FinTech Global FS Regulatory Round-up – W/e 3 February 2023

FATF Annual Report 2021 – 2022

The Financial Action Task Force (FATF) has published its Annual Report 2021-2022. The report sets out the FATF's achievements from the last year and highlights its priorities going forward. Among the highlights from the year's activities, the FATF notes:

• the delivery of reports that explore how technology can help detect suspicious activities, analyse financial intelligence, and better understand money laundering and terrorist financing risks, especially through information sharing, while respecting high standards of data protection and privacy; and
• updated guidance which explains how the FATF Recommendations apply to virtual assets and virtual asset service providers. [31 Jan 2023]

#VirtualAssets

#DigitalTransformation

DRCF: Insight paper on Web 3

The Digital Regulation Cooperation Forum (DRCF), which brings together the FCA, Competition and Markets Authority (CMA), the Office of Communications (Ofcom) and the Information Commissioner's Office (ICO), has published an insights paper on Web 3. The insights paper sets out the following:

• definition and overview of Web 3 – explains the key concepts and technologies underpinning the visions for Web 3, including decentralisation and DLT;
• benefits, risks and harms harms – presents the DRCF's perspective on the possible benefits of the concepts and technologies associated with Web 3 as well as the existing and potential consumer harms and wider societal risks;
• regulatory considerations – explores the regulatory considerations across the DRCF member regulator remits that may be relevant to applications related to Web 3; and
• next steps – discusses next steps in relation to Web 3 as well as the DRCF's wider work programme. [3 Feb 2023]

HMT: Consultation and CfE on regulatory regime for cryptoassets

HMT has published a consultation and call for evidence (CfE) on the future financial services regulatory regime for cryptoassets. Proposals are centred around a number of cryptoasset activities – including exchange activities, custody activities and lending activities – which will be brought into the regulatory perimeter for financial services. For each activity the consultation sets out key design features of the regime covering themes such as prudential requirements, data reporting, consumer protection, location policy and operational resilience.

The consultation paper also proposes regimes for a range of cross-cutting issues which apply across cryptoasset activities and business models, including market abuse and cryptoasset issuance and disclosures.

The CfE portion of the consultative exercise asks for views on decentralised finance (DeFi), a collection of other cryptoasset activities (including investment advice and portfolio management, post-trade activities, and crypto mining and validation), and sustainability.

Feedback is requested by 30 April 2023. Once legislation is laid, the FCA will consult on its detailed rules for the sector. [1 Feb 2023]

#DeFi

HMT: Consultation outcome – cryptoasset financial promotions

Alongside the consultation and CfE on a broader regime for cryptoassets, HMT has also published the consultation outcome confirming that certain cryptoasset financial promotions will be brought into the scope of the financial promotions regime. In order to accomplish this, the scope of the Financial Promotions Order (FPO) will be expanded, with a new definition for 'qualifying cryptoassets'. In a change from the original proposals, there will be a transitional period (approximately six months) from both the finalisation and publication of the proposed FPO regime and the complementary FCA rules.

In addition, HMT's press release explains that: 'In order to address industry concerns about the small number of FCA authorised cryptoasset firms who can issue their own promotions, a time limited exemption will be introduced. Cryptoasset businesses that are registered with the FCA for anti-money laundering purposes will be allowed to issue their own promotions, while the broader cryptoasset regulatory regime is being introduced.' [1 Feb 2023]

#FinancialPromotions

CMA: Report on recommendations for the future of Open Banking

The CMA has published Report: Trustee end of implementation roadmap report – Recommendations for the Future of Open Banking. The report sets out recommendations on how to maintain the ongoing requirements of the Retail Banking Market Investigation Order. It also sets out the views of the Chair and Trustee of Open Banking Limited (OBL), Charlotte Crosswell, on what the Joint Regulatory Oversight Committee (JROC) should consider regarding the design of the Future Entity and strategic roadmap. The Chair also outlines the progress OBL has made to prepare for transition, and the key priorities for the organisation over the coming weeks and months.

JROC is expected to publicly set out its vision for the future of Open Banking by the end of the first quarter of 2023. [1 Feb 2023]

CMA: New chair of Open Banking appointed

The CMA has announced that Marion King has been appointed as new Chair and Trustee of the Open Banking Implementation Entity (OBIE). She will succeed the current Chair and Trustee Charlotte Crosswell on 1 February 2023, the current Chair and Trustee. [1 Feb 2023]

PRA/BoE/FCA: Letter on 2022 CBEST thematic findings

The PRA, FCA and Bank of England (BoE) have published the covering letter to senior management functions of banks, insurers, asset and investment managers, and financial market infrastructures (FMIs) relating to the 2022 CBEST thematic findings. CBEST is a framework for intelligence-led penetration testing which focuses on an organisation's security controls and capabilities when faced with a simulated cyberattack. In sharing the findings with firms, the regulators seek to ensure that: firms identify and address potential similar weakness; the senior executive team have an awareness of the issues; and support the work of the risk and internal audit functions. [31 Jan 2023]

ESMA Q&As on DLTR

The European Securities and Markets Authority (ESMA) has published updated questions and answers Q&As the implementation of DLT Pilot Regulation (DLTR) – the updates are in the chapters on transaction reporting, financial instruments reference data, and transparency. [3 Feb 2023]

ESMA: Final Report on the trading venue perimeter

ESMA has published the Final Report on the Opinion on the trading venue perimeter. This provides guidance on when certain systems and facilities qualify as multilateral and therefore should seek authorisation as a trading venue. The opinion provides clarity on the definition of multilateral systems provided in the Markets in Financial Instruments Directive (MiFID II), to account for innovation in the financial markets. In particular, Section 5 of the Opinion considers specific cases in which the trading venue perimeter may be difficult to determine, in particular the cases of new technology providers, request for quote systems and the case of pre-arranged transactions.

In terms of next steps, ESMA will work with national competent authorities (NCAs) to ensure that firms assess their systems against the ESMA Opinion and reflect whether they are operating under the appropriate authorisation. ESMA expects NCAs to require firms to take appropriate action to swiftly apply for authorisation as a trading venue where necessary. [2 Feb 2023]

ESMA: Article on AI in securities markets

ESMA has published an article on artificial intelligence (AI) in EU securities markets. The article provides an overview of AI use cases across securities markets in the EU and assesses the degree of adoption of AI-based tools. It also highlights some of the potential risks of AI in the context of securities markets. [1 Feb 2023]

EBA clarifies the application of SCA requirements to digital wallets

The European Banking Authority (EBA) has published three questions and answers (Q&As) that, jointly with three other Q&As that the EBA had published previously, clarify the application of strong customer authentication (SCA) to digital wallets under the revised Payment Service Directive (PSD2). The Q&As seek to ensure a consistent understanding of the applicable requirements. The new Q&As include:

• Question 2020_5622: Is strong SCA required when a payment service provider (PSP) issues a payment instrument or creates a token?
• Question 2021_6145: Does the authentication to unlock the mobile device count as one of the elements of SCA when a payment service user is tokenising a card on an e-wallet solution such as Apple Pay?
• Question 2022_6464: Is SCA required for the replacement of a tokenized card happening in the background without any 'action by the payer' under Article 97(1)(c) PSD2 in certain cases?

The previous Q&As are available here: Question 2018_4047, Question 2019_4827 and Question 2021_6141. [31 Jan 2023]

#DigitalWallets

APRA releases policy and supervision priorities for 2023

The Australian Prudential Regulation Authority (APRA) has released its policy and supervision priorities for 2023. APRA's 2023 agenda focuses on embedding recent regulatory reforms, as well as bolstering operational resilience and ensuring entities have sufficient financial strength to act as a buffer against any emerging financial stresses. In particular, APRA identifies the following key priorities for 2023.

Policy priorities:

• completing key reforms to strengthen the financial and operational resilience of APRA-regulated entities, and improve outcomes for superannuation members;
• progressing APRA's plan to modernise the prudential architecture, a core strategic initiative designed to make the framework clearer, simpler and more adaptable; and
• reviewing core standards, including governance and the regulation of conglomerate groups.

Supervision priorities:

• heightened supervision on cyber resilience through detailed assessments and rigorous pursuit of breaches;
• embedding the capital reforms for banks and insurers;
• continuing to hold trustees to account to improve superannuation member outcomes; and
• ongoing work to address challenges in the availability, affordability and sustainability of insurance. [2 Feb 2023]

HKMA publishes conclusions to discussion paper on crypto-assets and stablecoins, with plans to conduct further consultation and implement regulatory regime by 2023/2024

The HKMA has published the conclusions to its discussion paper on crypto-assets and stablecoins (see our previous update regarding the discussion paper of January 2022).

In general, the respondents were supportive of regulating stablecoins with a risk-based and agile approach. They also broadly support the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime.

The HKMA aims to implement the regulatory regime by 2023/2024, and is considering the pros and cons between introducing a new legislation and amending existing laws.

A further consultation with more granular information about the regulatory regime will be conducted in due course with a view to hammering out the major parameters that will be covered in the draft legislation. The HKMA's thinking includes:

• Adopting a risk-based approach in scoping in stablecoin structures for regulation – The HKMA will start with regulating stablecoins that purport to reference to one or more fiat currencies. Flexibility will be built in to enable the regulator to scope in other stablecoin structure(s) for regulation in the future.
• The key activities that will be regulated include governance, issuance, stabilisation and wallets.
• The value of the reserve assets of a stablecoin arrangement should meet the value of the outstanding stablecoins at all times. The reserve assets should be of high quality and high liquidity. Stablecoins that derive their value based on arbitrage or algorithm will not be accepted.
• In broad terms, the following entities will require a licence from the HKMA – Entities that (i) conduct a regulated activity in Hong Kong, (ii) actively market a regulated activity to the Hong Kong public, (iii) conduct a regulated activity which concerns a stablecoin that purports to reference to the value of the HKD; or (iv) in the opinion of the regulator should be regulated in light of matters of significant public interest. [31 Jan 2023]

#Stablecoins

HKMA publishes presentation materials for upcoming briefing to LegCo Panel on Financial Affairs on 6 February 2023

The HKMA has published presentation materials for its upcoming briefing to the Legislative Council (LegCo) Panel on Financial Affairs on 6 February 2023. Updates are provided in various areas, among others:

Financial Infrastructure

• Fintech – Progressing with its projects to develop wholesale and retail central bank digital currencies, and launching the Commercial Data Interchange (slide 71);

Hong Kong as an International Financial Centre

• Mutual market connect schemes – Preparation for Swap Connect Northbound Trading, and targeted launch of the dual-counter market maker regime in the first half of 2023 (slide 78);
• Crypto-assets and stablecoins – Issue of consultation conclusions to the discussion paper on crypto-assets and stablecoins, with further consultation planned on the details of the proposed regulatory parameters (the regulatory regime is expected to be implemented between 2023 to 2024 (slide 82). [31 Jan 2023]

#Cryptoassets

#Stablecoins

MAS and BDCB hold 4^th Bilateral Roundtable

The Brunei Darussalam Central Bank (BDCB) and Monetary Authority of Singapore (MAS) have held their fourth BDCB-MAS Bilateral Roundtable. At the Roundtable, BDCB Managing Director, Rokiah Bakar and MAS Managing Director, Ravi Menon signed a Memorandum of Understanding (MoU) to deepen cooperation in banking and insurance supervision. The MoU will facilitate the effective supervision of banks and insurers operating across the two jurisdictions, including through information exchange and cross border on-site inspections.

BDCB and MAS also exchanged views on recent economic and financial developments, cooperation in sustainable finance to accelerate climate change mitigation and adaptation in ASEAN, as well as developments in Central Bank Digital Currencies (CBDCs) and cross-border payments. [3 Feb 2023]

SECT amends rules for quota allocation for FX transactions of digital asset fund managers

The Securities and Exchange Commission, Thailand (SECT) has amended the regulations on quota allocation for foreign exchange (FX) transactions to allow digital asset fund managers to apply for such quota allocation in the same manner as other types of digital asset business operators. The amendment is with effect from 1 February 2023. [3 Feb 2023]

BSP: PH Open Finance Pilot open for standards consultation

The Bangko Sentral ng Pilipinas (BSPs) is inviting interested BSP-supervised financial institutions (BSFIs) and third-party providers to participate in the standards consultation for the Philippine Open Finance Pilot (PH Open Finance Pilot) to inform the development of open finance technical and operational standards and arrangements. The PH Open Finance Pilot is a collaborative undertaking of financial institutions and third-party providers, participating on a voluntary basis, to explore the use of Application Programming Interface (API) technologies in the delivery of financial products and services responsive to the needs of customers.

The activities of the PH Open Finance Pilot, which will operate through the support of the International Financial Corporation (IFC), will be governed pursuant to Circular No. 1122, and monitored by the Open Finance Oversight Committee Transition Group (OFOC TG). [1 Feb 2023]

DoJ: Individual charged in $110 million cryptocurrency scheme

The Department of Justice (DoJ) has announced that a man has been charged with commodities fraud, commodities market manipulation, and wire fraud in connection with the manipulation of a decentralized cryptocurrency exchange.

According to court documents, the man engaged in a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from the cryptocurrency exchange and its customers and achieved this objective by artificially manipulating the price of certain perpetual futures contracts.

If convicted, he faces a maximum penalty of 10 years in prison for the commodities fraud count, maximum penalty of 10 years in prison for the commodities manipulation count, and maximum penalty of 20 years in prison for the wire fraud count. The Commodity Futures Trading Commission (CFTC) has initiated parallel civil proceedings. [2 Feb 2023]