FinTech Global FS Regulatory Round-up – w/e 14 July 2023

Global 

FSB: Lessons learnt from banking turmoil, cryptoasset recommendations and climate roadmap

The Financial Stability Board (FSB) has published a letter from its Chair, Klaas Knot, to the G20 Finance Ministers and Central Bank Governors in advance of their forthcoming meeting. In the letter, Mr Knot announced that the FSB had finalised its recommendations for the regulation, supervision and oversight both of crypto-assets and markets and of global stablecoin arrangements, among other matters; these would be issued the following Monday, 17 July 2023 and will include a workplan of activities which the FSB and its fellow standard setting bodies (SSBs) will undertake to further advance the regulatory and supervisory approach.  Attention will then move to global implementation of those standards in order to avoid a fragmented regulatory system.  [13 Jul 2023]

#cryptoassets #stablecoin

BIS: Report on crypto ecosystem

The Bank for International Settlements (BIS) has published a report submitted to the G20 Finance Ministers and Central Bank Governors which reviews the key elements of the crypto ecosystem and assesses its structural flaws. It then goes over the risks posed and discusses options for addressing them. It also identifies data gaps and discusses ways to alleviate them.

The report has three key takeaways. First, the crypto ecosystem is subject to a high degree of fragmentation and is characterised by congestion and high fees. Second, despite an original ethos of decentralisation, crypto and decentralised finance (DeFi) often feature substantial de-facto centralisation, which introduces various risks. Third, while DeFi mostly replicates services offered by the traditional financial system, it amplifies known risks.  [11 Jul 2023]

#cryptoecosystem #DeFi

BIS: Report on lessons learnt on CBDCs

BIS has published a report on how the BIS Innovation Hub (BISIB) is helping central banks on their CBDC journeys and discusses the lessons learnt so far.

The report starts by introducing the BISIH and how it operates. It then presents the different CBDC projects, splitting them into retail and wholesale as well as domestic and cross-border use cases. For each category, the key insights and lessons learnt are presented from the perspectives of desirability, feasibility and viability. In conclusion, a gap analysis seeks to guide the BISIH, central banks and other policy makers on what should come next in terms of CBDC experimentation. [11 Jul 2023]

#CBDC

BIS: Results of 2022 survey on CBDCs and cryptoassets

BIS has published a report presenting the results of a survey of 86 central banks conducted in late 2022 about their involvement in central bank digital currency (CBDC) work, as well as their motivations and intentions of potentially issuing one. The survey also asked about central banks’ assessment of the use of stablecoins and other cryptoassets in their jurisdictions.

The paper notes that 93% of surveyed central banks are engaged in some form of CBDC work and more than half are running concrete experiments or working on pilots. In addition, the report shows that most central banks see potential value in having both a retail CBDC and a fast payment system, and that there could be 15 retail and nine wholesale CBDCs publicly circulating in 2030. The survey further shows that, to date, stablecoins and other cryptoassets are rarely used for payments outside the crypto ecosystem. [11 Jul 2023]

#CBDC #cryptoassets #stablecoin #cryptoecosystem

UK

PSR publishes 1st annual review of Specific Direction 12

The Payment Systems Regulator (PSR) has published its first annual review of Specific Direction 12 (SD12), designed to make sure LINK continues to do all it can to fulfil its commitment to maintain a broad geographic spread of free-to-use ATMs. Having considered the results of the analysis and responses to the call for views, the review concludes that SD12 is working well and should remain in place.

The PSR also confirmed that it will undertake another review of SD12 in spring 2024 when it will assess SD12’s role in protecting free access to cash in the context of changes to the regulatory landscape through implementation of FSMA 2023.  [14 Jul 2023]

#LINK

FCA: Speech on regulatory approach to Big Tech and response to DP22/5 feedback

The FCA has published a speech by its Chief Executive, Nikhil Rathi, on the FCA's emerging regulatory approach to Big Tech and AI. Mr Rathi welcomed the government’s call for the UK to be the global hub of AI regulation and confirmed that the regulator will open its AI sandbox to firms wanting to test the latest innovations. He also stated that:

• Big Tech’s role as the gatekeepers of data in financial services will be under increased scrutiny;
• the FCA's outcomes and principles-based approach to regulation, including the Senior Managers Regime and Consumer Duty, should mean firms have scope to innovate while protecting consumers and market integrity; and
• the FCA will regulate firms that are designated as Critical Third Parties (CTPs) where they underpin financial services and can impact stability and confidence in UK markets.

Mr Rathi also announced the publication of a feedback statement on the responses received to DP 22/5 which assessed potential competition benefits and harms arising from Big Tech entry and expansion in four retail financial services sectors: payments, deposits, consumer credit and insurance.

Following the feedback received to DP22/5, the FCA is proposing three additional next steps:

1. Launch, by the end of 2023, a Call for Input on Big Tech firms as ‘gatekeepers’ and key drivers including the role of data sharing asymmetry between Big Tech firms and financial services.
2. Review its supervisory approach for Big Tech firms given they are active across different financial sectors with complementarities between them and with the Big Tech firms’ core products and services.
3. Continue its work with the government and the Digital Markets Unit (DMU) as the new Digital Markets, Competition and Consumers Bill passes through Parliament; and, at the appropriate time, set out the detail of how the FCA will implement the regulatory coordination provisions in the Bill through a memorandum of understanding with the DMU. [12 Jul 2023]

#BigTech #AI

Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 published

The Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 as enacted has been published to legislation.gov.uk. These Regulations amend the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 to remove a limitation on the FCA’s power to make rules in relation to authorised electronic money institutions, small electronic money institutions, authorised payment institutions, small payment institutions, and registered account information service providers. [12 Jul 2023]

#e-moneyinstitutions #payments

FCA continues crackdown on unregistered crypto ATMs

The FCA has reported that, since the start of 2023, it has visited and inspected 34 locations across the UK suspected of hosting crypto ATMs. It stated that the visits were part of a coordinated operation with other law enforcement agencies to crackdown on this illicit sector and that, as a result, 26 machines operating unlawfully had been disrupted.

The FCA also warned the public of a lack of protection when using crypto ATMs and affirmed its commitment to take enforcement action against unregistered crypto ATM operators. [11 Jul 2023]

#cryptoATMs

BoE publishes Andrew Bailey's Mansion House speech

The Bank of England (BoE) has published the Mansion House speech delivered by Governor Andrew Bailey. The speech included a discussion on crypto, concluding that neither unbacked crypto assets such as Bitcoin nor existing stablecoins used in crypto settlement meet the standards expected of safe money in the financial system. However, Mr Bailey noted that enhanced forms of digital money which are currently being explored, including in the Central Bank Digital Currency (CBDC) taskforce, are more promising. Also on CBDCs, Mr Bailey commented that the BoE's recent consultation has attracted a record number of responses – over 50,000. [11 Jul 2023]

#crypto #stablecoins #CBDC #cryptoassets #Bitcoin

Edinburgh Reforms: HMT consults on an FMI sandbox for digital securities

HMT has published a consultation setting out the proposed approach to delivering a financial market infrastructure (FMI) sandbox – the Digital Securities Sandbox (DSS) – which will be the first FMI sandbox delivered under the powers granted as part of FSMA 2023. The DSS will facilitate the testing and adoption of digital securities across financial markets. Through the DSS, industry will be able to set up financial market infrastructures that utilise digital asset technology, which can perform a number of activities in relation to digital securities under a temporarily modified legislative and regulatory framework.

The consultation also highlights further policy issues, including: technology considerations; prudential treatment of digital assets; reporting; custody; retail users; operational resilience and outsourcing; and taxation.  It also addresses some legal considerations, including typology of digital securities where HMT says it considers that securities would either be 'digitally native' (issued for the first time on DLT) or 'digital representations of traditional securities held at a central securities depository (CSD), and jurisdiction/choice of law.

Feedback to the consultation is requested by 22 August 2023. In terms of next steps, HMT intends to lay a statutory instrument before Parliament later this year, which will set up the legal framework for the Sandbox. In parallel, the BoE and FCA will publish further guidance, consult on rule changes, and set out the application process. [11 Jul 2023]

#FMISandbox #digitalsecurities #DLT

HMT: Future of Payments Review 2023 – Call for input and terms of reference

HMT has published the terms of reference for and a call for input to the Future of Payments Review 2023 which was announced by the Chancellor in his Mansion House speech on 10 July 2023.  The review will be led by Joe Garner and will 'consider how payments are likely to be made in the future and make recommendations on the steps needed to successfully deliver world leading retail payments, further boosting UK fintech competitiveness'. Although the call for input refers to fintech, the terms of reference explain that the review is not considering stablecoins or central bank digital currency (CBDC) policy.

Feedback to the call for input are requested by 1 September 2023.  The chair will provide a report and recommendations to the Government in Autumn 2023.

In a press release, the Payment Systems Regulator (PSR) has welcomed the launch of the review. [11 Jul 2023]

#stablecoins #CBDC

Europe

ECB: 4th progress report on digital euro investigation phase

The European Central Bank (ECB) has published its fourth progress report on the investigation phase of a digital euro. The ECB and the euro area national central banks launched the investigation phase which aims to address key issues relating to the design and distribution of a digital euro in October 2021.

The current report explains why a digital euro should be free of charge for basic use and how it could strengthen financial inclusion. It also sets outs key principles of a compensation model for the distribution of a digital euro and gives an update on other ongoing areas of work. In addition, it looks at the results of the prototyping exercise and the market research on technical solutions for a digital euro.

Based on the result of the investigation phase, the Governing Council of the ECB is to decide whether to start testing and developing a digital euro in the autumn of 2023.  [14 Jul 2023]

#DigitalEuro

ESMA and EBA publish MiCAR consultations

ESMA has published its first of three consultation packages under the Markets in Crypto Assets Regulation (MiCAR). The consultation seeks input on proposed rules for cryptoasset service providers (CASPs), particularly in relation to their authorisation, identification and management of conflicts of interests, and how CASPs should address complaints.

Responses to this consultation are requested by 20 September 2023. ESMA expects to publish a final report and submit the draft technical standards to the EC for endorsement by 30 June 2024 at the latest.

Additionally, the EBA has published the following consultations on draft technical standards under MiCAR:

• draft regulatory technical standards (RTS) on complaints handling procedures for issuers of asset-referenced tokens (ARTs) under MiCAR;
• draft RTS on information for application for authorisation to offer to the public and to seek admission to trading of ARTs and draft Implementing Technical Standards (ITS) on standard forms, templates and procedures for the information to be included in the application under MiCAR; and
• draft RTS on the detailed content of information necessary to carry out the assessment of a proposed acquisition of qualifying holdings in issuers of ARTs under MiCAR

Responses to the EBA consultations are requested by 12 October 2023.

Alongside the consultations, the EBA has also published a statement addressed to financial institutions and other undertakings who intend to commence, or have commenced, ART or electronic money token (EMT) activities prior to 30 June 2024. The statement is intended to encourage timely preparatory actions to MiCAR application in order to reduce the risks of potentially disruptive and sharp business model adjustments at a later stage, to foster supervisory convergence, and to facilitate the protection of consumers. [12 Jul 2023]

#MiCAR #cryptoassets #CASPs #ART #EMT

Hong Kong

HKMA Executive Director discusses approach in combatting financial crime in opening keynote speech

The HKMA's Executive Director (Enforcement and AML), Ms Carmen Chu, gave an opening keynote speech at the Fraud and Financial Crime Asia Summit 2023 on 13 July 2023.

Ms Chu highlighted the increase in financial crime (particularly digital fraud) in recent years.  Deception cases reported to the Hong Kong Police as well as financial losses to victims have more than tripled in recent years, and the HKMA has received 637 fraud-related banking complaints in the first six months of 2023, more than the total for the whole of 2022.

Ms Chu discussed the HKMA's approach and upcoming plans for tackling financial crime:

• Data – The HKMA has transformed its supervisory approach to the collection, storage and analysis of data, in support of more data-driven supervision, which in turn drives more targeted interventions, via its anti-money laundering (AML) surveillance enhancement programme.  It will shortly move to an automated common submission portal for data, through which each bank is able to demonstrate effectiveness based on its risks and corresponding AML and counter-financing of terrorism programme.
• Technology – Since 2019, the HKMA has engaged banks to understand their regtech journeys, published various guidance documents, and organised AML regtech labs (or AMLabs) to allow banks to target common pain points and identify relevant technology solutions.  About 60% of retail banks are now deploying network analytics, more than twice as many as three years ago, greatly increasing the number of intelligence-led suspicious transaction reports being filed, and consequently the amount of criminal proceeds being restrained or confiscated.
• Private-to-private partnership – This is as important as public-private partnerships, and the HKMA has collaborated with the industry and the Police recently to launch the Financial Intelligence Evaluation Sharing Tool (FINEST), a bank-to-bank information sharing platform which helps increase banks’ ability to share information for detecting and disrupting fraud and mule account networks.
• Data analytics – The HKMA is running a pilot (Macro Analytics), which for the first time applies analytics to granular financial crime data across multiple banks, including eight retail and virtual banks, to generate new supervisory insights that will help the HKMA target and tackle vulnerabilities and threats such as mule account networks.

There is a need to be dynamic and creative in tackling financial crime, adopting a 'whole-system approach' where banks, regulators and law enforcement share a common purpose to reduce harm and losses to members of the public.  [13 Jul 2023]

#digitalfraud #regtech #AML

HKSCC issues circular regarding commencement of market practice session for FINI on 10 July 2023

The Hong Kong Securities Clearing Company Limited (HKSCC) has issued a circular to announce the commencement of the market practice session on 10 July 2023, with six hypothetical new listings being tested following the new T+2 settlement timetable in the Fast Interface for New Issuance (FINI) external user testing environment.  FINI is targeted for launch in October 2023 (see our previous update).

The HKEX strongly encourages FINI banks and HKSCC participants to participate in the market practice session to familiarise themselves with the system functions.  No separate registration is required.

The HKEX expresses its appreciation to all FINI users who participated in the market-wide rehearsal and go-live arrangement webinars on 5 and 6 July 2023.  A consolidated list of questions and answers has been published on the FINI webpage.

As FINI enters the final stage of implementation, the HKEX encourages all FINI users to set up user accounts and teams within the HKEX Access Management Portal to prepare for the upcoming market rehearsal and platform launch. [12 Jul 2023]

#FINI

HKIMR publishes research report on digitalisation of financial services in Hong Kong

The HKMA has announced the publication of a new research report, titled 'The Digitalisation of Financial Services in Hong Kong: Recent Experience, Regulatory Developments and Considerations for Sustainable Innovation and Growth', by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the research arm of the Hong Kong Academy of Finance.

The report discusses (among other things):

• Market and policy factors that have accelerated the digitalisation of financial services in Hong Kong in recent years, such as a high IT penetration rate, the pandemic, the fintech ecosystem, competition from new entrants and peers, business transformation opportunities, and policy initiatives such as promoting fintech adoption and enhancing data infrastructure;
• The implications of digitalisation for financial inclusion and environmental sustainability, as well as the associated risks for consumers (such as online frauds and scams, data breaches and mis-selling of financial products), featuring insights from local financial institutions based on interviews commissioned by the HKIMR;
• The measures implemented both in Hong Kong and internationally to mitigate the potential risks and enhance consumer protection, by policy makers (such as alignment with international standards, regulations and supervision, data protection and consumer education) and financial institutions (such as data governance, consent management, and strengthening of the complaints handling and redress mechanism); and
• Considerations for sustainable innovation and growth in the digitalisation journey for financial services in Hong Kong, including fostering a positive user experience and trust in digital tools, securely embracing advanced technologies, and allocating resources to talent acquisition and professional development.  [12 Jul 2023]

#fintechecosystem #fintech #digitalisation

Singapore

MAS and SFA invite fintech nominations

The Monetary Authority of Singapore (MAS) and the Singapore FinTech Association (SFA) have announced the call for nominations for the 2023 Singapore FinTech Festival (SFF) Global FinTech Awards. The awards seek to recognise innovative fintech solutions by corporates and individuals which have been instrumental in transforming fintech industry practices, creating new growth opportunities, promoting financial inclusion and enhancing the delivery of financial services.

There will be a total of seven award categories and 16 winners of the awards who will be announced at SFF 2023, held from 15 to 17 November.

Nominations for the awards are requested by 4 September 2023. [11 Jul 2023]

#fintech #FinTechAwards

MAS: Management of ML/TF and sanctions risks from customer relationships with nexus to digital assets

MAS has published a paper produced by the Digital Assets Risk Management Group, a working group established under the AML/CFT Industry Partnership (ACIP) for the purpose of defining and sharing best practices on the management of money laundering and terrorism financing (ML/TF) and sanctions risks arising from customer relationships with a nexus to digital assets.

The paper aims to provide financial institutions with a foundational framework to advance understanding and management of ML/TF and sanctions risks in the Singapore context by:

• presenting a high-level overview on the classes of digital assets and proposing risk factors for assessing relevance of digital assets from the AML/CFT perspective;
• identifying the possible types of customer nexus to digital assets such as cryptocurrencies and analysing the underlying risk profiles; and
• clarifying risk management objectives and assessing incremental risk management capabilities required to manage these associated risks.  [11 Jul 2023]

#digitalassets #cryptocurrencies #AML

Malaysia

BNM: AML/CFT 'hackathon' 2023

The Bank Negara Malaysia (BNM) has announced the winners of the Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) Hackathon 2023. The event attracted over 660 participants from 140 teams, representing more than 20 countries from the Asia-Pacific region.

Participants comprising regulatory bodies, law enforcement agencies, financial institutions, private entities and undergraduate students competed to develop prototypes of innovative digital tools to combat financial crimes. During the hackathon, workshops coupled with mentoring sessions by 30 technology and AML/CFT experts were conducted to guide, equip and motivate the participants.  [10 Jul 2023]

#hackathon #AML

India

RBI: Speech on fintech

The Reserve Bank of India (RBI) has published a speech by its Deputy Governor, T Rabi Sankar, on the road ahead with fintech at the Moneycontrol India Startup Conclave in Bengaluru. Mr Sankar began by discussing the emergence of fintech and thereafter explained how the RBI views the changes in the financial services space, caused by absorption of new and innovative technologies and the resulting issues like regulatory level playing field, consumer protection, innovation, and central bank digital currencies (CBDCs).

He concluded the speech by stating that it is crucial for regulators, the fintech industry, and established institutions to engage in open and meaningful dialogue in order to ensure effective regulation and foster a conducive environment for fintech innovation.  [11 Jul 2023]

#fintech #CBDC

USA

CFTC: Federal Court orders digital asset derivatives platform and Florida resident to pay more than $15 million for multiple violations of the Commodity Exchange Act

The Commodity Futures Trading Commission (CFTC) has announced that on July 5, Judge Roy K Altman, in the US District Court for the Southern District of Florida, issued a default judgment granting a permanent injunction against a Florida resident and four companies he controlled.

The order stems from a September 30, 2022 complaint, which alleged that from approximately May 2020 through May 2022, the defendant operated a digital asset derivatives exchange from an office in Florida. The exchange allegedly sought participation from US customers through web-based solicitations, despite the fact Todd knew such participation subjected the exchange to US regulation.

The CFTC charged attempted manipulation of the exchange’s native token. The token was a digital asset, a digital representation of value that functioned as a medium of exchange, and also traded on web-based trading platforms that were accessible to market participants in the US, including the defendant, and therefore was a commodity in interstate commerce. [12 Jul 2023]

#digitalassets