FinTech Global FS Regulatory Round-up - w/e 8 September 2023

In this weekly post, we round-up FinTech-related financial services regulatory developments for the week ending 8 September 2023.

ICYMI

• Select Committee recommends legislation on AI including to establish and enforce rights of IP owners (UK)
• Cyber risk in Critical National Infrastructure features prominently in UK 2023 National Risk Register
• Common Concepts In The Data Protection Laws Of India And Singapore

Global

IOSCO consults on policy recommendations for DeFi

The International Organization of Securities Commissions (IOSCO) has published a consultation on nine policy recommendations to address market integrity and investor protection concerns arising from decentralised finance (DeFi).

The recommendations cover six key areas: (1) understanding DeFi arrangements and structures; (2) achieving common standards of regulatory outcomes; (3) identification and management of key risks; (4) clear, accurate and comprehensive disclosures; (5) enforcement of applicable laws; and (6) cross-border cooperation.

Responses to the consultation are requested by 19 October 2023. [7 Sep 2023]

#DeFi 

IMF-FSB synthesis paper: Policies for cryptoassets

The Financial Stability Board (FSB) and the International Monetary Fund (IMF) have published a joint paper which synthesises risks and policy findings from IMF work on macroeconomic and monetary issues and FSB work on financial stability risks related to cryptoassets.

The paper looks at the key risks posed by cryptoasset activities to macroeconomic stability, financial stability and other areas; it then presents policy responses to these risks. The paper concludes with an implementation roadmap which seeks to: build institutional capacity beyond G20 jurisdictions; enhance global coordination, cooperation, and information sharing; and address data gaps necessary to understand the rapidly changing cryptoasset ecosystem.

In addition, Annex 3 of the paper sets out the FSB shared workplan with other standard setting bodies (SSBs), including the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the Committee on Payments and Market Infrastructures (CPMI) and the Basel Committee on Banking Supervision (BCBS). [7 Sep 2023]

#Cryptoassets 

FSB Chair writes to G20 leaders ahead of New Delhi Summit – Cross-border payments, cryptoassets, operational resilience

The FSB has published two letters from its Klaas Knott to G20 leaders in advance of the Summit taking place in New Delhi.

The first letter reports on the work the FSB has undertaken under the Leadership of India’s G20 Presidency to address existing vulnerabilities in the financial system and enhance the resilience of the financial system to structural change.  The letter outlines the FSB’s work to address the financial stability implications of digitalisation and climate change. In response to the former, earlier this year, the FSB delivered its set of recommendations for the regulation, supervision and oversight both of crypto activities and global stablecoin (GSC) arrangements. The FSB is now working with standard-setting bodies and international organisations to ensure that these recommendations are implemented globally. Recognising that cryptoassets raise both financial stability and macroeconomic risks, the FSB and IMF will deliver to the Summit a jointly-prepared Synthesis Paper (see above).

Also with regard to digitalisation, Mr Knott notes the operational resilience challenges which accelerating digitalisation presents, and highlights the FSB's work to achieve greater convergence in cyber incident reporting frameworks, and its work on a finalising a policy toolkit that financial institutions and financial authorities can use to enhance their third-party risk management and oversight.

Mr Knott's second letter sets out the progress made during the first phase of work to implement the 2020 G20 Roadmap to enhancing cross-border payments.  The letter also explains that delivering to specific quantitative targets by 2027 will occupy phase two of the implementation work. To support this current phase of work, two new public-private sector taskforces have been established to look at:  practical changes that can reduce unnecessary legal, regulatory and supervisory frictions; and projects to enhance payment systems.  The taskforces are accompanied by a range of public sector groups looking at practical actions for enhancing cross-border payments, including the adoption of International Standards Organisation (ISO) messaging standards, the updating of the Financial Action Task Force (FATF) recommendation on wire transfers, and the sharing of best practices on operating central bank payments systems. The FSB will submit a progress report, setting out in detail the substantial progress made on these next steps, to the October G20 Finance Ministers and Central Bank Governors meeting. [6 Sep 2023]

#Cryptoassets #Payments #OpRes #Cyber

WFE research: Crypto-trading infrastructure survey

The World Federation of Exchanges (WFE) has published a report on its 2022 survey of members and affiliates about exchanges' engagement with crypto market functioning and development. The report provides a snapshot of the evolution of crypto-trading platforms across different jurisdictions. It reports on exchanges’ engagement with these developments and their views on the future opportunities or challenges that these new technologies bring. The report also provides an overview of the set-up and operation of crypto-trading platforms; it contrasts centralised platforms (CEXs) with decentralised platforms (DEXs), including with regard to liquidity provision, price discovery and the custody of assets. The report sets out some of the implications of these differences for anti-money laundering, prudential regulation and financial stability, and investor protection. [6 Sep 2023]

#CryptoTrading #CEX #DEX

BIS research paper on digital safety nets roadmap

The Bank for International Settlements (BIS) has published a research paper showing how new digital technologies can be used to improve safety nets for insurance against idiosyncratic and aggregate income risks, tailored to deal specifically with well-known obstacles to trade, including: limited commitment; moral hazard; unobserved states; and payment transaction costs. The paper illustrates the gains from incentive-compatible voluntary risk-sharing schemes for groups of economic agents, eg Thai households and Spanish firms. It assesses the currently best-fitting financial regime within each group, and quantifies large welfare gains from improved insurance, despite the obstacles to trade.  The paper's authors explain that the method described could be applied in various contexts to foster financial inclusion and complement existing broader safety net mechanisms in a cost-effective way. [4 Sep 2023]

#Digital #Platforms #FinancialInclusion #Data

BIS working paper on panic-driven bank runs and the role of public communication

BIS has published a working paper (WP) entitled Keep calm and bank on: panic-driven bank runs and the role of public communication. The paper examines panic-driven runs and the influence of public communication in the aftermath of SVB's collapse. The findings include:

• deposit withdrawal is more likely, due to both a higher perceived risk of bank failure and higher expected losses on deposits in case of bank failure;
• households reallocate deposit withdrawals primarily into other banks and cash, with little passthrough into spending;
• there is no evidence that deposit risk increases the demand for cryptocurrencies; and
• information about deposit insurance and communication about bank stability by the central bank and/or regulators can reassure depositors, whilst communication from political leaders tends only to influence their electoral bases. [4 Sep 2023]

#Crypto #SVB

UK

FCA writes to wholesale bank CEOs

The FCA has published a template version of the 'Dear CEO' letter sent to firms in the wholesale banks portfolio. The letter outlines the FCA's key priorities for firms in the portfolio. It describes the FCA's supervisory work programme over the next two years which will shape its engagement with the sector.  The letter highlights a number of topics, including: risk management; conduct standards; operational resilience; the implementation of the Consumer Duty; and artificial intelligence (AI).  On AI, the FCA highlights the publication of Discussion Paper 5/22 (DP5/22 - published jointly with the Bank of England and the PRA). The regulator intends to engage with wholesale banks on current deployment as well as plans for the future and the applicable control infrastructure.

The FCA expects that, within two months, boards will have discussed the contents of the letter, considered how it applies to their business and taken action where necessary.  [8 Sep 2023]

#AI #OpRes

BoE paper: Open banking, shadow banking and regulation

The Bank of England (BoE) has published a staff working paper which discusses the implications of open banking for the market and regulation of banks. It considers how open banking impacts the role traditional regulatory tools play in reducing risk taking by banks (eg capital requirements and deposit rate ceilings), and then considers how this is affected by the presence of unregulated competitors or so-called 'shadow banks'.  [8 Sep 2023]

#OpenBanking

HoC Library: Research briefings on the Digital Markets Competition and Consumers Bill

The House of Commons (HoC) Library has published a research briefing which outlines the changes made to the Digital Markets, Competition and Consumers Bill's consumer provisions (Parts 3 and 4) following consideration by a Public Bill Committee over fourteen sittings between 13 June and 11 July 2023.

Additionally, a research briefing covering the second reading debate and committee stage of Parts 1 and 2 (and Schedules 1 to 12) of the Bill, on digital markets and competition, has also been published.

A carry-over motion has been agreed so that the Bill will resume in the next session of Parliament in September.  [8 Sep 2023]

#Digital

FCA sets expectations ahead of incoming crypto marketing rules

The FCA has issued a press release which sets out its expectations of firms ahead of the cryptoasset financial promotions regime coming into force on 8 October 2023. The FCA has signalled that in response to industry readiness it will consider giving cryptoasset firms more time to implement certain changes, for instance a 24-hour cooling off period. Firms could be given until 8 January 2024 to introduce features that require greater technical development, with the core rules still coming into effect from 8 October 2023.

To further support firms in making necessary improvements to their marketing, the FCA has published examples of good and poor practice on firms’ preparations for the new marketing rules.

The regulator warned that anyone continuing to promote cryptoassets to UK customers past the October deadline without complying with the rules may be committing a criminal offence punishable by an unlimited fine and/or up to 2 years imprisonment. [7 Sep 2023]

#Cryptoassets #FinProms

SI: The Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023 – regulatory gateway

The Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023 has been made. The Financial Services and Markets Act 2023 (FSMA 2023) introduces a regulatory gateway for the approval of financial promotions. The gateway will require any authorised person wishing to approve financial promotions of an unauthorised person to first obtain permission from the FCA unless an exemption applies. This statutory instrument (SI) legislates for the exemptions that HM Government (HMG) stated it would put in place. This SI comes into force on 27 September 2023. An explanatory memorandum accompanies the SI. [6 Sep 2023]

#FinProms #RegulatoryGateway

FSCP publishes research into bias in financial services firms' use of customer data and makes  recommendations to FCA on use of AI and algorithms

The Financial Services Consumer Panel (FSCP) has published the report of the research which it commissioned into whether use of personal data and algorithms by financial services firms was leading to unfair, biased or discriminatory outcomes for consumers with protected characteristics.  The research reports that 'despite strong anecdotal evidence, categorically evidencing that algorithmic decision-making is the cause of bias is challenging because systems are opaque, making it difficult for third parties to truly understand what is happening "behind the scenes"'. However, the researchers were able to point to some clear areas of concern based on the evidence gathered:

• consumers experiencing unfair bias relating to their ethnicity in terms of access to products, pricing of products and service received;
• disability is another area where there is evidence of unfair outcomes; and
• while evidence about impact in relation to other types of protected characteristics is thinner, this should remain an area of focus (the issue may be more the dearth of concrete evidence).

In light of the research and the FSCP's prioritisation of the ethical application of algorithms and artificial intelligence (AI), the FSCP makes the following recommendations to the FCA:

• Conduct analysis to assess whether consumer harm is occurring as a result of (intentional or unintentional) bias in firms’ collection and use of data and, if so, to identify the nature and scale of that harm.
• Provide, based on the findings of this analysis, guidance for firms on the ethical use of data including examples of good and poor practice.
• Insist that firms understand and are able to demonstrate, what personal information is collected and why, how consumers’ personal data is used in their algorithms and AI and how this drives decisions and outputs that affect consumer outcomes.
• Require firms to disclose to the FCA, and make available to consumers, which data fields are used when making decisions that impact consumers.
• Ensure that firms have a named individual accountable for their use of algorithms, decision engines and AI, either through expansion of the roles detailed under the senior managers and certification regime (SMCR) or some other mechanism.
• Embed the consideration of algorithms and AI – and their potential to affect consumer outcomes and cause harm - as a cross-cutting theme, relevant to all workstreams. [6 Sep 2023]

#AI #Algorithms #Data

FSCP: Consultation responses on cryptoasset financial promotions 

The FSCP has published its response to FCA Guidance Consultation 23/1 (GC23/1) on cryptoasset financial promotions. In its GC23/1 response, the FSCP recommends that:

• financial promotions should be limited to professional investors and self-certification as either sophisticated or high net worth (HNW) should not be permitted;
• financial promotions should be communicated in the appropriate mediums, and the FSCP notes that it is 'not convinced' that social media is such a medium;
• purchases should be supported by tools such as cooling off periods;
• terms and risks should be repeated to consumers within the promotion; and
• promotions should be in line with the principles under the Consumer Duty and this should be made clear in the FCA Guidance. [4 Sep 2023]

#Cryptoassets #FinProms

House of Commons: Answer to written question on FCA's capacity to regulate cryptocurrencies

For HM Treasury, Economic Secretary Andrew Griffith has provided a written statement in response to the question posed by Alan Cairns, MP and Vice-Chair of the All Party Parliamentary Group (APPG) on Financial Services and Markets  on what assessment has been made of the adequacy of the capacity of the FCA to regulate cryptocurrencies. The response refers to the FCA's Transformation Programme (completed in March 2023), which involved significant investment in the FCA’s systems and capabilities to enable better use of data and intelligence to regulate 50,000 firms effectively and efficiently. [4 Sep 2023]

#Cryptoassets

Hong Kong

HKSCC announces further deferral of second FINI market rehearsal to 16 September 2023 due to extreme conditions

The Hong Kong Securities Clearing Company Limited (HKSCC) has issued a circular to inform Fast Interface for New Issuance (FINI) users that the second market rehearsal scheduled for 9 September 2023 will be postponed to 16 September 2023 due to the impact of 'extreme conditions'.

The second FINI market rehearsal was originally scheduled for 2 September 2023 but was postponed to 9 September 2023 due to severe weather conditions brought about by tropical cyclone Saola (see our previous update).  [8 Sep 2023]

#FINI 

SFST discusses initiatives to strengthen cross-border fintech cooperation at Fintech Salon of GBA-SZ-HK Exchange Seminar

The Hong Kong Secretary for Financial Services and the Treasury (SFST), Mr Christopher Hui, gave a speech (in Chinese only) at the Fintech Salon of the GBA-SZ-HK Exchange Seminar on 7 September 2023.

Mr Hui commented on the vibrancy of the fintech ecosystem in Hong Kong, comprising of more than 800 fintech companies and covering a wide range of businesses including wealth and investment management and virtual assets trading.  He also highlighted the Hong Kong Government's focus on the development of fintech and its cooperation with financial regulators and industry participants to launch a number of initiatives between Hong Kong and the Mainland.  These initiatives include (among others) the HKMA and the People's Bank of China (PBOC)'s  joint launch of a cross-border fintech 'one-stop' testing platform in 2022 to allow fintech companies to conduct cross-border fintech testing.  This is so that fintech companies can obtain feedback from regulators and users in Hong Kong and the Greater Bay Area (GBA) on products before its launch on the market. Currently, two projects have completed testing.

The Hong Kong Government launched a one-stop platform in 2022 to encourage the promotion of Hong Kong businesses and connect local fintech companies with the Mainland and other markets, as well as strengthen the collaboration with Mainland public and private entities.

Mr Hui further noted that the first phase of the technical tests conducted in Hong Kong by the HKMA and the PBOC on the use of digital RMB for cross-border payments has been completed.   The second phase of the tests is currently underway. Looking forward, the digital RMB will provide residents of Hong Kong and the Mainland with a safer and more convenient option for cross-border retail consumption, improve the efficiency and user experience of cross-border payment services, and promote interconnectivity between Guangdong, Hong Kong and Macao in the GBA.

Hong Kong will also launch a fintech internship scheme for post-secondary students in 2024, to provide cross-border work experience to Hong Kong and GBA students undertaking fintech-related degrees.  [7 Sep 2023]

#FinTech #Payments #DigitalRMB

HKMA Chief Executive discusses HKMA's upcoming initiatives at Treasury Markets Summit

The HKMA's Chief Executive, Mr Eddie Yue, gave a keynote speech at the Treasury Markets Summit 2023 on 4 September 2023.

Mr Yue commented on the resilience of Hong Kong's financial markets over the past year despite various challenges, and provided an overview of HKMA's upcoming initiatives, including on digitalisation and innovation.  He highlighted:

• The HKMA published its Fintech Promotion Roadmap in August 2023 (see our previous update) to further accelerate fintech adoption in the financial services industry.  The HKMA continues to invest in digitalisation and innovation as it believes they can open up new opportunities.
• The first is the opportunity to test a concept and validate efficiency gains in a controlled scale, such as developing a prototype digital platform for green bond tokenisation, and conducting a pilot to test the concept of applying central bank digital currency (CBDC) in solving the key pain points of cross-border payments (Project mBridge).  The second is the opportunity for public-private sector collaboration, which is featured in the above two projects.  [4 Sep 2023]

#FinTech #Payments #Tokenisation #CBDC

Singapore

MAS responds on crypto concerns

MAS has issued a response to a letter printed in the Financial Times on 22 August 2023 under the heading 'Singapore treads uneasily in the crypto sandbox'.  In the response, MAS comments that the letter 'conflates several unrelated issues', and advises that (1) MAS does not have a 'crypto sandbox'; (2) while crypto companies (like any company or individual with a bank account) may access Singapore's FAST interbank payment system, this does not have the effect of linking retail bank deposits to crypto payments; and (3) recent malware scams mentioned in the letter have nothing to do with cryptocurrencies.  [4 Sep 2023]

#Crypto #Sandbox #Payments

India

RBI Governor addresses the Global FinTech Festival in Mumbai on Fintech and the changing financial landscape

The RBI has published the keynote delivered by Shri Shaktikanta Das, Governor of the RBI on 6 September at the Global Fintech Festival in Mumbai. The RBI Governor spoke about the changes in the financial landscape with the advent of FinTechs, with particular emphasis on the role of digital public infrastructure and role of the RBI in fostering innovation.  When highlighting some recent tech-based initiatives undertaken by the RBI, the Governor outlined central bank digital currency (CBDC) pilots. He explained that having enabled full inter-operability of CBDC with unified payments interface (UPI) QR codes, the RBI is targeting one million CBDC transactions per day by December 2023. This will give it enough data points to study various design choices, use cases and behavioural patterns.  [6 Sep 2023]

#FinTech #CBDC #UPI #QRCodes

RBI and BISIH announce winners of G20 TechSprint

Under India’s G20 Presidency, the RBI and the Bank for International Settlements Innovation Hub (BISIH) had launched the fourth edition of the G20 TechSprint on May 4, 2023 and invited global innovators to help develop technology solutions for cross-border payments. TechSprint 2023 received an enthusiastic response with 93 proposals submitted across the three problem statements by teams from Australia, Canada, Germany, India, Indonesia, Sweden, Singapore, UK, and USA, among others. Seven teams were shortlisted for each of the three problem statements. The final evaluation took place on 3 and 4 September in Mumbai during which the shortlisted teams demonstrated their solutions to an independent panel of judges. The panel of judges selected one team each as the winner for each of the three problem statements, with the three winning teams awarded a prize money of INR 4 million each.  [4 Sep 2023]

#TechSprint #Payments

RBI circular: Operation of pre-sanctioned credit lines at banks through UPI

The RBI has issued a circular regarding the operation of pre-sanctioned credit lines at banks through unified payment interface (UPI). Currently, savings accounts, overdraft accounts, prepaid wallets and credit cards can be linked to UPI; this is now being expanded to include pre-sanctioned credit lines as a funding account.  [4 Sep 2023]

#Payments  #UPI

Thailand

BoT: Digital Finance Conference 2023

The Bank of Thailand (BoT) is hosting its Digital Finance Conference 2023 on 14 and 15 September at the BoT Learning Center. The objective of hosting the conference is to support the development of digital finance, and this year's theme is 'Building an ecosystem for responsible innovation'. Focus will be on: connecting and making use of data (open data), including financial data and information outside the financial sector (non-financial data); the use of artificial intelligence (AI); and important projects that use financial innovations such as payment systems. There will be more than 60 executives, regulators, and experts from both domestic and international organizations attending. [7 Sep 2023]

#AI #Payments

Philippines

BSP selects technology for CBDC pilot project

The Bangko Sentral ng Pilipinas (BSP) has announced the selection of Hyperledger Fabric as the distributed ledger technology (DLT) for its wholesale Central Bank Digital Currency (CBDC) pilot project, Project Agila (formerly known as Project CBDCPh). Project Agila aims to orient the BSP and participating financial institutions on CBDC technology solutions that have the potential to enhance the country’s large-value payment system.

Commenting on the pilot, BSP Governor Eli M Remolona Jr said: 'By the end of Project Agila, the pilot participants are expected to have a clearer understanding of CBDC technology and assess the capability of wholesale CBDCs to foster advancements in the large-value payment system. The results of the assessment are seen to guide the BSP and the industry on a possible launch of wholesale CBDCs in the Philippines.' [7 Sep 2023]

#DLT #CBDC

USA

FINRA Notifies Member Firms of Joint CISA & FBI Cybersecurity Advisory

FINRA has highlighted a recent joint Cybersecurity and Infrastructure Security Agency (CISA) and Federal Bureau of Investigation (FBI) Cybersecurity Advisory published on August 30, 2023, which may be updated as new intelligence is uncovered. This Advisory complements the successful effort of the FBI and international partners to disrupt Qakbot on August 25, 2023, which included the seizure of over $8.6 million worth of crypto assets extorted from victims. As part of the successful operation, law enforcement agencies were able to identify over 700,000 computers that may have been infected by Qakbot, which has been implicated as one of the most active forms of ransomware in 2023. Threat actors typically deliver Qakbot via social engineering.

The Joint CISA and FBI Advisory provides an overview of Qakbot’s infrastructure and indicators of compromise (IOCs) of which organizations should be aware. The Cyber and Analytics Unit (CAU) within FINRA’s Member Supervision program suggests firms evaluate the IOCs with appropriate personnel to determine whether their systems, including any provided by vendors, are at risk. [31 Aug 2023]

#Cyber #Crypto