Global Digital Assets Digest: July 2023

Welcome to this month's Global Digital Assets Digest.

We have a number of important documents published by IMF in relation to cross-border payments and digital finance. At the EU-level, there have been legislative proposals in relation to the digital euro. The ESAs have also been busy with consultations on technical standards for MiCA following its publication in the Official Journal last month.

In the UK, the big news is that the Financial Services and Markets Act 2023, a key piece of post Brexit legislation containing a regulatory framework for financial market infrastructure sandboxes and cryptoassets, has been published. Ahead of the implementation of the new financial promotions regime in October 2023, the FCA has issued a warning to in-scope firms to be fully prepared.

Stateside, there are a number of communications from the OCC, as well as an important speech from a U.S Treasury official on the digitalisation of financial services.

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UPDATES AND GUIDANCE: INTERNATIONAL BODIES

1. ESMA: Consultation paper on technical standards specifying certain requirements of MiCA

2. EBA: Consultation paper on technical standards concerning authorisation application for asset referenced token issuers under MiCA

3. EBA: Consultation paper on draft regulatory technical standards on handling complaints under MiCA

4. EBA: Consultation paper on draft regulatory technical standards regarding assessments of qualifying holdings in issuers of asset-referenced tokens under MiCA

5. EBA: Statement on preparatory steps towards the application of MiCA to asset-referenced and e-money token

6. BIS: The crypto ecosystem: key elements and risks

7. BIS: Report: Lessons learnt on CBDCs

8. ECB: Changes to TIPS pricing

9. EBA: Speech by José Manuel Campa, Chairperson, EBA: FinTech and the future of financial intermediation

10. ESRB: Annual Report 2022

11. European Commission: Legislative proposals in relation to the digital euro

12. ECB: European Commission legislative proposals on digital euro and cash

13. FATF: Targeted update on Implementation of the FATF Standards on virtual assets and virtual asset service providers

14. IMF: Fintech notes: Institutional Arrangements for Fintech Regulation: Supervisory Monitoring

15. ESMA: Speech by Verena Ross on building safe digital financial markets

16. ECB: First meeting of the New Technologies for Wholesale settlement Contact Group

17. IOSCO: Speech of the Chairman of the FSMA and IOSCO at a conference organized by Better Finance

18. IMF: The Role of the Public Sector in Money and Payments – A New Vision

19. IMF: Fintech Notes: The Rise of Payment and Contracting Platforms

20. IMF: Exploring Cross-Border and Domestic Payment and Contracting Platforms

21. ECB: TARGET Annual Report 2022

22. BIS: Project Rosalind: Building API prototypes for retail CBDC ecosystem innovation

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UPDATES AND GUIDANCE: UK

23. HM Treasury consultation on digital securities sandbox

24. Financial Services and Markets Act 2023

25. FCA: Cryptoasset firms marketing to UK consumers must get ready for the financial promotions regime by 8 October 2023

26. Speech by HHJ Pelling KC: Issues in Crypto Currency Fraud Claims – an update

27. Bank of England: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation, on global action to enhance cross-border payments

28. PSR: Response to HMT and BoE consultation on digital pound

29. FCA: Handbook Notice 110

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UPDATES AND GUIDANCE: EUROPE

30. Keynote speech of Burkhard Balz on central bank digital currencies

31. German Banking Industry Committee calls for political guard rails for a digital euro

32. German Banking Industry Committee: Position paper on the digital euro

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UPDATES AND GUIDANCE: APAC

33. MAS: Announcement on investor protection measures for digital payment tokens

34. SFC: Speech by Julia Leung on Hong Kong's new virtual asset licensing regime

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UPDATES AND GUIDANCE: AUSTRALIA

None

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UPDATES AND GUIDANCE: NORTH AMERICA

35. OCC: Speech by Acting Comptroller on Tokenisation

36. OCC: Semi-annual risk perspective

37. U.S Department of Treasury: Remarks by Graham Steele on the Digitisation of Financial Services at the Transform Payments USA

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UPDATES AND GUIDANCE: MIDDLE EAST

None

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PRESS/ARTICLES

38. FT: SEC dealt legal setback in effort to tame cryptomarket

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UPDATES AND GUIDANCE: INTERNATIONAL BODIES

1. ESMA: Consultation paper: Technical standards specifying certain requirements of MiCA

On 12 July 2023, ESMA published a consultation paper on draft regulatory technical standards and implementing standards under MiCA concerning proposed rules for cryptoasset service providers (CASPs).

Areas covered by draft RTS

• Notification of intention to provide cryptoasset services.
• Authorisation of cryptoasset service providers.
• Complaints handling by CASPs.
• Identification, prevention, management and disclosure of conflicts of interest.
• Proposed acquisition of a qualifying holding in a CASP.

The draft ITS cover standard forms, templates and procedures in respect of a notification of intention to provide cryptoasset services and authorisation of CASPs.

The deadline for comments is 20 September 2024.

ESMA is expected to publish a final report and submit draft technical standards to the European Commission for endorsement by 30 June 2024.

ESMA intends to publish sets of RTS and ITS in October 2023 and in Q1 2024.

2. EBA: Consultation paper on technical standards concerning authorisation application for asset referenced token issuers under MiCA

On 12 July 2023, the EBA published a consultation paper on draft technical standards and implementing technical standards in relation to the authorisation application of issuers of asset-referenced tokens (ARTs) under MiCA.

Areas covered by draft RTS

• The identification details of the applicant issuer.
• The programme of operations, including the main features of the intended issuance.
• Internal governance arrangements and structural organisation.
• Liquidity management, reserve of assets and redemption rights (including a description of the stabilisation mechanism for the ART in question).
• Suitability of members of the management body.
• Repute of shareholders/members with direct or indirect qualifying holdings.

The draft ITS set out a standard application letter, the application template and clarify the process relating to the assessment of completeness of applications. The draft RTS do not apply to credit institutions.

The deadline for comments is 12 October 2023. The draft RTS and ITS will be submitted to the European Commission for consideration.

3. EBA: Draft Regulatory Technical Standards on handling complaints under MiCA

On 12 July 2023, the EBA published a consultation paper on draft technical standards on complaints handling procedures for issuers of asset referenced tokens (ARTs) under article 31 of MiCA.

Article 31 of MiCA requires the EBA to develop, in cooperation with ESMA, draft RTS on complaints handling procedures of issuers of ARTs. The RTS have been informed by the existing Joint Committee Guidelines on complaints handling applicable to all financial institutions. Where the EBA mandate requires the EBA to consider further information not covered by the JC Guidelines (e.g. requirements relating to third party entities, the procedure for investigating complaints and communicating the outcome to ART holders), the additional content will be read across from other material and emerging MiCA RTS.

Areas covered by the RTS include:

• definitions of complaints and complainants;
• requirements related to complaints management policy and function;
• provision of information to holders of ARTs and on templates and recording; and
• procedure for investigating complaints and complaints handling involving third parties.

The draft RTS will be submitted to the European Commission for endorsement.

4. EBA: Consultation paper on draft regulatory technical standards regarding assessments of qualifying holdings in issuers of asset-referenced tokens under MiCA

On 12 July 2023, the EBA published a consultation paper containing draft technical standards in relation to the information to be contained in a notification in respect of acquisitions /increase of qualifying holdings in issuers of asset referenced tokens.

MICA contains a framework for a prudential assessment by competent authorities in relation to the acquisition of qualifying holdings in issuers of ARTs that are not credit institutions. The prudential assessment must be performed by competent authority against five criteria: the reputation of the proposed acquirer; suitability of any person who will direct the target undertaking; financial soundness of the proposed acquirer; compliance with prudential requirements of the target undertaking; and reasonable ground to suspect an attempt or increase in money laundering or terrorist financing risk by the proposed acquisition. The information request set out in the draft RTS therefore includes information against this criteria.

The draft RTS will be submitted to the European Commission for endorsement.

5. EBA: Statement on preparatory steps towards the application of MiCA to asset-referenced and e-money tokens

On 12 July 2023, the EBA published a statement on preparatory steps to be undertaken by entities seeking to begin activities relating to asset-referenced token or electronic money tokens prior to 30 June 2024. The aim of the statement is to, among other things, avoid disruptive changes to firms' business models at a later stage. Prior to beginning ART/EMT activities, financial institutions (and other undertakings) are encouraged to undertake a comprehensive legal assessment to ascertain if activities are legally permissible. Firms are also encouraged to undertake an assessment of any impact on the risk profile and ascertain appropriate risk mitigation techniques.

The statement contains guiding principles that firms are encouraged to have regard for before the application date of MiCA and cover:

• disclosures to potential acquirers and holders of ARTs and EMTs and fair treatment;
• business model;
• sound governance, including effective risk management;
• robust reserve, recovery and redemption arrangements; and
• communication of information to competent authority of intention to offer ARTs/EMTs to the public or to seek admission to trading.

The EBA also published a template for financial institutions (and other undertakings) intending to carry out/carrying out ART/EMT activities.

The EBA also warns consumers that ARTs and EMTs do not yet constitute regulated instruments and that the consumer protection provisions under MICA are not applicable before 30 June 2024.

6. BIS: The crypto ecosystem: key elements and risks

On 11 July 2023, BIS published a report submitted to the G20 Finance Ministers and Central Bank Governors titled "The crypto ecosystem: key elements and risks". The report reviews the key elements of the crypto ecosystem, exploring the development of Bitcoin and blockchain technology and the increasing role of centralised intermediaries. It also looks at smart contracts and the decentralised finance applications that are based on them.

The report notes that data on crypto activities originates from on-chain data from blockchains and off-chain data reported by market actors, adding that data gaps prevent a proper assessment of potential risks. Reasons cited include the difficulty in aggregating, reconciling and analysing the data available on distributed ledgers.

Operational risks identified in the report concerning Defi include: high concentration of voting power held across major decentralised autonomous organisations; reliance placed by DeFi services on underlying blockchain and the impact that disruptions to the blockchain can have on DeFi services; and reliance of DeFi protocols on oracles.

7. BIS: Report: Lessons learnt on CBDCs

On 11 July 2023, BIS published a report on lessons learnt from work done by BIS Innovation Hub (BISIH) and central banks in relation to CBDCs. The report notes that BIS Innovation Hub has carried out 12 CBDC projects, covering retail and wholesale CBDCs and looking at the domestic and cross border context. In relation to domestic use cases, BISIH has conducted two projects looking at wholesale CBDC, while five projects have focused on retail CBDC.

Findings contained in the report include that: a retail CBDC is a complex project, while cross-border arrangements represent new ground and are more complicated than their domestic counterparts .BISIH work on retail CBDC has used a two-tier model with public-private partnership and has explored issues like privacy and cybersecurity.

BIS considers that future work on CBDCs in any jurisdiction could be informed by the lessons learnt in the experiments of other central banks and the BISIH. It argues that while previous research has focused on instant payments, interoperability and privacy for all types of CBDC and use case, more work needs to be done in relation to: scalability and performance; the coexistence of DLT based and traditional infrastructures; cyber security and resilience; and legal arrangements. The report also notes that complex trade-offs between various features will need to be considered.

8. ECB: Changes to TIPS pricing

On 4 July 2023, the ECB announced that the pricing structure for TIPS (TARGET Instant Payment Settlement), the Eurosystem's instant settlement platform for electronic payments, will change on 1 January 2024. The ECB confirms that instant payment transaction fees will be shared equally between sending participants and receiving participants. The ECB also confirms that monthly payments will introduced for payment service providers and automated clearing houses connected to the platform.

The ECB confirms that some aspects of TIPS would remain unchanged (i.e. there will be no fees for joining TIPS).

9. EBA: Speech by José Manuel Campa, Chairperson, EBA: FinTech and the future of financial intermediation

On 4 July 2023, the EBA published a speech by EBA Chairperson, José Manuel Campa, titled "FinTech and the future of financial intermediation". The speech looks at three aspects of technology-enabled transformation:

• the emergence of new products and services, such as crypto-assets and associated services such as custody and exchange;
• new ways of performing front and back-office processes, such as cloud data storage, credit scoring, customer onboarding, regulatory reporting, risk modelling, and suspicious transactions monitoring; and
• new distribution models, such as mobile and online banking interfaces, and multi-service digital platforms.

Mr Campa calls for appropriate "skilling up" on technology, risks, and risk mitigation techniques and also sets out a proposed timeline for EBA consultations in relation to MiCA.

10. ESRB: Annual Report 2022

On 3 July 2023, the ESRB published Annual Report 2022. In the report the ESRB refers to its work on several important cross-sectoral and cross-border policy dossiers. The ESRB argues that authorities need to improve their understanding of developments in the crypto ecosystem and attendant implications for financial stability. Noting that that financial stability is not a key theme of MiCA, the ESRB states that consideration has been given to the role that the ESRB might play in this area. The ESRB confirms that its work on cryptoassets may result in policy proposals to mitigate any financial stability and macroprudential risks in the EU deriving from crypto-assets and decentralised finance.

11. European Commission: Legislative proposals in relation to the digital euro

On 28 June 2023, the European Commission published: a proposed Regulation on the establishment of the digital euro; and a proposed Regulation on the provision of digital euro services by payment services providers incorporated in the EU. The first legislative proposal seeks to introduces a legal framework for a possible digital euro to complement euro banknotes, while the second proposal introduces rules for EU-incorporated payment service providers in respect of digital euro services. The European Commission also published a legislative proposal on the legal tender of euro banknotes and coins intended to safeguard the role of Euro cash.

Key points

• The digital euro would be legal tender and therefore acceptance will be mandatory. It will be a "central bank digital currency" issued and directly backed by the ECB.
• The digital euro is aimed to act exactly like cash and therefore can be exchanged at face value for euro cash, can be paid to anyone, anytime (24/7), across the euro area, and received instantly.
• The ECB can set holding limits, fees and charges for the use of the digital euro.
• Member States would be required to monitor cash acceptance levels, cash access levels and levels of cash refusals.

The legislative proposals were published on the same day that the European Commission published the third Payment Services Directive, a Payment Services Regulation and a Financial Data Access Regulation.

For more information, please see our briefing here.

12. ECB: European Commission legislative proposals on the digital euro

On 28 June 2023, the ECB issued a press release welcoming the EU Commission's legislative proposals on the digital euro and cash. The ECB confirms that the investigation phase of digital euro will conclude in October 2023, with the Governing Council of the ECB deciding whether to move to the next phase of the project. In the next phase, the ECB would further develop and test the technical solutions and business arrangements On the same day, the ECB published a blog setting out why Europe needs a digital euro.

13. FATF: Targeted update on Implementation of the FATF Standards on virtual assets and virtual asset service providers

On 27 June 2023, the Financial Action Taskforce published an update on country compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15) and Recommendation 16 (the Travel Rule).

In relation to the Travel Rule, FATF recommendations include the following:

• jurisdictions that have not yet introduced legislation/regulation to implement the Travel Rule should urgently do so;
• jurisdictions that have introduced the Travel Rule should rapidly operationalise it, including through effective supervision and enforcement against non-compliance;
• to allow for counterparty due diligence in line with Rule 16 as well as Rule 13, jurisdictions should maintain and publicise information on VASPs that are registered or licensed in their jurisdiction;
• jurisdictions could consider engaging with their VASP sector to promote the adoption of Travel Rule compliance tools that meet all the FATF requirements; and
• VASPs should look at their Travel Rule compliance tools to ensure they fully comply with the FATF requirements.

14. IMF: Fintech notes: Institutional Arrangements for Fintech Regulation: Supervisory Monitoring

On 26 June 2023, IMF issued a document on institutional arrangements for the regulation of FinTech. The IMF calls for authorities to closely monitor developments in order to determine the size and type of new risks generated by Fintech, noting that Fintech can affect market conduct and integrity in a number of ways. The paper argues that existing supervisory structures will be sufficient for many authorities to monitor new Fintech developments and respond to challenges, but that some jurisdictions might need dedicated specialist resources.

The paper identifies different approaches adopted by supervisory authorities (including test and learning; adjusting existing frameworks in relation to regulating; and bespoke regulation) and states that outcomes will depend on issues such as impact on markets, risks, end users and financial stability.

The paper argues that sandboxes are generally unsuitable as the sole means for gathering insights and monitoring fintech developments. It calls for poorly designed/implemented sandboxes and innovation hubs to be reviewed and updated where necessary.

15. ESMA: Speech by Verena Ross on building safe digital financial markets

On 21 June 2023, ESMA published a speech by Verena Ross, ESMA Chair, on the importance of safe digital financial markets. In the speech, Ms Ross welcomes the finalisation of EU Digital Finance Package, in particular MiCA and the EU DLT Pilot Regime Regulation, confirming the following:

• MiCA includes more than 50 mandates for developing Level 2 and Level 3 measures, with more than 30 mandates to be developed within the next 12-to-18 months for ESMA alone (these cover areas such as authorisation of CASPs, the governance of CASPs, their conduct of business and disclosure requirements;
• ESMA has established a phased consultation plan involving three consultation packages: one early July; one in October; and the third one early 2023;
• ESMA is seeking to promote convergent approaches to authorisation and supervision of crypto-asset service providers; and
• two official applications have already been submitted for the DLT Pilot Regime and approximately 15 other potential applications are expected for the second half of 2023 and the beginning of 2024.

16. ECB: First meeting of the New Technologies for Wholesale settlement Contact Group

On 21 June 2023, the ECB announced that the new Technologies for Wholesale Settlements contact group (NTW-CG) had held its first meeting. This is the first stage of Eurosystem's exploratory work on how wholesale financial transactions recorded on DLT platforms can be settled in central bank money. It is part of a wider initiative to ensure that developments in central bank money keep pace with digital innovation in wholesale and retail payments.

The ECB states that the first meeting focused on the planned approach to exploratory work, conceptual solutions for the settlement in central bank money of wholesale financial transactions recorded on DLT platforms.

17. IOSCO: Speech of the Chairman of the FSMA and IOSCO at a conference organized by Better Finance

On 20 June 2023, IOSCO published a speech by Jean-Paul Servais, the chairman of IOSCO and of the FSMA, given at the conference organized by Better Finance, the European Federation of Investors and Financial Services Users. Mr Servais discussed recent IOSCO initiatives, such as IOSCO report on retail market conduct and IOSCO recommendations for the regulation of cryptoassets.

Key points

• Digital promotions and online marketing are increasingly being used to facilitate fraudulent activities. Cryptoasset scams are an important example of misconduct arising from global trends and technological developments.
• To be able to better effectively track and intervene in cases of fraudulent online marketing channel, regulators need to address retail investor harm at its root e.g. by adopting and mastering the same technological tools as those used by market actors.
• It is time to deal with the risks of regulatory arbitrage surrounding crypto activities.
• Cryptoasset service providers need to address unacceptable conflicts of interest and take far more seriously their clients' safeguarding rights.

18. IMF: The Role of the Public Sector in Money and Payments – A New Vision

On 19 June 2023, the IMF published a speech by Kristalina Georgieva, IMF Managing Director, at a High-level Policy Roundtable on Central Bank Digital Currencies.

Key points

• There is a need to continue dialogue on CBDCs and to collect and share knowledge and information for wider benefit.
• Harnessing the digital transition is a key theme of the IMF's 2023 Annual Meetings.
• CBDCs could help to increase inclusion by: increasing access to financial services, and at a lower cost; strengthening the resilience and efficiency of payment systems; and making cross-border payments and remittances cheaper and quicker.
• CBDCs could reduce the number of intermediaries in cross-border payments.

19. IMF: Fintech Notes: The Rise of Payment and Contracting Platforms

On 19 June 2023, the IMF published a paper titled "IMF: Fintech Notes: The Rise of Payment and Contracting Platforms" . The paper explore the design and governance of platforms for enhancing cross-border payments in line with public policy goals.

The paper cites existing challenges with cross-border payments (such as scarce infrastructure and sporadic governance) and refers to the G20 roadmap on cross-border payments. It discusses existing initiatives experiments, such as Project Ubin 3 by the Monetary Authority of Singapore, as well as projects by BIS Innovation Hub, such as mCBDC Bridge and Dunbar. The paper presents the XC platform blueprint as an evolution of past payment innovations and looks at the three layers of the platform (settlement, programming and information management).

The paper argues that in order to deliver benefits associated with cross-border payments - such as lower transaction costs, lower cost remittances - XC platforms must use novel technologies (such as single ledger, programmability and encryption), but not require these from countries or participating institutions.

20. IMF: Exploring Cross-Border and Domestic Payment and Contracting Platforms

On 19 June 2023, the IMF published a speech by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the Joint IMF—Bank Al-Maghrib High Level Policy Roundtable on Central Bank Digital Currencies. Mr Adrian's remarks draw on an IMF Fintech Note entitled “The Rise of Payment and Contracting Platforms" and focuses on the three layers of XC platforms.

Settlement

• The platform would settle central bank reserves denominated in different currencies.
• To make a payment, participating banks would deposit their domestic central bank reserves in an escrow account controlled by the platform operator, and in return obtain a digital version to trade on the platform.
• The ledger would be controlled by the platform operator,
• XC platforms would allow a multicurrency system, without imposing a single or new settlement asset.

Programming layer

• Basic functions would be available to customize and bundle to complement payments.

Information management layer

• XC platforms allow the unbundling of settlement and non-settlement services including compliance checks, allowing for responsibilities to be separated.
• Countries are to control how much their citizens and firms can hold or transact in foreign currency
• As compliance checks occur outside the platform, transactions on the platform can preserve users’ privacy, but not their anonymity.

21. ECB: TARGET Annual Report 2022

On 16 June 2023, the ECB published TARGET Annual Report 2022. The report is the 23rd edition of the TARGET Annual Report, providing an overview on TARGET2 traffic, its performance and key developments occurring in 2022. Topics of covered include: improvements made to TARGET service communications tools; TARGET2 analytics for regulatory compliance; TIPS volume development and functional evolution; and the update to the TARGET2/T2S consolidation project and future RTGS services. The report states that the new RTGS system provides enhanced services that will also be available for currencies other than the euro. The ECB also confirms that the messaging standard has migrated to ISO 20022.

22. BIS: Project Rosalind: Building API prototypes for retail CBDC ecosystem innovation

On 19 June 2023, BIS issued a report on Project Rosalind, a joint project involving BIS Innovation Hub and BoE, looking at how an API layer could connect central bank and private sector infrastructures. The report notes that the G20 roadmap for cross-border payments stressed identified harmonising API protocols for data exchange as a building block for enhancing cross-border payments.

The exercise was based on a two-tier CBDC model under which a central bank issues a CBDC and provides the ledger infrastructure and the private sector offers user-facing services, including digital wallets. The API layer passes on instructions from service providers to the central bank ledger and directs activities in relation to payments.

According to BIS, the project has provided insights covering retail CBDC including: A well-designed API layer could facilitate retail payments in CBDC; the design of the API layer must be consistent with the requirements of the wider privacy model for a CBDC, APIs can support offline payments in CBDC, but there are some challenges to this.

UPDATES AND GUIDANCE: UK

23. HM Treasury consultation on digital securities sandbox

On 11 July 2023, HM Treasury published a consultation paper on the first financial market infrastructure (FMI) sandbox delivered under powers conferred by the Financial Services and Markets Act 2023, the Digital Securities Sandbox (DSS). This follows a 2021 HM Treasury call for evidence on the application of DLT to FMIs, which suggested that aspects of UK legislation may impede the use of DLT in FMIs.

Notable aspects

• The DSS will allow industry to set up financial market infrastructures using digital asset technology performing the activities of a central securities depository (notary settlement and maintenance) and operating a trading venue under a legislative and regulatory framework adjusted to accommodate digital asset technology.
• Activities would be performed in relation to existing security classes and would exclude the following asset types: unbacked cryptoassets; and derivatives. HM Treasury is intending for limits to be placed to ensure activities undertaken align with regulatory objectives (such as financial stability), with regulators being given powers to limit the amount of assets in scope and to allocate limits to individual FMIs in the DSS.
• Firms would only apply for the DSS if existing regulatory and legislative framework impedes their proposed business model and would provide information during application process on (among other things): regulatory barriers identified; core activities that are to be undertaken; and existing authorisations for related activities.
• For the purposes of the DSS, HMT will be able to modify, disapply and remove legislation such as: Financial Services and Markets Act 2000; Companies Act 2006; Financial Markets Insolvency (Settlement Finality) Regulations 1999; UK MiFIR; and UK CSDR. HMT expects that most modifications would relate to CSD activity rather than operating a trading venue.
• Regulatory barriers provisionally identified by HMT in the UK CSDR include: definitions; book entry provisions; integrity of issue provisions; cash settlement provisions; and record keeping and reporting provisions.

The consultation closes on 22 August 2023.

24. Financial Services and Markets Act 2023

On 7 July 2023, the Financial Services and Markets Act 2023 was published. The Act is a key piece of post-Brexit UK legislation and was introduced into the House of Commons in July 2022.

The Act gives HM Treasury a power to bring digital settlement assets used for payments within the UK regulatory perimeter so that the existing payments regulatory regime will be extended to cover issuers of stablecoins and entities providing related services (introducing an authorisation regime in respect of services).

Section 69 of Act include provisions bringing cryptoassets within the scope of provisions in FSMA concerning financial promotions and regulated activities regime. Section 69 also amends FSMA to introduce a definition of cryptoassets.

Sections 13 to 17 and Schedule 4 to the Act contain provisions permitting HM Treasury to establish one or more FMI sandboxes, which will enable participating firms to test and adopt new technologies and practices.

The provisions concerning cryptoassets and FMI sandboxes are expected to come into force on 29 August 2023.

25. FCA: Cryptoasset firms marketing to UK consumers must get ready for the financial promotions regime by 8 October 2023

On 4 July 2023, the FCA published a letter from Lucy Castledine, FCA Director of Consumer Investments Supervision, Policy and Competition, urging in-scope firms (i.e. all firms marketing cryptoassets to UK consumers, including firms based overseas) to get ready for the new financial promotions regime for cryptoassets.

The letter notes that once the regime comes into force, there will only be four routes to lawfully communicate cryptoasset promotions to UK consumers and that persons illegally promoting to UK consumers could be placed on the FCA warning list and that the FCA could remove or block any illegal financial promotions.

Unregistered or unauthorised cryptoasset businesses marketing to UK consumers are advised to consider: which of the four legal routes they will use to make their financial promotions; how they will deal with UK customers if they are unable to communicate financial promotions to them; and have in place orderly wind downs if they can no longer provide services to UK clients.

Firms seeking registration under the MLRs 2017 are reminded of FCA's expectations in this area, and that poor quality/incomplete submissions will be rejected.

26. Speech by HHJ Pelling KC: Issues in Crypto Currency Fraud Claims – an update

On 29 June 2023, a speech by HHJ Pelling KC titled "Issues in cryptocurrency fraud claims - an update" was published. The speech was delivered at the ThoughtLeaders4 Annual Crypto in Disputes Conference and follows a similar speech delivered in July 2022.

The speech refers to key publications, such as the Legal Statement on Cryptoassets and Smart Contracts published by the UK Jurisdiction Taskforce, as well as the Law Commission's June 2023 paper on digital assets (see our briefing here).

The speech goes on to assess some of the conclusions contained in the Law Commission's report and discusses common law developments in relation to cryptocurrency. The speech also discusses key trends, such as the continued increase in the number of cyber currency fraud claims and the increasing proportion of commercial entity claimants in cryptocurrency fraud claims. HHJ Pelling KC also discusses the merits of chracterising non fungible tokens as property, as well as key trends in enforcement procedures against exchanges and other intermediaries.

For more on issues relating to cryptocurrency litigation, please see Ashurst briefing here.

27. Bank of England: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation, on global action to enhance cross-border payments

On 29 June 2023, the BoE published a speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation on cross-border payments was published. The speech provides an overview of the importance of cross-border payments and cites recent achievements, such as the renewal of the UK RTGS service and CHAPs moving to ISO 20022.

The speech explores the FSB's October 2022 priority themes for future work in relation to cross-border payments: payment system interoperability; cross-border data exchange and message standards; and legal, regulatory and supervisory frameworks.

Notable points

• The plan is for payment systems to be open for longer and available to more payment service providers. The UK led the way in this regard and the BoE will be reviewing whether current direct access requirements need updating in light of new trends. The BoE plans to publish a discussion paper on initial findings.
• As part of its RTGS roadmap beyond 2024, the BoE is considering longer operating hours, for RGTS. Any potential benefits (such as speeding up cross-border payments) need to be weighed against potential costs (such as impact on operations). Changes in hours and access could complement initiatives on directly interlinking national payment systems, but these initiatives need to have right governance, risk management and oversight considerations.
• Message standards are vital for the continued evolution of payment standards, and the wide-spread adoption of ISO 20222 across jurisdictions can lead to gains in efficiency. It could also support regulatory compliance in areas such as financial crime. The harmonisation of APIs is another key consideration in enabling quicker and cheaper payments.

28. PSR: Response to HMT and BoE consultation on digital pound

On 21 June 2023, the PSR published a response to HMT and BOE's consultation on a digital pound (see our briefing here).

The PSR has identified several key areas for further development in the design phase of the project, specifically: user protection; the assignment of responsibilities and liabilities; the commercial model; user adoption; and functionality.

Notable recommendations

• A set of intended uses for the digital pound needs to be set up so that appropriate rules and minimum standards of behaviour for participants are designed and implemented before launch (especially if the digital pound is use in a consumer and retail context).
• Governance arrangements will probably need to support ongoing changes to rules and be backed by clear regulatory oversight
• The digital pound should ensure that participation rules are appropriate to its use cases.
• The PSR wants to share lessons learnt from its own work in developing a commercial model for open banking and reviewing key elements of the commercial model and pricing within the cards market.
• It will be important to consider how to best encourage adoption by consumers’ and merchants, particularly if the digital pound is to be used for retail payments.
• If the digital pound is to be used for a wide range of payments by consumers, it will be important to design an open data and open payments approach into the framework, to build on open banking benefits.

29. FCA: Handbook Notice 110

On 30 June 2023, the FCA published Handbook Notice 110. This includes a number of FCA Instruments, such as the Cryptoasset Financial Promotions Instrument 2023. The instrument extends financial promotion rules to cryptoasset businesses registered with the FCA under the MLRs 2017.

This follows the publication of FCA Policy Statement 23/6 and Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (SI 2023/612).

For more information on the new regime, please see our briefing here.

UPDATES AND GUIDANCE: EUROPE

30. Germany: Keynote speech of Burkhard Balz on central bank digital currencies (CBDC)

On 30 June 2023, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank), held a keynote speech at the School of Economics of Cape Town titled "The digital euro: How CBDC can shape tomorrow's payments landscape".

In his speech, Balz focused on the recipe for success for the digital euro, being (1) broad usability, without unwanted side effects, (2) well-thought-out implementation at the front-end, (3) future-proof concept, enabling new business opportunities, (4) a solid legal framework, and (5) the collaboration of all stakeholders. He announced the review of the different design options, which will be brought together into a well-balanced concept for the digital euro. Based on this, the ECB Governing Council will decide in autumn 2023 whether the project will continue in a preparatory phase towards actual implementation, a phase that would take at least another three years.

31. German Banking Industry Committee calls for political guard rails for a digital euro

On 28 June, 2023, Marija Kolak, President of the Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken, BVR) in charge of the German Banking Industry Committee (Deutsche Kreditwirtschaft, DK), commented on the EU Commission's legislative proposal on the establishment of the digital euro, which was presented the same day.

Ms Kolak stated that "it is crucial to set the guard rails for a digital euro on the basis of a political process as well as society-wide opinion forming" and that "the mandate of the European Central Bank and the concrete design of a digital euro must be transparent and democratically legitimized as well as enshrined in law". Ms Kolak noted that while the German banking industry takes a positive view of the fact that the risks associated with the introduction of an unlimited digital euro have been addressed, it finds it unacceptable that the EU Commission leaves the management of limits to the European Central Bank. Furthermore, the proposed qualification of the digital euro as a legal tender with an acceptance obligation must be proportionate and take adequate account of contractual freedom. Finally, Ms Kolak stated that it is necessary to strengthen the existing trust in the euro, which is the anchor for the economic and financial system, but this also applies to the digital euro as a new form of central bank money.

32. German Banking Industry Committee: Position paper on the digital euro

On 15 June, 2023, the German Banking Industry Committee (Deutsche Kreditwirtschaft, DK) published a position paper on the current discussion about the digital euro.

DK states that the dual structure of the monetary system (comprising central bank money and commercial bank money) is essential and should not be endangered by the issuance of a digital euro. DK recommends in addition to the issuance of a digital euro for consumers (retail digital euro), the development of tokenised central bank money for financial institutions (wholesale digital euro) to make payments and capital markets transactions more efficient. In addition, DK warns of market intervention and a possible violation of market economy principles, if price fixing by the ECB or the legislative process lead to an unrivalled low-cost payment system. Therefore, the digital euro should not constitute a centralised payment system, but should be limited to a digital form of cash in the sense of a raw material. DK welcomes the fundamental design principles of the digital euro, being privacy, transfer of funds (online/offline mechanism) and limitation of the volume in circulation. In this context, it emphasizes that the digital euro must be based on a democratically legitimised process from conception to issuance.

UPDATES AND GUIDANCE: APAC

33. MAS: Announcement on investor protection measures for digital payment tokens

On 3 July 2023, the Monetary Authority of Singapore (MAS) published a press release on the next steps following its October 2022 public consultation on regulatory measures for Digital Payment Token (DPT) Proposals for DPT service providers included: segregation of customers' assets from assets of DPT service providers; safeguarding customer's moneys; daily reconciliation of customers' assets; and disclosures to customers on risks of assets being held by DPT service provider.

34. SFC: Speech by Julia Leung on Hong Kong's new virtual asset licensing regime

On 13 June 2023, the Securities and Futures Commission (SFC) published a speech by Julia Leung, Chief Executive Officer of the SFC. The speech provides an overview of the SFC's approach to virtual asset regulation over the years and some key aspects of the new virtual asset trading platform (VATP) licensing regime.

Points to note:

• The SFC adheres to the concept of "same business, same risk, same rules" to regulate virtual-asset-related activities from an investor protection perspective.
• The new VATP licensing regime commenced on 1 June 2023. The regime enables retail investors to access VATP platform for trading, given that the licensed platform must comply with robust investor protection measures, covering onboarding, governance, disclosure and token due diligence and admission.
• The SFC has set up a regime to authorize ETFs which provide exposure to mainstream virtual assets, while Mainland China still prohibits crypto trading. This demonstrates Hong Kong's role as a game changer and the pursuance of "One Country, Two Systems".

UPDATES AND GUIDANCE: AUSTRALIA

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UPDATES AND GUIDANCE: NORTH AMERICA

35. OCC: Speech by Acting Comptroller on Tokenisation

On 16 June 2023, the OCC published remarks by Acting Comptroller of the Currency, Michael J. Hsu on the benefits and risks of tokenisation. The speech also looked at the differences between public, trustless blockchains and centralized, trusted blockchains. The speech also referred to two interagency statements reminding banks of supervisory risk management expectations regarding crypto activities and exposures.

Key points

• Centrally operated, trusted blockchains could bring security and achieve scale efficiently.
• Blockchain technology could improve settlement efficiency through tokenisation of real-world assets and liabilities on trusted blockchain
• Tokenisation of fiat currencies for cross-border payments could potentially reduce frictions, costs, and delays
• Clarifying the ownership and other property rights of tokenised real-world assets and liabilities is key.
• The legal foundations for tokenisation need to be developed.

36. OCC: Semi-annual risk perspective

The OCC has published the Semi-Annual Risk Perspective Spring 2023 report. The report highlights key risks facing the federal banking system, focusing on threats to the safety and soundness of banks. The key takeways are: the overall strength of the federal banking is system is sound; there has been increased volatility in the banking system owing to liquidity crisis in Q1 2023; and banks should confirm the effectiveness of their risk management practices.

The report highlights liquidity, operational, credit and compliance risks and notes that while disruption in the cryptoassets sector may have lessened, volatility remains in the industry.

In the section of the report concerning the adoption of innovative products and services by banks, the OCC reiterates the cautious approach it adopts towards crypto services and products. It refers to the OCC's Interpretative Letter 1179 and the joint statement on liquidity risks to banking organisations on cryptoasset market vulnerabilities.

37. U.S Department of Treasury: Remarks by Graham Steele on the Digitisation of Financial Services at the Transform Payments USA

On 13 June 2023, the US Treasury published a speech by Assistant Secretary for Financial Institutions, Graham Steele, on the Digitisation of Financial Services at the Transform Payments USA 2023 Conference.

Referring to CBDCs, Mr Steele states that the US has not decided whether to proceed with issuing a CBDC but confirms the following:

• the Treasury is leading an interagency working group to elicit a wider Administration perspective for considering the implications of any potential U.S. CBDC;
• privacy and anonymity concerns in the design of the retail CBDC need to be considered, as well as available technologies and methods (including Privacy Enhancing Technologies (PETs);
• risks posed by retail CBDCs include runs into that could destabilize private sector lending and could be heightened in the age of digital banking; and
• depending on the design and intermediaries involved, a retail CBDC could aid competition and innovation in the payment system and support financial inclusion.

UPDATES AND GUIDANCE: MIDDLE EAST

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PRESS/ARTICLES

38. FT: SEC dealt legal setback in effort to tame cryptomarket

This article reports on recent developments in relation to a civil lawsuit brought by the US Securities Exchange Commission. According to the article, the case centres on a contentious provision in US securities law that bans the sale of "investment contracts" unless they are registered as securities. The article argues that the ruling sheds some light as to issues the SEC may face in relation to its enforcement actions against cryptoasset service providers.

 

Co-authors: Tobias Bauerfeind, Senior Associate; Daphne Chung, Associate; Anna He, Associate; Cornelius Hille, Associate; Gréta Müller, Associate; Ringo Yeung, Intern.