FinTech Global FS Regulatory Round-up – w/e 13 January 2023

IIF: Cybersecurity risk for global banks 

The Institute of International Finance (IIF) has published the results of its recent bank risk management survey which finds that cybersecurity is viewed as the top year-ahead risk, followed by credit and environmental risks. Other key findings include:

• geopolitical risk is adding uncertainty to economic turbulence, with varying impacts across regions;
• credit risk remains a high priority as banks look out for hidden risks that may materialize in the looming economic downturn;
• new products and business models, in particular involving digital assets and product innovation strategies, will require attention; and
• risk teams need to be adaptable and agile. [11 Jan 2023]

UNIDROIT: Consultation on draft principles on digital assets and private law

The International Institute for the Unification of Private Law (UNIDROIT) has published a consultation on its draft principles on digital assets and private law. The principles aim to reduce legal uncertainty which practitioners, judges, legislators, and market participants would otherwise face in the coming years in dealing with digital assets.

Feedback is requested by 20 February 2023. [11 Jan 2023]

HMT: Review and CfE on PSRs

HMT has published a review and call for evidence (CfE) in relation to the Payment Services Regulations (PSRs).

In the review, HMT notes that the PSRs and wider retained EU payments law have had some success in promoting HMG's objectives for payments. However, it also identifies certain deficiencies where the framework could be improved.

The CfE considers how UK payments regulation should evolve to continue to meet HMG's aims and address the specific challenges highlighted in the review. Feedback is requested by 7 April 2023.

With regard to stablecoin and cryptoasset regulation, HMT comments in the Executive Summary of the Review that a consultation is forthcoming; it also notes ongoing work on Open Banking.  [13 Jan 2023]

E-Money

Open Banking

CMA: Open Banking Roadmap - Completion Decision

The Competition and Markets Authority (CMA) has published a Completion Decision which confirms that the six largest banking providers in the UK have now implemented all the requirements of the Open Banking Roadmap, and the Roadmap is therefore substantially complete.

The Open Banking Implementation Entity (OBIE) has also published a letter to the CMA confirming the completion. [12 Jan 2023]

New UK digital currencies association

Five associations have come together to form the UK Forum for Digital Currencies (UK FDC); the associations are: the City of London Corporation; the Digital Pound Foundation; The Payments Association; TheCityUK; and UK Finance. The aim of the new group is to develop better policies, practice and regulation around digital currencies. [11 Jan 2023]

FCA: Innovation Hub - Market insights 

The FCA has updated its data on the firms supported by FCA Regulatory Sandbox and Innovation Pathways services including sectors, technologies, areas of innovation and locations. Until end of 2022, the FCA supported 867 firms, including 168 firms and products accepted for testing in the Regulatory Sandbox. [10 Jan 2023]

TSC: Evidence session with HMT - Inquiry into cryptoassets

The Treasury Committee (TSC) of the House of Commons has published the Oral Evidence from 10 January 2023 evidence session for its Inquiry into Cryptoassets. The TSC heard from Andrew Griffith MP, Economic Secretary to the Treasury; Laura Mountford, Deputy Director, Payments and Fintech, HM Treasury; and Daniel Rusbridge, Deputy Director, Financial Services Strategy, HM Treasury.  [10 Jan 2023]

#FMISandbox

CMA/ICO/Ofcom/FCA: DRCF workplan 2023 - 2024

The Competition and Markets Authority (CMA), Information Commissioner's Office (ICO), Ofcom and the FCA, which together comprise the Digital Regulation Cooperation Forum (DRCF), have extended the response deadline for the consultation on the DRCF workplan 2023-2024 to 27 January 2023. [9 Jan 2023]

#DRCF

ESAs: Draft programme for event on DORA

The European Supervisory Authorities (ESAs) have published a draft programme for a public event on the Digital Operational Resilience Act (DORA) which is due to take place on 6 February 2023. The ESAs plan to discuss their ongoing preparatory work; the European Commission will provide an update on the latest developments concerning DORA. [13 Jan 2023]

ECB: Digital euro market research

The European Central Bank (ECB) has announced it is conducting market research on the digital euro. The market research will allow the ECB to get an overview of options for the technical design of possible digital euro components and services. This will provide important input for an implementation plan, which will be a key part of the final report due in autumn 2023 at the conclusion of the investigation phase.

Submissions to the market research are requested by 17 February 2023; questions may be submitted by 25 January 2023. [13 Jan 2023]

ESAs: Thematic report on national financial education initiatives on digitalisation, with a focus on cybersecurity, scams and fraud 

The European Supervisory Authorities (ESAs) have published a joint thematic report on national financial education initiatives on digitalisation, with a focus on cybersecurity, scams, and fraud. The report identifies good practices that national competent authorities and other public entities can follow when designing and implementing their financial education initiatives. [12 Jan 2023] 

#CyberSecurity

EBA: Report on the peer review on authorisation under PSD2

The European Banking Authority (EBA) has published its peer review on authorisation of payment institutions and e-money institutions under the revised Payment Services Directive (PSD2). The review generally found increased transparency and consistency of the information required in the authorisation process. However, it also identified significant divergences in competent authorities’ assessment and the degree of scrutiny of applications. The review, therefore, sets out a series of measures to address such divergencies, to level out the supervisory playing field and to mitigate against ‘forum shopping’. [11 Jan 2023] 

#PSD2

EP: Updated procedure files – MiCA, cryptoassets 

The European Parliament (EP) has updated the following:

• procedure file on the proposed Regulation on markets in cryptoassets (MiCA); and
• procedure file on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets.

The procedure files indicate that the EP will consider the proposed Regulations during its plenary session to be held from 17 to 20 April 2023. [11 Jan 2023]

EPC: Consultation on interoperability of MSCTs based on NFC or BLE

The European Payments Council (EPC) has published a consultation on the draft document Interoperability of mobile initiated (instant) credit transfers (MSCTs) based on Near Field Communication (NFC) or Bluetooth Low Energy (BLE).

Feedback is requested by 21 March 2023. [10 Jan 2023]

#BLE

BOT publishes consultation on virtual bank licensing framework

The Bank of Thailand (BOT) has published a Consultation Paper (CP) on the virtual bank licensing framework to introduce virtual banks as new financial service providers. The licensing framework includes the following key points.

• Virtual banks may provide full-service banking businesses to be flexible and accommodate changing customer needs.
• Virtual bank applicants must meet appropriate qualifications. These include possessing business models that can sustainably achieve the above objectives, as well as having expertise in technology, digital services, and data.
• Virtual banks shall comply with the same regulations and supervision as traditional commercial banks. The BOT shall supervise virtual banks in a risk-proportionate manner, placing great importance on robust corporate governance, sound risk culture, IT system continuity, efficient customer support via digital channels, and appropriate outsourcing services.
• Virtual banks shall go through a restricted phase during the initial years of operation. During this period, virtual banks shall be subject to specified conditions as well as to close monitoring to ensure sustainable business operations without posing systemic risks.

Feedback is requested by 12 February 2023. [12 Jan 2023]

SEC charges two companies for the unregistered offer and sale of crypto asset securities 

The Securities and Exchange Commission (SEC) has charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. Through this unregistered offering, Genesis and Gemini raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

According to the complaint, in December 2020, Genesis, part of a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer Gemini customers, including retail investors in the US, an opportunity to loan their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Beginning in February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction. Gemini deducted an agent fee, sometimes as high as 4.29 percent, from the returns Genesis paid to Gemini Earn investors. As alleged in the complaint, Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors. The complaint further alleges that, in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market. At the time, Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors. Gemini terminated the Gemini Earn program earlier this month. Gemini Earn retail investors remain unable to withdraw their crypto assets.

The SEC’s complaint alleges that the Gemini Earn program constitutes an offer and sale of securities under applicable law which should have been registered. The SEC’s complaint charges Genesis and Gemini with violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties. [12 Jan 2023]

DoJ: Crypto fraud victims receive over $17 million in restitution from BitConnect scheme

The Department of Justice (DoJ) has announced that a federal district court in San Diego has ordered that over $17 million in restitution be distributed to approximately 800 victims from over 40 different countries due to their investment losses in BitConnect, a cryptocurrency investment scheme, which defrauded thousands of investors worldwide.

Previously, in September 2021, the top US-based promoter for BitConnect pleaded guilty to conspiracy to commit wire fraud and, in February 2022, the founder of BitConnect was indicted for his central role in the multibillion-dollar fraud. As part of the promoter’s plea, he admitted to conspiring with others to exploit investor interest in cryptocurrency by fraudulently marketing BitConnect’s initial coin offering and digital currency exchange as a lucrative investment. The promoter and co-conspirators misled investors about BitConnect’s 'Lending Program'. Under this program, the promoter touted BitConnect’s purported proprietary technology, known as the 'BitConnect Trading Bot' and 'Volatility Software', as being able to generate substantial profits and guaranteed returns by using investors’ money to trade on the volatility of cryptocurrency exchange markets. In truth, however, BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors. The promoter and his co-conspirators ensured that up to 15% of the money invested into BitConnect went directly into a slush fund to be used for the benefit of its owner and promoters. [12 Jan 2023]