Guidance documents and information

The second circular highlights various documents and information which assist licence applicants and provide guidance on the new regulatory requirements.  It also sets out the notification requirements for licensed VATPs.

The guidance and information include (among others):

• A dedicated webpage on virtual assets;
• Guidelines for VATPs;
• Updated anti-money laundering and counter-terrorist financing guidelines (for licensed corporations and SFC-licensed VATPs and for their associated entities);
• Licensing Handbook for Virtual Asset Trading Platform Operators;
• FAQs on licensing and conduct-related matters;
• Information about licensing forms, financial returns and related documents; and
• Information on reporting of material breach and non-compliance incidents (the SFC has upgraded its paragraph 12.5 notifications online portal).  [31 May 2023]

HKMA and CBUAE agree to strengthen cooperation in financial infrastructure, financial market connectivity and virtual asset regulation

The HKMA and the Central Bank of the United Arab Emirates (CBUAE) have held a bilateral meeting to enhance collaboration between the financial services sectors of the two jurisdictions.

The two central banks discussed various collaborative initiatives and agreed to strengthen cooperation in three major areas: financial infrastructure, financial market connectivity, and virtual asset regulation. They also facilitated discussions between their respective innovation hubs on joint fintech development initiatives and knowledge sharing efforts.

A joint working group led by the HKMA and the CBUAE, with support from stakeholders of the two jurisdictions' banking sectors, will be formed to take forward the agreed initiatives.

A seminar was held following the bilateral meeting to discuss key opportunities for Hong Kong and the UAE, including possible arrangements to facilitate better cross-border trade settlement, how UAE corporates can better utilise the Hong Kong financial infrastructure platforms to access Asia and the Mainland markets, as well as financial and investment solutions and capital markets opportunities in the Guangdong-Hong Kong-Macao Greater Bay Area.

The above were part of a three-day visit to the UAE by HKMA Chief Executive, Mr Eddie Yue, and senior banking executives from several major Hong Kong banks.  [30 & 31 May 2023]

> Singapore

MAS signs MoU with Google Cloud for generative AI solutions

MAS has announced that it has signed a memorandum of understanding (MoU) with Google Cloud to collaborate on generative artificial intelligence (AI) solutions that are grounded on responsible AI practices.  MAS explains that the partnership will explore technology opportunities to advance the development and use of responsible generative AI applications within MAS, as well as cultivate technologists with deep AI skillsets.  [31 May 2023]

> Malaysia

BNM: Risk management in technology – policy document

The Bank Negara Malaysia (BNM) has published a policy document which sets out updated requirements with regard to financial institutions' management of technology risk. The release explains that 'all financial institutions shall implement robust risk management controls above the minimum regulatory standards to deliver efficient financial services securely and prevent the exploitation of weak links in interconnected networks and systems with robust cyber fortification to preserve public confidence in the financial system'.

Key updates to the policy document include:

• additional guidance to strengthen financial institution’s cloud risk management capabilities;
• shift to a risk-based approach in cloud consultation and notification process, with corresponding updates in the risk assessment and submission requirement;
• updated cross references including the multi-factor authentication (MFA) security control denoted as a standard requirement.

Additionally, the frequently asked questions (FAQs) document has been revised to aid implementation of the revised policy requirements.  [1 Jun 2023]

SCM seeks to transform agri sector with fintech

The Securities Commission Malaysia (SCM) has announced that it is encouraging wider adoption of fintech in agriculture to support Malaysia's food security agenda. Speaking at the SCxSC Grow Fintech Conference, SCM Chair Dato' Seri Dr. Awang Adek Hussin said that leveraging fintech solutions will help improve access to financing and increase efficiency in the agriculture sector.  The SCM Chair highlighted alternative financing such as equity crowdfunding and peer-to-peer as facilitating the mobilisation of capital direct to 'agri-preneurs'.  [31 May 2023]

#crowdfunding

> India

RBI launches computer software and ITES export survey 2022-23

The RBI has launched the 2022-23 round of its annual survey on computer software and information technology enabled services (ITES) exports. The survey collects data on various aspects of computer services exports as well as exports of ITES and business process outsourcing (BPO). Responses are due by 15 July 2023.  [1 Jun 2023]

> Vietnam

SBV focuses on enhancing cashless payment

The State Bank of Vietnam (SBV) has issued a request to banks, foreign bank branches and intermediary payment service providers to implement several measures to further enhance cashless payment. SBV directs banks, foreign bank branches and intermediary payment service providers to research and apply incentive programs and policies on payment and intermediary payment service fees for their customers, with the priority given to the fee exemption for account maintenance and cash withdrawals for customers who are beneficiaries of the social security support policy.

The SBV has also requested that banks, foreign bank branches and intermediary payment service providers positively and proactively implement practical activities within the framework of the Non-cash Day 2023 through special offers and appropriate promotion policies.  [30 May 2023]

> US

SEC announces brothers agreed to settle insider trading charges relating to crypto asset securities

The SEC has announced that a former product manager and his brother have agreed to settle charges that they engaged in insider trading through a scheme to trade ahead of multiple announcements regarding at least nine crypto asset securities which were to be made available for trading on a platform. The defendants each agreed to be permanently enjoined from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 and to pay disgorgement of ill-gotten gains, plus prejudgment interest. As is often the case when a criminal court has already ordered defendants to forfeit their ill-gotten gains, the disgorgement and prejudgment interest in the SEC’s case would be deemed satisfied by the orders of forfeiture of the brothers’ assets in the criminal action, if approved by the court, and the SEC determined not to seek civil penalties in light of the brothers’ prison sentences.

The SEC's complaint, alleged that, one defendant helped to coordinate the platform’s public listing announcements that included what crypto assets would be made available for trading. According to the complaint, the platform treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, in breach of his duties, the defendant repeatedly tipped the timing and content of upcoming listing announcements to his brother and his friend. Ahead of those announcements, which usually resulted in an increase in the assets’ prices, the other defendants allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit. The brothers agreed, as part of the settlement, not to deny the SEC’s allegations.  [30 May 2023]

CFTC Division of Clearing and Risk issues staff advisory on the risks associated with expansion of derivatives clearing organization clearing of digital assets 

The Commodity Futures Trading Commission (CFTC) Division of Clearing and Risk (DCR) has issued a staff advisory on the risks associated with the expansion of derivatives clearing organization (DCO) clearing of digital assets. In the past several years, DCR has observed increased interest by DCOs and DCO applicants in expanding the types of products cleared and business lines, clearing models, and services DCOs offer, including related to digital assets.

The advisory, “reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.”  [30 May 2023]

U.S. Department of the Treasury kicks off public-private executive steering group to address cloud report recommendations

The U.S. Department of the Treasury has announced the formal launch of the Cloud Executive Steering Group (CESG), a public-private partnership dedicated to bolstering regulatory and private sector cooperation. First announced as part of Treasury’s Financial Services Sector’s Adoption of Cloud Services report (released in February), the multi-pronged follow-up effort aims to ensure that Treasury, financial federal regulators, and the financial sector work together to address challenges associated with the increasing trend of cloud adoption identified in the report. CESG will report out to the Financial Stability Oversight Council (FSOC), Financial and Banking Information Infrastructure Committee (FBIIC), and the Financial Services Sector Coordinating Council (FSSCC).

The key objectives of the CESG are:

• Document effective practices for cloud third-party risk, outsourcing, and due diligence processes to increase transparency, led by the FSSCC.
• Develop a “best practices” document for institutions considering “all in” or hybrid cloud adoption strategies including an update to the Financial Sectors’ Cloud Profile, led by the FSSCC.
• Improve transparency and monitoring of cloud services for better “Security by Design,” led by the FSSCC.
• Establish a common set of terms and definitions that can be used by financial institutions and regulators, led by the Office of the Comptroller of the Currency (OCC).
• Enhance information sharing and coordination for supervision and examination of financial institutions, led by the Consumer Financial Protection Bureau (CFPB).
• Determine if existing authorities for cloud service provider oversight are sufficient and account for systemic risks, led by the Treasury Department.  [25 May 2023

CFTC charges five defendants with fraudulent digital assets trading scheme

The CFTC has filed a civil enforcement action in the US District Court for the Central District of California against multiple individuals.The complaint charges the defendants with fraudulently soliciting hundreds of thousands of dollars from more than 170 individuals in the US and other countries for the platform to supposedly trade bitcoin and other digital asset commodities for them, and for misappropriating customer funds. The complaint alleges the defendants’ fraud and misappropriation scheme predominately targeted Spanish-speaking communities.

The complaint alleges from approximately August 2018 through December 2019, to get actual and prospective customers to give them money, the defendants falsely represented they would use the money to trade Bitcoin and other digital asset commodities for the customers; that the platform would provide “daily returns” of between 0.9% to 2.8% on the customers’ money from trading; and the platform would double the customers’ money in approximately four to eight months from trading. As alleged in the complaint, in actuality, the defendants did not trade Bitcoin or other digital asset commodities for the customers as they said, and did not earn daily returns nor double the customers’ investments based on trading. Instead, the defendants misappropriated the customer funds, and some customers lost all of their money.  [24 May 2023]