FinTech Global FS Regulatory Round-Up – w/e 9 February 2024

In this regular post, we round-up FinTech-related financial services regulatory developments for the week ending 9 February 2024.

ICYMI

• Taming the machine – AI and the role of senior managers
• The future of securities tokenisation and crypto regulation – What you need to know
• Cyber Monthly Wrap-up (UK, EMEA and the US) – December 2023 – January 2024
• Regulating AI: Two steps forward for the UK as pro-innovation approach remains

UK

FCA update on reducing and preventing financial crime – questions for firms' boards and suggested actions

The FCA has published an update on its progress regarding the prevention and reduction of financial crime. The update covers the FCA's progress on its 3-year strategy, published in 2022, and takes into account HM Government's (HMG's) public-private national Economic Crime Plan 2 and Fraud Strategy, both published in 2023.

At this mid-point in its strategy, the FCA notes that its work on fraud – including investment fraud and authorised push payment (APP) fraud – is having an impact. The FCA has increased dedicated resource in this space, with over 70 new staff joining to focus on fraud-related initiatives since 2022; the regulator has also invested in its systems. Progress is also being made on money laundering and sanctions, an area where the FCA highlights its development and roll-out of a synthetic data sanctions testing tool, its robust approach to authorisation, and its multi-firm review work.

The update also highlights four future areas of focus for the FCA: data and technology; collaboration; consumer awareness; and metrics. For each of these areas, the FCA sets out questions for firms' boards to consider and/or suggested actions. [8 Feb 2024]

#APPFraud #SyntheticData

BoE: DPs on RTGS operating hours and access policies

The Bank of England (BoE) has published two Discussion Papers (DPs) as follows:

• DP on real-time gross settlement (RTGS) operating hours – This DP seeks views on the potential benefits, costs and impacts which an extension of RTGS operating hours could create. The BoE aims to gain insights ahead of forming a proposal on future operating hours and the path to getting there.
• DP on RTGS access policies – This DP identifies four areas where enhancements to the BoE's policy framework could be made.

Responses are requested by 30 April 2024.

In terms of next steps, the BoE intends to publish a consultation paper (CP) in 2025 on RTGS and the Clearing House Automated Payment System (CHAPS) operating hours.

Regarding RTGS access, the BoE will consider industry views and aims to publish a response to this DP within 12 months of the closing date.  [8 Feb 2024]

#Payments

BoE: DP on the regulatory regime for systemic payment systems using stablecoins and related service providers – deadline extended

The Bank of England (BoE) has extended the deadline for feedback to its November 2023 discussion paper (DP) on the regulatory regime for systemic payment systems using stablecoins and related service providers. The consultation on the DP will now close on 12 February 2024 at 10am. [7 Feb 2024]

#Stablecoins #Payments

OAI: HMG response to AI regulation white paper consultation

The Office for Artificial Intelligence (OAI) has published HM Government's (HMG's) response to the March 2023 white paper consultation which set out proposals to establish a regulatory framework for AI to drive safe, responsible innovation.

With respect to the five cross-sectoral principles introduced in the white paper, the OAI confirmed that it remains committed to a context-based approach that avoids unnecessary blanket rules that apply to all AI technologies. In this regard, HMG has written to several regulators, including the FCA and the Bank of England (BoE), to ask them to publish an update outlining their strategic approach to AI by 30 April 2024.

The response notes that the OAI has already started to establish a new central function to monitor and assess risks across the whole economy and support regulator coordination and clarity – a number of consultations on this area will be published later in 2024.

The response also announced that the UK will invest over £100 million to help realise new AI innovations and support regulators’ technical capabilities. [6 Feb 2024]

#AI

HMT: Joint statement on the UK-US Financial Regulatory Working Group meeting

HM Treasury (HMT) and the US Treasury have issued a joint statement on the ninth official meeting of the UK-US Financial Regulatory Working Group. The meeting focused on several key themes, including: the economic and financial stability outlook; banking issues; developments in the non-bank sector; climate-related financial risks and sustainable finance; digital finance; cross border regimes; and operational resilience.

The Working Group will reconvene in September 2024. [6 Feb 2024]

#DigitalFinance #OpRes

Europe

EC: Banking and finance newsletter

The European Commission (EC) has published its latest banking and finance newsletter. Among other things, this edition includes: the views of the European Securities and Markets Authority (ESMA) Chair on what changes the markets in cryptoassets regulation (MiCAR) implementation is likely to bring cryptoasset service providers; and an overview of the keynote speech by Commissioner McGuinness, at the Afore Annual Conference, on fintech and regulation. [8 Feb 2024]

#MiCAR #Crypto

EP adopts new rules on instant money transfers – SEPA

The EP has adopted new rules to ensure transferred funds arrive immediately into the bank accounts of retail customers and businesses across the EU.

The new regulation aims to make sure that retail clients and businesses will not have to wait for their money, as well as to enhance the safety of transfers. Banks and other payment service providers (PSPs) will have to ensure credit transfers are affordable and immediately processed. The adopted text updates the current Single Euro Payments Area (SEPA) rules.

The new rules enter into force 20 days after publication in the Official Journal of the EU (OJ). Member States will have 12 months to apply the regulation. [7 Feb 2024]

#Payments

ESMA warns people posting investment recommendations on social media

The European Securities and Markets Authority (ESMA) has published a warning to raise awareness on some requirements established by the Market Abuse Regulation (MAR) which apply when posting investment recommendations on social media.

The MAR framework provides a very broad definition of 'Investment Recommendation'. Therefore, any video or any other type of public communications, including social media, in which a person gives advice or ideas, directly or indirectly, about buying or selling a financial instrument or on how to compose a portfolio of financial instruments may constitute an investment recommendation.

The warning also highlights the risks of market manipulation when posting on social media. [6 Feb 2024]

#SocialMedia #Advertising

EIOPA: Insurance Risk Dashboard – February 2024

The European Insurance and Occupational Pensions Authority (EIOPA) has published its February 2024 Insurance Risk Dashboard, which shows that insurers’ exposure to market risk is currently at a 'High' level. Macro and digitalisation risks are still relevant but have decreased to 'Medium' levels. Risk levels for the remaining risk categories are at 'Medium' levels.

The Risk Dashboard, based on Solvency II data, summarises the main risks and vulnerabilities in the EU’s insurance sector through a set of risk indicators. Risk Levels are based on a 4-level scale from 'Low' to 'Very High'. Risk trend reports the quarter on quarter variation of the risk based on a 5-level scale from 'Substantial Decrease' to 'Large Increase'. [5 Feb 2024]

#CyberRisk

Australia

ASIC: Federal Court finds Block Earner crypto product needs financial services licence

The Australian Securities and Investment Commission (ASIC) has announced that the Federal Court has found that fintech company Block Earner provided unlicensed financial services and operated an unregistered managed investment scheme when offering its crypto-backed Earner product. The Court held that the Earner product met the definition of a managed investment scheme and a facility for making a financial investment under the law.

The case was brought by ASIC who claimed both Block Earner’s Access and Earner products were 'financial products' and that Block Earner had therefore contravened s 911A of the Corporations Act 2001 (Cth) (the Act) by carrying on a financial services business without holding an Australian Financial Services Licence (AFSL) and s 601ED(5) of the Act by operating an unregistered managed investment scheme in relation to both products. However, the Federal Court distinguished the Access product, a variable yield cryptoasset based offering, on the basis that it did not operate under a managed investment scheme and therefore no AFSL was required.  [9 Feb 2024]

#Cryptoasset

Hong Kong

FSTB launches public consultation on proposed licensing regime for providers of OTC VA / crypto trading services

The Financial Services and the Treasury Bureau (FSTB) has launched a public consultation on legislative proposals to introduce a licensing regime for providers of over-the-counter (OTC) trading services for virtual assets (VA).  It is proposed that the licensing regime will be introduced via amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).

This consultation was alluded to by the Secretary for Financial Services and the Treasury in a recent blog post.  Feedback on the proposals is required to be submitted by 12 April 2024.

Given that a number of recent fraud cases have involved VA OTC operators (such as serving as main avenues for channelling retail investors' funds to suspected fraudulent schemes), the government sees a need to regulate OTC services under the AMLO to mitigate money laundering and terrorist financing risks and protect investors.

Under the proposal:

• Any person who conducts a business in providing services of spot trade of any VA for money in Hong Kong will be required to be licensed by the Commissioner of Customs and Excise (CCE);
• The licensing regime will cover all VA OTC services irrespective of whether the services are provided through a physical outlet and/or other platforms (VA trading platforms will be excluded as they are regulated separately under the AMLO);
• The CCE will be conferred powers to supervise the anti-money laundering and counter-terrorist financing conduct of licensees, and enforce the statutory and regulatory requirements under the new regime; and
• Transitional arrangements will be provided to facilitate the effective implementation of the regulatory regime.  [8 Feb 2024]

#Crypto  #VirtualAssets

GBA Fintech Pilot Trial Facility expanded to cover Macao

The HKMA has issued a circular to inform the industry that the Greater Bay Area (GBA) Fintech Pilot Trial Facility has been expanded to include Macao.  The People's Bank of China (PBoC) (Guangzhou and Shenzhen) and the Monetary Authority of Macao (AMCM) have issued similar notices to inform the industry in the Mainland and Macao.

In November 2023, the HKMA, the PBoC and the AMCM signed the 'Memorandum of Understanding on Deepening Fintech Innovation Supervisory Cooperation in the Guangdong-Hong Kong-Macao Greater Bay Area', agreeing to link up the PBoC’s Fintech Innovation Regulatory Facility, the HKMA’s Fintech Supervisory Sandbox and the AMCM’s Regulatory Requirements for Innovative Fintech Trials (see our previous update).  This builds on the memorandum of understanding signed in October 2021 between the HKMA and the PBoC and expands the one-stop pilot trial facility to cover Macao in addition to Hong Kong and Mainland GBA cities.  The facility was introduced to facilitate the pilot trials of cross-boundary fintech initiatives within the GBA cities (see our previous update).

The three authorities have updated the operational procedures for the trial facility to reflect Macao’s participation.  Financial institutions and technology firms in Hong Kong that intend to access the facility should contact the HKMA.  They will be requested to complete a sandbox application form and provide information about their company’s background, the fintech product or service to be tested, and the scope of testing.  Depending on the geographic coverage of the initiative, the information provided will be shared with the PBoC and/or the AMCM.  [8 Feb 2024]

#Fintech

HKMA launches consultation on proposals for implementing new rules on prudential treatment of cryptoasset exposures

The HKMA has issued a consultation paper on its proposals for implementing new rules on the prudential treatment of cryptoasset exposures.  Feedback on the proposals is required to be submitted by 6 May 2024.

In December 2022, the Basel Committee on Banking Supervision (BCBS) issued its new standard 'Prudential treatment of cryptoasset exposures', which is aimed at providing a robust and prudent global regulatory framework for internationally active banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability.  Cryptoassets will be categorised into two groups:

• Group 1 cryptoassets consist of qualifying tokenised assets and stablecoins. They will generally be subject to the risk-based capital requirements of the existing Basel capital framework.
• Group 2 cryptoassets are cryptoassets that fail to meet all of the Group 1 classification conditions. They will be subject to a more conservative capital treatment.

In October and December 2023, the BCBS published two consultative documents 'Disclosure of cryptoasset exposures' and 'Cryptoasset standard amendments' respectively, but not all of the additional requirements proposed in such consultations have been incorporated in the HKMA's consultation paper.  The HKMA will further update the local implementation proposal after the conclusion of the BCBS’ consultation process.

It is expected that the proposed rules will take effect no earlier than 1 July 2025.  There will be a further consultation on draft amendments to the rules and an industry consultation on the draft revised banking return and completion instructions, both targeted for the first quarter of 2025.  [7 Feb 2024]

#Crypto #Stablecoins

HKMA provides update to AIs and AVF licensees on its AML/CFT Surveillance Capability Enhancement Project

The HKMA has provided an update to authorised institutions (AIs) and stored value facility (SVF) licensees regarding its progress on the 'AML/CFT Surveillance Capability Enhancement Project'.   This project is part of the HKMA's 'Fintech 2025' strategy and aims to transform the HKMA's risk-based anti-money laundering (AML) supervision leveraging data and supervisory technology.

The project has delivered more proactive and collaborative AML supervision which has helped AIs accelerate the transition from a focus on regulatory compliance towards effectiveness and outcomes in managing fraud, money laundering and financial crime risks.

• Automation and process reengineering has led to many supervisory activities being streamlined, replaced or eradicated completely, allowing a focus on higher risk / higher value activities.  For example, the HKMA has revamped how it collects and processes financial crime risk data from AIs and SVF licensees, consolidated various data returns, and collected more frequent data to provide richer and detailed analysis of sector and institution specific risk exposures.  The HKMA has used this more detailed analysis to design a thematic review which is being conducted on high-end money laundering in 2024.
• A dedicated macro analytics capability, underpinned by built-for-purpose data infrastructure and access to more granular data, is unlocking new insights on money laundering and terrorist financing risks.  The macro analytics pilot has focused specifically on fraud-related mule account networks.  In the next stage of development, macro analytics 3.0 will further innovate the capabilities tested in the pilot, with the objective of expediting the interdiction of fraud and mule accounts at greater speed and volume, by combining multi-bank analysis with relevant interbank payment data.
• A dedicated horizon scanning capability supports a more forward-looking approach to threat identification and response.

In 2024, the HKMA will roll out the next phase of its regtech engagement, including more targeted AMLabs, focusing on use cases providing the greatest impact to the overall ecosystem, including anti-fraud work.  The HKMA will also issue practical guidance to the industry to support the responsible use of artificial intelligence in AML work, in particular for screening and transaction monitoring.

Further details are provided in a report.  The HKMA encourages AIs and SVF licensees to review the report and assess the implications for their risk management systems.  [7 Feb 2024]

#RegTech #DataAnalytics

SFC warns public of suspicious crypto-related product

The SFC has issued a warning to the public of a suspicious investment product involving 'Hong Kong International Financial Centre Token' or 'Hong Kong International Financial Center Token' (IFCT) and its associated projects and arrangements.  The product and its related information were posted on the SFC’s 'Suspicious Investment Products Alert List' on 7 February 2024.

The product involves the potential public offering of IFCT, node pledging and financial management of IFCT, offering of meta-universe that offers virtual lands and digital entertainment, etc., introducing digital offshore RMB and digital HKD and other arrangements and offerings.  The product displays characteristics of a collective investment scheme under the Securities and Futures Ordinance.

The marketing materials claim that the product is officially approved in Hong Kong but it has not been authorised by the SFC for offering to the Hong Kong public.  Information regarding the product is accessible to the Hong Kong public on its website, and a team managers public accounts or channels on Facebook, X, and Telegram.

The SFC states that it will take all appropriate actions where there is any breach of the law.  [7 Feb 2024]

#Crypto

HKMA announces government's second digital green bond offering

The HKMA has announced the government's successful offering of around HK$6 billion worth of digital green bonds denominated in HKD, RMB, USD and EUR under the Government Green Bond Programme.

This is the second digital bond issuance following the government’s inaugural tokenised green bond issued in February 2023.  The HKMA completed Project Genesis in 2021 in collaboration with the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre to concept-test the issuance of tokenised green bonds in Hong Kong.  This issuance further develops on the basis of Project Genesis and achieved new breakthroughs in the following areas:

• Broadening investor participation via existing market infrastructure – International investors have the option of accessing the digital green bonds via their accounts with Euroclear or Clearstream.  This broadens the bond’s investor base and enhances its liquidity, and could potentially facilitate interoperability across different digital assets platforms and traditional central securities depositories.
• Streamlining issuance process – The green bonds are issued in digitally native format, eliminating the need to first issue in traditional central securities depositories and subsequently convert the bond into digital format.
• Building in standardisation elements – This was the first issuance by an issuer of relevant category and the first green bond to adopt the International Capital Market Association’s (ICMA's) Bond Data Taxonomy, a standardised and machine-readable language that was developed to promote market efficiency and cross-system interoperability.
• Integrating green bond disclosures with digital assets platform – Key green bond documentation (including the issuer’s Green Bond Framework and relevant third-party review reports) can be viewed on the digital assets platform, enhancing transparency and accessibility of information.  [7 Feb 2024]

#DigitalGreenBond #Tokenisation #MachineReadable

SFC urges investors to check regulatory status of VATPs as end of transition period under VATP regulatory regime approaches

The SFC has issued a reminder to investors to trade virtual assets only on SFC-licensed virtual asset trading platforms (VATPs), as they may leave themselves unprotected by trading on unlicensed platforms.  If they are not certain about the regulatory status of the VATPs they are dealing with, they can check the SFC's lists of VATPs (see our previous update).

• Investors should check whether a VATP is on the list of licensed VATPs (formally licensed by the SFC) or the list of VATP applicants (VATPs operating in Hong Kong which have submitted licence applications to the SFC on or before 29 February 2024).  Trading on platforms which are VATP applicants carries a risk, as their applications may or may not ultimately be approved by the SFC.
• Investors should check the regulatory status of a VATP from time to time and in any event on 1 March 2024, given that VATPs operating in Hong Kong which have not submitted their licence applications to the SFC by 29 February 2024 must close down their businesses in Hong Kong by 31 May 2024 pursuant to the transitional arrangements under the SFC’s VATP regulatory regime.
• Where investors are dealing with VATPs operating in Hong Kong which are not on the list of licensed VATPs nor the list of VATP applicants, they are urged to make preparations early, before 31 May 2024, such as by closing their accounts with these VATPs or transferring to SFC-licensed VATPs.  [5 Feb 2024]

#VirtualAssets #VATP #Crypto

India

RBI: Statement on developmental and regulatory Policies

The Reserve Bank of India (RBI) has published a statement setting out various developmental and regulatory policy measures relating to financial markets; regulations; and payment systems and fintech.  Among other matters, the statement covers:

• the RBI's decision to review the regulatory framework for electronic trading platforms (ETPs); a revised regulatory framework will be issued for feedback;
• the forthcoming instructions which will enhance the security of Aadhaar Enabled Payment System (AePS) transactions;
• the forthcoming instructions regarding the adoption of a principle-based 'Framework for authentication of digital payment transactions'; and
• the introduction of programmability and offline functionality in Central Bank Digital Currency (CBDC) Pilot.  [8 Feb 2024]

#Payments #CBDC

US

Treasury Secretary testifies before Congressional committees

The statement of Secretary of the Treasury Janet Yellen before the Senate Committee on Banking, Housing, and Urban Affairs has been published.  She commented on the activities of the Financial Stability Oversight Committee (FSOC) over 2023, noting, among other matters:

• the regional bank failures in March 2023;
• efforts to bolster protections against cybersecurity;
• monitoring the use of artificial intelligence (AI); and
• the focus on digital assets and related risks.

The statement is substantially the same as that delivered before the Committee on Financial Services of the U.S. House of Representatives.  [8 Feb and 6 Feb 2024]

#Cybersecurity #AI #DigitalAssets

SEC charges company for unregistered offer and sale of crypto lending product

The SEC has announced charges against a Florida company for failing to register the offer and sale of a crypto lending product that allowed U.S. investors to deposit or purchase cryptoassets in a cryptocurrency account in exchange for the company’s promise to pay interest. To settle the SEC’s charges, the company agreed to pay a $1.5 million penalty.

According to the SEC’s order, the company began to offer and sell the crypto lending product with the interest feature around August 2020. The company had marketed the interest feature as a way for investors to earn interest while the company had complete discretion over how to deploy the assets to generate revenue to pay interest to investors. The order finds the company offered and sold the crypto lending product with the interest feature as a security, and, since it did not qualify for a registration exemption, the company was required to register its offer and sale but failed to do so.

On June 30, 2022 the company voluntarily stopped this service and announced that it would terminate all crypto related produces in the US market on February 22, 2024. Without admitting or denying the SEC’s findings, in addition to the civil penalty, the company agreed to a cease-and-desist order prohibiting it from violating the registration provisions of the Securities Act of 1933. In parallel actions announced on the same day, the company agreed to pay an additional $1.5 million in fines to settle similar charges by state level regulatory authorities. [7 Feb 2024]

#Cryptoasset #Cryptocurrency

CFTC customer advisory alerts app and social media users to financial romance fraud following CFTC complaint against crypto exchange

The CFTC Office of Customer Education and Outreach (OCEO) has issued a customer advisory alerting dating/messaging app and social media users to a scam asking for financial support or giving investment advice using the platforms. The advisory titled “Just in time for Valentine’s Day, the Customer Advisory: Six Warning Signs of Online Financial Romance Frauds,” reminds app and social media users to be wary of texts and messages from strangers that promote crypto investments. The text could actually be from international criminal organizations that trick victims into investing money in cryptocurrency or foreign currency scams only to defraud them. The scam can take advantage of even the savviest of investors because fraudsters develop relationships with their victims through weeks of seemingly authentic text messaging conversations, a practice known as “grooming.” The CFTC also recently filed a complaint related to financial grooming fraud. The CFTC alleged a crypto exchange used popular romance scam tactics to fraudulently misappropriate $2.3 million in customer funds intended for digital asset commodity trading.  [7 Feb 2024]

#DigitalAsset #Crypto

Treasury: Joint Statement on the U.S.-UK Financial Regulatory Working Group

The ninth official meeting of the U.S.-UK Financial Regulatory Working Group took place in London on January 31, 2024. Officials and senior staff from HM Treasury and the U.S. Department of the Treasury were joined by representatives from independent regulatory agencies.  The Working Group meeting focused on several key themes, including: the economic and financial stability outlook; banking issues; developments in the non-bank sector; climate-related financial risks and sustainable finance; digital finance; cross border regimes; and operational resilience.

At the conclusion of the event, the Working Group agreed to reconvene in September 2024, while noting the importance of continued open dialogue on shared priorities.  [5 Feb 2024]

#DigitalFinance

SEC charges founder of bitcoin online trading course for fraud targeting students

The SEC has announced that an individual and his company settled fraud charges in connection with a scheme targeting students with a bitcoin online crypto trading course. The founder, from early 2018 to mid-2019, encouraged hundreds of his online students to invest in a crypto fund that he claimed he would launch, and which would use cutting-edge technologies like artificial intelligence (AI) and trading strategies involving crypto to generate returns for investors. The complaint alleges that the individual received approximately $1.2 million from 15 students but never launched the fund nor executed the trading strategies he advertised to investors, instead holding on to the invested money in bitcoin. The complaint further alleges that the bitcoin was eventually stolen when the individual's digital wallet was hacked and looted, ultimately draining all of the funds collected from the students.

The SEC's complaint, filed in U.S. District Court for the District of Delaware, charges the individual with violating antifraud provisions of the federal securities laws. Without admitting or denying the allegations in the complaint, the defendants have consented to injunctive relief and subsequently settled. The individual and his company will pay disgorgement and prejudgment interest totalling $1,602,089 for the company along with a civil penalty of $223,229 on the individual. The settlement is subject to court approval.  [2 Feb 2024]

#AI #Crypto