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Regulatory and Legislative Analysis – October 2023

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Regulatory and Legislative Analysis – October 2023

November 1, 2023

Demetrios Tseas

Regulatory and Legislative Analysis – GLOBAL

Bank of International Settlements works with EU central banks to build a crypto tracking platform

The Bank of International Settlements (BIS) Innovation Hub on 4 October published a report titled “Project Atlas: Mapping the world of decentralized finance.”  Project Atlas is a proof of concept that creates a data platform demonstrating the macroeconomic relevance of cryptoasset markets and decentralized finance (DeFi). Project Atlas with Eurosystem partners – the Deutsche Bundesbank and De Nederlandsche Bank – focuses on international cryptoasset flows.  Cryptoassets and DeFi applications are part of an emerging global financial ecosystem. While introducing new technologies, these markets often lack transparency and potentially present risks to financial stability. The collapse of some stablecoins and DeFi platforms highlights the difficulty of making such risk assessments. Although blockchain transactions are theoretically transparent, reliable information on macro-financial implications are hard to obtain.  Project Atlas provides data tailored to the needs of central banks and financial regulators by fusing data gathered from crypto exchanges (off-chain data) with data from public blockchains (on-chain data) gathered from nodes. By connecting various sources across geographic locations, Atlas allows data vetting, giving users tools to evaluate these markets’ economic significance more accurately.  The approach uses transactions attributed to crypto exchanges on the Bitcoin network, along with the location of those exchanges as a proxy for cross-border capital flows.

The Basel Committee plans to propose new requirements for banks to disclose their crypto holdings

The Basel Committee on 5 October published a report on 2023 banking turmoil; agreed to consult on banks’ cryptoasset exposures and approved a 2023 assessment exercise for global systemically important banks (G-SIBs). International regulators, including the Basel Committee on Banking Supervision, plan to propose new requirements for banks to disclose their cryptocurrency holdings, alongside existing capital requirements for digital assets in response to concerns about the impact of crypto on the financial system.  The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability.

The Egmont Group suspends Russia’s FIU from membership

Egmont Group of Financial Intelligence Units (FIUs) on 20 October agreed to suspend Rosfinmonitoring, Russia’s FIU, from membership due to Russia’s invasion of Ukraine. The official suspension follows previous Egmont Group measures to revoke Rosfinmonitoring’s formal group leadership, advisory, representation, its ability to host or physically attend meetings, and in-kind agreements.  The Egmont Group, an international network, supports its FIU members by helping them expand and systematize the exchange of financial intelligence and information, improve expertise and capabilities of personnel, and enable secure communication with one another to combat AML/TF financing.

The Financial Action Task Force adds Bulgaria and removes Albania, Panama, Jordan and the Cayman Islands from grey list

The Financial Action Task Force (FATF) Plenary, with Singapore holding the FATF Presidency, on 25 October convened delegates from over 200 jurisdictions and observers from international organizations in Paris. The Plenary added Bulgaria to the list of jurisdictions subject to increased monitoring, while Albania, the Cayman Islands, Jordan and Panama are no longer under increased monitoring. The FATF agreed to publish a key report on Crowdfunding for Terrorism Financing; welcomed Indonesia as its 40th member; discussed the joint FATF-GAFILAT mutual evaluation of Brazil; and confirmed Russia’s membership suspension. The next FATF Plenary is scheduled for February 2024.

Regulatory and Legislative Analysis – NAM (United States & Canada)

Senator Elizabeth Warren sends letter urging the White House and Treasury to crack down on the illegal use of crypto by terrorists

Senator Elizabeth Warren (D-MA) on 7 October sent a letter to the White House and US Treasury, urging the Biden administration to combat the illegal use of crypto by terrorists organization such as Hamas who were using digital currencies to raise funds.

The Securities and Exchange Commission does not plan to appeal court decision on Grayscale bitcoin ETF

The U.S. Securities and Exchange Commission (SEC) reportedly will not appeal a recent court ruling that found it was wrong to reject Grayscale Investments’ application to create a spot bitcoin exchange-traded fund (ETF). This decision increases the possibility of the first Bitcoin ETF issuance in the United States.

California regulators propose a bill to limit crypto ATM withdraws to $1,000

On Oct 16, California legislators have proposed a bill to limit crypto ATM withdrawals to $1,000 per day and cap operator fees at $5 or 15% starting in 2025, with the bill set to take effect on January 1, 2024. The bill comes in response to concerns about high markups and fees on crypto assets at ATMs, with some charging as much as 33%, and the need to protect consumers from scams and fraud associated with crypto ATMs, which have become a hub for such activities due to the nature of cash transactions.

U.S. Senators urge White House to address the illegal use of crypto in terrorist financing following the Israel attack

On Oct 18, 105 U.S. Senators led by Senators Elizabeth Warren (D-Mass), Roger Marshall (R-Kan). and Representative Sean Casten (D-Ill.) sent a letter to the U.S. Treasury Department and the White House expressing “grave concern” that Hamas and an affiliated group called Palestinian Islamic Jihad were using digital assets to fund their operations and evade U.S. sanctions.  “Between August 2021 and this past June, (Hamas and PIJ) raised over $130 million in crypto, and moved millions among each other, ‘with PIJ sending over $12 million in crypto to Hezbollah since 2023...Congress and this administration must take strong action to thoroughly address crypto illicit finance risks before it can be used to finance another tragedy,” the letter said.  Nevertheless, a few days later, on Oct 27, U.S. Treasury Deputy Secretary Wally Adeyemo reportedly said that the vast majority of terrorism financing is not denominated in crypto.

SEC voluntarily dismisses charges against Ripple’s CEO and Chairman

On Oct 19, the U.S. Securities and Exchange Commission (SEC) notified the United States District Judge, Southern District of New York, Hon. Analisa Torres, that it  will no longer pursue claims that Ripple’s CEO Brad Garlinghouse or Executive Chairman Chris Larsen aided and abetted the company in violating federal securities laws in its XRP transactions, canceling a trial scheduled for next year. This step gives the crypto company another victory in the agency’s long-running suit against, although the SEC could appeal the judge’s ruling. The SEC now says it’s just pursuing the central Ripple case.

FinCEN proposes new regulation to require financial institutions to record and report suspected transactions that involve the use of cryptocurrency mixers. 

On Oct 19,  the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a Notice of Proposed Rule Making (NPRM) that proposes identifying international Convertible Virtual Currency Mixing (CVC mixing) as a class of transactions of primary money laundering concern. The NPRM highlights the risks posed by the extensive use of CVC mixing services by a variety of illicit actors including  Hamas, Palestinian Islamic Jihad, and the Democratic People’s Republic of Korea (DPRK).

U.S. Senators introduce the PROOF Act, which will require crypto exchanges to verify their proof of reserves monthly via independent third-party auditors

On Oct 20, U.S. Senators Thom Tillis (R-NC) and John Hickenlooper (D-CO) introduced the bipartisan Proving Reserves of Others Funds (PROOF) Act, that would require crypto exchanges to have third-party auditing firms verify their proof of reserves monthly, and prohibit the commingling of funds.  Specifically, the PROOF Act contains provisions that establish regulatory standards governing how digital asset institutions hold customer assets; prohibit the co-mingling of customer funds; and require digital asset exchanges and custodians to submit to a Proof of Reserves inspection by a neutral third-party. Full text of the bill may be viewed here.

FinCEN issues an alert to financial institutions to counter financing to Hamas and its terrorist activities

On Oct 20, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert urging financial institutions to be vigilant in identifying suspicious activity relating to financing Hamas and reiterated the obligation to report such activity to FinCEN through the SAR reporting process.  FinCEN has also identified several red flag indicators to help detect, prevent and report potential suspicious activity related to Hamas’s terrorist financing.

Sam Bankman-Fried trial currently underway, with closing arguments and deliberation to take place first days of November

Throughout the month of October the trial of Sam Bankman-Fried (SBF), the founder of the now-defunct cryptocurrency exchange FTX has taken place. Closing arguments and deliberation are set to occur within the first days of November. During Sam Bankman-Fried’s testimony in his trial, he faced cross-examination by the prosecution, revealing contradictions between his public statements and his private actions. The prosecution aimed to portray him as orchestrating a massive financial fraud, funneling billions of dollars from FTX’s users to cover company expenses and lavish spending. Despite the tough questioning, Bankman-Fried maintained his innocence, claiming he made mistakes and blaming his top lieutenants for mismanagement. Bankman-Fried is charged with seven criminal counts, including securities fraud, and could face a life sentence if found guilty. As Sam Bankman-Fried’s criminal fraud trial nears its end Judge Lewis Kaplan, is setting jury instructions. Bankman-Fried’s lawyers argued for English law to govern FTX’s terms of service, but Judge Kaplan insisted on applying New York law.

Regulatory and Legislative Analysis – EMEA

EU’s ESMA issues second consultation paper- technical standards specifying certain requirements on MiCA 

On Oct 5, the European Securities and Markets Authority (ESMA) issued a second public consultation, with an aim to collect views, comments, and opinions from stakeholders and market participants on the appropriate implementation of the regulation on Markets in Crypto-Assets (MiCA), which was published in the Official Journal of the EU on 9 June 2023.  This consultation paper contains six sections: 1) the content, methodologies and presentation of sustainability indicators and adverse impacts on climate; 2) continuity and regularity in the performance of CASP services; 3) offering pre- and post-trade data to the public; 4) content and format of order book records and record keeping by CASPs; 5) machine readability and registration of white papers; and 6) the technical means for appropriate public disclosure of inside information.

Reserve bank of Zimbabwe announces gold-backed digital token as means of payment

On Oct 5, the Reserve Bank of Zimbabwe announced the launch of a gold-backed digital token (commodity-based stablecoin) called Zimbabwe Gold (ZiG) as means of payment.  The value of ZiG will be at par with the value of the physical Mosi-oa-Tunya gold coin, which weighs 1 troy oz (aprx 31.10 grams) 22 carat gold.  The mission behind the newly introduced ZiG is to persuade local investors to put their money into national assets and not United States dollars, which is not an easy task in a country with triple-digit inflation.

UK’s FCA issues alerts under the new disclosures and crypto marketing rules 

On Oct 8, the Financial Conduct Authority’s tough new rules designed to make the marketing of cryptoasset products clearer and more accurate, cane into force.   Firms wishing to promote cryptoassets in the UK must be registered by the FCA or have their marketing approved by an authorized firm.  On Oct 9, the FCA later announced that it issued 146 alerts about cryptoasset promotions, warning consumers that the promotions may be breaking the law.  Firms could be given until  Jan 8, 2024 to introduce features that require greater technical development.

UK’s FCA Reserve restricts Binance’s UK partner, Rebuilding Society, shortly after collaboration announcement

On Oct 10, UK’s Financial Conduct Authority (FCA) imposed restrictions on Rebuilding Society, Binance’s UK approver for financial promotions compliance, just days after the partnership was announced. The FCA intervention prohibits Rebuilding Society from conducting financial promotions on behalf of unauthorized crypto-asset service providers.  The firm must, by no later than 5pm on 11 October 2023, withdraw any existing approvals of financial promotions containing a qualifying cryptoasset. Additionally, the FCA has instructed Rebuilding Society to inform clients using its third-party financial promotions service that it cannot approve content from unauthorized persons or entities. The withdrawal of any advertisements offering approval services for financial promotions is also mandated.

EU Tax Ministers issue new directive to facilitate transactions in crypto assets for customers residing in the EU

On Oct 17, the European Union Finance Ministers have adopted new tax transparency rules for all service providers facilitating transactions in crypto-assets for customers resident in the EU.  The new rules, which come as an update to the Directive on Administrative Cooperation (DAC8), complement the Markets in Crypto-assets (MiCA) Regulation and transfer in funds regulation (TFR) and are fully consistent with the OECD initiative on the Crypto-Asset Reporting Framework.  The Directive will improve Member States’ ability to detect and counter tax fraud, tax evasion and tax avoidance, by requiring all crypto-asset providers based in the EU – irrespective of their size – to report transactions of clients residing in the EU. Moreover, its scope has been extended to include reporting obligations of financial institutions regarding e-money and central bank digital currencies and the automatic exchange of information on advance cross-border rulings used by natural persons.

Eurosystem proceeds to next phase of digital Euro project 

On Oct 18, the governing council of the European Central Bank (ECB) announced that it will begin the ”preparation phase” for the digital euro project.  The ECB plans to “start laying the foundation for the possible issuance of a digital euro” beginning on Nov. 1, 2023.  The announcement followed the release of a 44-page report on a potential digital euro’s design and distribution.  The preparation phase will last two years, will include testing and experimentation and will focus on finalizing rules for the digital currency, as well as selecting possible issuers.

ECB publishes paper “The Future of DAOs in Finance: in Need of Legal Status”

On Oct 18, the European Central Bank (ECB) published a paper titled “The Future of DAOs in Finance: in Need of Legal Status”. The paper highlights that many Decentralized Finance (DeFi) projects are structured in the form of a Decentralized Autonomous Organization (DAO), a virtual organization built and run on code and blockchain technology. As this new DAO corporate structure is growing, most countries around the globe do not yet have in place a specific legal regime for DAOs. Thus until now, DAOs have been operating outside of regulatory financial frameworks.  This paper introduces the DAO structure and how it relates to other methods of organization in finance, lists use cases and describes the benefits and drawbacks of the DAO structure, taking a closer look at (inter)national regulatory frameworks. The paper proposes that the establishment of regulatory frameworks on crypto-assets and crypto-asset services, such as the EU Markets in Crypto-Assets (MiCA), may force DAOs to rethink their legal status, governance and operational models.

Bank of Spain embraces a digital euro – ECB launces the next phase of the project

On Oct 19, Banco de España, the central bank of Spain, issued a statement explaining what a digital euro/Central Bank Digital Currency (CBDC) would be, how it resembles and how it differs from the euro we know, and its advantages if eventually adopted.  The Bank of Spain underscores that traditional physical currency is ill-suited to exploit the advantages presented by the increasing digitization of the economy, while “the digital euro would be a means of payment accepted throughout the euro area, and would offer free-of-charge and easy-to-use basic services”. The European Central Bank (ECB) has been working for two years to define exactly how a digital euro should be designed and how to make it available to citizens.

Consultation on joint EBA and ESMA guidelines on the suitability assessment under MiCA

On Oct 20, the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA), published a consultation paper on two draft Joint Guidelines covering suitability assessment of members of the management body, and suitability of shareholders and members with qualifying holdings of issuers of asset-referenced tokens (ARTs) and of crypto-asset service provider (CASPs) under MiCA.  The deadline for feedback on these guidelines is Jan 22, 2024.

UK’s Digital Pound consultation receives over 50K responses, with privacy among the major concerns

On Oct 27, the UK’s Bank of England (BoE) reportedly received over 50,000 responses to its digital pound consultation.  Deputy  BoE Governor Sir Jon Cunliffe, said that many of the respondents highlighted concerns regarding privacy, programmability (which will limit its functionality), and the decline of cash, if a digital pound was adopted at scale, which could pose a threat to the traditional banking system.

UK Treasury publishes response to consultations on a future financial services regulatory regime for cryptoassets

On Oct 30, His Majesty’s Treasury (HM Treasury) published its response to the consultation and call for evidence on the future financial services regulatory regime for cryptoassets. HM Treasury confirmed its final proposals and noted its intention to bring a number of cryptoasset activities into the regulatory perimeter for financial services. The initial consultation and call for evidence ran from February 1 to April 30, 2023. The UK is actively working on expansive regulations for cryptoassets, although the precise details of the regulations are still unclear. Virtual Asset Service Providers (VASPs) will require authorization under the Financial Market Services Act, irrespective of their FCA authorization under Money Laundering Regulations. The government intends to include cryptoassets in the Market Abuse Regime and plans to ban reverse solicitation, aligning with recently implemented Financial Promotions rules. The stated aim is for phase 2 secondary legislation to be laid in 2024, subject to parliamentary time.

Regulatory and Legislative Analysis – APAC

Mastercard demonstrates interoperable CBDC for trusted Web3 commerce in Australia and beyond

On Oct 12, Mastercard announced that it has successfully demonstrated capabilities of a new solution that enables Central Bank Digital Currencies (CBDCs) to be tokenized (or “wrapped”) onto different blockchains, providing customers with a new option to participate in commerce across multiple blockchains with increased security and ease.  The solution, developed in partnership with Cuscal (a leading payments and regulated data services provider) and Mintable (an NFT-as-a-service provider) as part of a research project in conjunction with the Reserve Bank of Australia (RBA) and Australia’s Digital Finance Cooperative Research Centre  (DFCRC). The project is aimed at exploring potential use cases for a CBDC in Australia, including controls ensuring that the pilot CBDC can be held, used, and redeemed only by authorized parties that have been Know Your Customer (KYC) verified and risk assessed by licensed service providers.  Mastercard demonstrated in a live environment how the solution could enable the holder of a pilot CBDC to purchase a NFT listed on the Ethereum public blockchain. The process “locked” the required amount of a pilot CBDC on the RBA’s pilot CBDC platform and minted an equivalent amount of wrapped pilot CBDC tokens on Ethereum.

MAS partners with policymakers in Japan, Switzerland and the UK to foster responsible digital asset innovation next phase of the project

On Oct 30, the MAS announced that it is partnering with the Financial Services Agency of Japan (FSA), the Swiss Financial Market Supervisory Authority (FINMA) and the United Kingdom’s Financial Conduct Authority (FCA), to advance digital asset pilots in fixed income, foreign exchange and asset management products. This effort is under MAS’ Project Guardian, which started in May 2022.  The policymaker group aims to advance discussions on legal, policy and accounting treatment of digital assets; identify potential risks and possible gaps in existing policies and legislation relevant to tokenized solutions;  explore the development of common standards for the design of digital asset networks and market best practices across various jurisdictions;  promote high standards of interoperability to support cross-border digital assets development;   facilitate industry pilots for digital assets through regulatory sandboxes, where applicable; and promote knowledge sharing among regulators and industry.  Additionally, regulatory sandboxes will be utilized to facilitate industry pilots for digital and tokenized assets.

Regulatory and Legislative Analysis – LATAM

Brazilian congressional committee recommends that Binance CEO and other executives be indicted for fraud and other financial crimes

A Brazilian congressional committee has recommended the indictment of Binance CEO Changpeng Zhao (CZ) and three local Binance executives, Daniel Mangabeira, Guilherme Haddad Nazar, and Thiago Carvalho, for alleged fraud and financial crimes related to financial pyramid schemes in Brazil. The committee’s 500-page final report accused them of fraudulent management practices, unauthorized operations, and unapproved securities trading. They claimed that Binance and Zhao had set up a network of legal entities to evade compliance with the law. The committee recommended that the Federal Public Ministry investigate all of Binance’s operations in Brazil, with a special focus on tax evasion, money laundering and the financing of organized crime and terrorism. They also urged Brazil’s Securities and Exchange Commission (CVM) to launch an investigation into Binance’s derivatives offerings. The report also recommended the indictment of 45 other individuals connected to various crypto companies. The recommendations are not legally binding, and law enforcement will decide whether to proceed with further action. Binance stated its commitment to collaborating with local authorities but rejected certain accusations and attempts to target the platform. This comes as part of a broader crackdown on Binance by regulatory authorities in various countries.

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