Legal development

Global Digital Assets Digest December 2022

Insight Hero Image
    IN THIS EDITION we will cover:

    UPDATES AND GUIDANCE: INTERNATIONAL BODIES

    1. ESMA: Speech by Steffen Kern: Opening statement at ECON hearing

    2. BIS: Speech by Pablo Hernández de Cos, Chair of the Basel Committee and Governor of the Bank of Spain

    3. HM Treasury/Monetary Authority Singapore: Joint statement on UK and Singapore deepening collaboration in FinTech and strengthen financial cooperation

    4. IOSCO: Speech by Tuang Lee, IOSCO Fintech Task Force Chair

    5. IOSCO: Speech by Tajinder Singh, Deputy Secretary General:

    6. IMF Blog: Africa’s Growing Crypto Market Needs Better Regulations

    7. Speech by Mr Steven Maijoor, Executive Director of Supervision of the Netherlands Bank, at the Institutional Digital Assets and Crypto Regulation Symposium

    8. FSB: Final report: Developing the Implementation Approach for the Cross-Border Payments Targets

    9. FSB: Report: Promoting Global Financial Stability

    10. ISDA: Japan Derivatives Forum: Scott O’Malia Opening Remarks

    11. European Parliament: MICA and revised WTR to be considered at 13 to 16 February plenary session

    12. ECB: Speech By Christine Lagarde, President of the ECB on the digital euro

    13. EESC: Opinion on the digital euro

    UPDATES AND GUIDANCE: UK

    14. FCA: Speech by Emily Shepperd: From Zeroes to Heroes: How culture in financial services can change for everyone’s benefit

    15. House of Commons (Treasury Committee): Written evidence: The crypto-asset industry: Circle Internet Financial LLC

    16. UK Finance: Speech by Bob Wigley, Chair of UK Finance at the UK Finance annual dinner 2022

    17. Bank of England: Speech by Jon Cunliffe, Deputy Governor, Financial Stability: Reflections on DeFi, digital currencies and regulation

    18. Law Commission Digital Assets Consultation Paper: a summary of Ashurst's response

    19. House of Lords (Fraud Act 2006 and Digital Fraud Committee): Report: Fighting Fraud: Breaking the Chain

    20. DCMS Committee: Inquiry into the future of the NFT market

    UPDATES AND GUIDANCE: EUROPE

    21. Germany: BMF publishes Ordinance on requirements on Electronic Securities Registers

    22. Belgium: FSMA Communication on cryptoassets

    UPDATES AND GUIDANCE: APAC

    23. Singapore: Ongoing cases and disputes

    24. Singapore: Responses to Parliamentary Questions in light of cryptoasset turmoil

    25. Singapore: Responses to Parliamentary Question on the proposed trial of a digital Singapore dollar

    26. Singapore: Responses to Parliamentary Question on prudential treatment of Singapore banks' crypto asset exposure

    27. Temasek: Statement and FAQs in light of cryptoasset turmoil

    28. MAS Launch of Ubin

    29. MAS First Industry Pilot for Digital Asset and Decentralised Finance Goes Live

    UPDATES AND GUIDANCE: AUSTRALIA

    30. Australian Law Reform Commission Background Paper on regulatory reform and  the emergence of new business models

    UPDATES AND GUIDANCE: NORTH AMERICA

    31. CFTC: Testimony at the United States Senate Committee on Agriculture, Nutrition and Forestry

    32. OCC: Speech by Acting Comptroller of the Currency, Michael J. Hsu at the Financial Literacy and Education Commission’s Public Meeting “Careful and Cautious with Crypto”

    33. Senate Committee on Banking, Housing and Urban Affairs: Written testimonies from regulators

    34. Warren, Ocasio-Cortez, Lawmakers: Questions concerning "revolving door" between regulatory agencies and crypto industry

    35. Statement by Secretary of the Treasury, Janet L. Yellen, on recent crypto market developments

    36. CFTC: Affiliate withdraws CFTC application to offer disintermediated retail crypto derivatives

    37. Federal Reserve Bank of New York: Report on first phase of US Wholesale Central Bank Digital Currency (wCBDC)

    PRESS/ARTICLES

    38. FT article: Blockchain may have a green future regardless of crypto

    39. FT article: UK high street lenders toughen crypto stance on fraud concerns

    40. Guardian China circles El Salvador’s economy as country edges toward crypto plunge

    41. Arabian Business: Abu Dhabi launches a crypto and blockchain body

    Updates and Guidance: International Bodies

    1. ESMA: Opening statement by Steffen Kern at ECON hearing

    On 30 November 2022, ESMA published the opening statement by Steffen Kern at the hearing of the European Parliament's Economic and Monetary Affairs Committee on developments in the cryptoassets sector.

    Mr Kern comments that ESMA has issued warnings to investors on the risks associated with cryptoassets. Mr Kern argues that the segregation of client assets is a crucial safeguard in traditional finance and that the lack of safeguards in place at many entities active in crypto markets was one of the drivers for warnings issued by the ESAs to investors.

    Key points

    • Cryptoassets carry extreme market risk, with huge volatility seen in prices. Liquidity and operational risks mean that investors holding assets on crypto exchanges may find their assets are inaccessible.
    • ESMA continues to see aggressive marketing to mass market despite fundamental risks from cryptoassets.
    • ESMA does not currently see significant risks of major spill-overs into the wider financial sector, given that crypto assets represent less than one percent of total market capitalisation across traditional asset classes, and the fact that interlinkages across the crypto and traditional financial markets have remained relatively limited.
    • Recent turmoil demonstrates that corporate governance and controls in the cryptoasset markets may be very weak.
    • Service providers domiciled outside the EU play a dominant role in the crypto market and are likely to continue to do so after the implementation of a regulatory framework in the EU.
    2. BIS: Speech by Pablo Hernández de Cos, Chair of the Basel Committee and Governor of the Bank of Spain

    On 29 November 2022, BIS issued a speech by Speech by Pablo Hernández de Cos, Chair of the Basel Committee and Governor of the Bank of Spain.

    The speech covers the potential impact of digitalisation on banks’ business models and the recent turmoil in the cryptoassets sector.

    Key points

    • Use by banks of DLT could encourage cheaper, faster and more customised financial intermediation, but this carries risks relating to banks' operational resilience, a lack of legal clarity with regard to assets transacted on DLTs, and AML concerns.
    • Cryptoassets have the potential to scale up rapidly and pose risks to individual banks and overall financial stability.
    • Despite low current exposures of banks to cryptoassets, regulators still need to adopt a forward-looking approach to regulation and supervisions.
    3. HM Treasury/Monetary Authority Singapore: Joint statement on UK and Singapore deepening collaboration in FinTech and strengthen financial cooperation

    On 25 November 2022, HM Treasury and the Monetary Authority of Singapore issued a statement on collaboration in Fin Tech. In the statement, the parties confirmed that the UK and Singapore had agreed a Memorandum of Understanding (MoU) on the UK-Singapore FinTech Bridge to remove barriers to fintech trade and boost cooperation. This follows the 7th UK-Singapore Financial Dialogue in Singapore The statement notes that a variety of topics were discussed during the Dialogue, including cryptoassets, with both regulators sharing views on market developments, opportunities, trends, and longer-term expectations. The statement notes that there was also discussion in relation to strengthening rules on consumer protection and developing the regulation of stablecoins.

    4. IOSCO: Speech by Tuang Lee, IOSCO Fintech Task Force Chair

    On 21 November 2022, IOSCO issued a speech given by Tuang Lee, IOSCO Fintech Task Force Chair, on 2 November 2022 at the Singapore Fintech Festival. The speech contained an overview of the remit of IOSCO's Fintech Task Force and also key risks posed by the digital assets sector. The speech stressed the importance of separating technology from its use case, noting that DLT has many applications and benefits beyond cryptocurrencies.

    Notable points

    • Role of IOSCO Fintech Task Forces: The first workstream focuses on “Crypto and Digital Assets” is led by the UK FCA, while the second, covering “DeFi Products and Services” is led by the US SEC. The Fintech Task Force will act on its investor protection and market integrity mandate by delivering on its July 2022 road map.
    • Key risks: Existing IOSCO principles would apply to many examples of market manipulation, wash trading and insider trading (e.g. a platform employee may be aware of the potential listing of a certain coin and may use the information to invest in the coin and make a quick profit) that IOSCO has observed recently. There are also conflicts of interest risks where cryptoasset providers, such as exchanges performing multiple roles (e.g. trading platforms providing brokerage services, custody and proprietary trading under a single roof and, in some cases, issuing tokens, carry out lending activities and undertaking complex re-hypothecation arrangements with client assets).
    5. IOSCO: Speech by Tajinder Singh, Deputy Secretary General: IOSCO Targets Crypto-Asset Regulation

    In November 2022, IOSCO issued a speech by Tajinder Singh, Deputy Secretary General of IOSCO, on cryptoasset regulation at the World Federation of Exchanges 61st General Assembly & Annual Meeting. The speech referred to IOSCO's Fintech Taskforce and its Crypto-Asset Roadmap for 2022-2023, as well as IOSCO's report into decentralised finance in March 2022.

    Key points

    • Cryptoassets sector has grown markedly since the emergence of Bitcoin in 2009, branching into a wide array of asset classes and use cases. The cryptoasset market is no longer in its infancy and cannot be ignored by either investors or regulators.
    • Despite claims about decentralisation, the crypotoassets sector is marked by a relatively centralised market infrastructure where a number of crypto asset trading platforms or service providers hold a significant percentage of market share and volume. This concentration in turn increases risks via high levels of interconnectedness. There are also significant levels of vertical integration where multiple services and activities are performed by a single entity. IOSCO issued a report on Risks and Regulatory Considerations relating to Crypto Asset Trading Platforms in March 2020 raising pertinent matters.
    6. IMF Blog: Africa’s Growing Crypto Market Needs Better Regulations

    On 22 November 2022, an IMF blog was published in relation to the regulation of cryptoassets in Africa, in conjunction with the IMF's period regional outlook on Africa (which also contains an analytical note on digital currency innovations in Africa).

    Key points

    • Only one-quarter of countries in sub-Saharan Africa formally regulate crypto, but two-thirds have implemented some restrictions and six countries (Cameroon, Ethiopia, Lesotho, Sierra Leone, Tanzania, and the Republic of Congo) have banned crypto.
    • Possible roadblocks for wider CBDC adoption include the lack of national or digital identification of users in many countries, financial integrity and cyber security risks, and limited central bank capacity in this area.
    • Privately issued mobile money has been at the forefront of reshaping the region’s access to finance, allowing digital payments and transfers at low costs.
    • Although cryptocurrencies have been touted to promote financial inclusion and support remittances, their track record in these areas is limited.
    • Digital currency innovations need to be considered carefully, and countries should seek guidance when needed
    • Africa is one of the fastest-growing crypto markets in the world, according to Chainalysis, but remains the smallest, with crypto transactions peaking at $20 billion per month in mid-2021.
    • The Central African Republic is the first country in Africa, and the second in the world after El Salvador to designate Bitcoin as a legal tender.
    7. Speech by Mr Steven Maijoor, Executive Director of Supervision of the Netherlands Bank, at the Institutional Digital Assets and Crypto Regulation Symposium

    On 17 November 2022, BIS issued a speech by Steven Maijoor, Executive Director of Supervision of the Netherlands Bank, at the Institutional Digital Assets and Crypto Regulation Symposium in London.

    Notable points

    • Cryptoassets and underlying technology can bring real societal benefits.
    • Activities associated with cryptoassets resemble traditional finance in terms of activities (lending, deposit-taking, trading, or insurance) and risks (leverage, liquidity mismatches, or interconnectedness).
    • Rapid growth and incomplete regulation and supervision mean cryptoasset markets could soon reach a point where they represent a threat to the stability of the global financial system.
    • Some crypto activities are not in compliance with existing regulation or take place outside of the regulatory perimeter. Cryptoasset regulation differs across jurisdictions; and there is limited regulatory reporting and public disclosure.
    • Cross-border activities require regulatory response that is coordinated across borders.
    • Cryptoasset activities should be regulated on the basis of the "same activity, same risk" principle.
    • Wide-spread fraud and malicious behaviour in the crypto-ecosystem has been observed by regulators. Market integrity, consumer and investor protection, as well as AML/CFT, should figure on regulators' agenda.
    8. FSB: Final report: Developing the Implementation Approach for the Cross-Border Payments Targets

    On 17 November 2022, the FSB issued a report on cross-border payments. In November 2020, the G20 endorsed the roadmap for enhancing cross-border payments developed by the FSB and other international organisations and standard-setting bodies in the form of 19 Building Blocks and related actions to address the four challenges of cross-border payments: high costs, low speed, limited access and limited transparency. In 2021, the G20 Leaders endorsed the Targets Report, which established 11 targets at the global level to provide a common vision for the improvements sought under the Roadmap. The report provides an update on the FSB’s development of this framework, initially set out in an interim report, published in July 2022.

    9. ISDA: Japan Derivatives Forum: Scott O’Malia Opening Remarks

    On 15 November 2022, ISDA published opening remarks at the Japan Derivatives Forum made by Scott O’Malia. The speech looks at the growth of crypto derivatives, ISDA’s digital regulatory reporting (DRR) initiative and environmental, social and governance (ESG)

    Key points

    • Recent volatility in the market has highlighted a lack of certainty about rights of investors in the event of a bankruptcy. This underscores the importance of a clear, consistent contractual framework outlining the rights and obligations of both parties following a default.
    • ISDA is working on producing standard terms for cash-settled forwards and options referencing Bitcoin and Ether.
    • New standards will accommodate the specific characteristics of the crypto market, with the initial set of definitions due to be published before the end of 2022. ISDA may then look into the development of collateral documentation for the OTC crypto derivatives market.
    10. European Parliament: MICA and revised WTR to be considered at 13 to 16 February plenary session

    On 14 November 2022, the European Parliament announced it had updated its procedures files in relation to the proposed Regulation on information accompanying transfers of funds and certain cryptoassets, as well as the proposed Regulation on markets in cryptoassets (MiCA).

    The procedure files suggest that the Parliament will consider the proposed Regulations during its plenary session to be held 13 to 16 February 2023.

    11. ECB: Speech By Christine Lagarde, President of the ECB: Digital euro: a common European project

    On 7 November 2022, the European Central Bank issued the transcript of a video address by Christine Lagarde, President of the ECB, in relation to the digital euro. The address covers the following areas: disruptive transformation; designing digital public money; and privacy and legal tender status.

    Key issues

    • Achieving the right balance between the social value of privacy and the public interest in preventing illicit activities is a political choice and is up to EU co-legislators to define.
    • Widespread acceptance of the digital euro in payments, as well as citizens’ broad access to the digital euro across the euro area should be encouraged.
    • The entry of Big Techs into payments could increase the risk of market domination and dependence on foreign payment technologies, with consequences for Europe’s strategic autonomy.
    • Strategic autonomy could be strengthened by infrastructure for a digital euro that allows intermediaries to scale payments innovation throughout the euro area.
    12. EESC: Opinion: A digital Euro

    On 3 November 2022, the European Economic and Social Committee (EESC) published its own-initiative Opinion on the ECB's assessment of the risks and benefits of introducing a digital euro. The ECB is currently exploring and reviewing various design options for a digital euro and will take a final decision on whether to introduce a digital euro.

    In the Opinion, the EESC notes that many central banks around the world are considering and developing their own digital currencies.Among other things, the EESC:

    • supports the steps taken by the ECB-Eurosystem towards the introduction of a digital euro and confirms that it will continue to monitor the ECB's work on this project;
    • considers financial and digital inclusiveness to be very important in the introduction of the digital euro;
    • stresses that all of the potential risks of the digital euro must also be pointed out, especially in relation to the financial sector;
    • considers financial stability to be one of the key issues when moving towards the introduction of a digital euro and calls on the ECB to take all necessary measures in the area of supervision to counter unlawful transactions; and
    • stresses the importance of enabling both online and offline transactions.

    Updates and Guidance: UK

    14. FCA: Speech by Emily Shepperd: From Zeroes to Heroes: How culture in financial services can change for everyone’s benefit

    On 28 November 2022, the FCA published a speech by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, in relation to culture. In the speech, Ms Shepperd notes that the FCA Consumer Duty will encourage firms to analyse the impact of their culture on conduct.. Referring to the cryptoassets sector, Ms Shepperd comments that oversight of entities operating in this sector chiefly consists of AML rules, adding that high FCA standards have meant that few firms have been authorised. She adds that recent FCA cryptosprints revealed a cultural clash between crypto entrepreneurs and regulators about the importance of regulation and its role in financial services.

    15. House of Commons (Treasury Committee): Written evidence: The crypto-asset industry: Circle Internet Financial LLC

    On 21 November 2022, written evidence from Circle LLC in response to the inquiry on cryptoassets was published. In the response, Circle welcomes initiatives to regulate cryptoassets.

    Key points

    • Cryptoassets such as stablecoins can complement traditional currencies and can even coexist with a sterling CBDC.
    •  The UK's position as a leading jurisdiction for global finance and innovation is at risk owing to mixed messages from regulators and mismatch between Government and regulators.
    • The UK must regulate cryptoassets in a holistic, balanced, and technology-neutral manner. Circle has proposed recommendations for specific policy areas of focus (payment stablecoins, cryptoasset firm registration, and advertising and promotions).
    • Circle was encouraged by the Government’s plans to establish a Cryptoasset Engagement Group to bring together key stakeholders to collaborate on issues facing the cryptoasset sector.
    • Public blockchains are technically complex, and use of cryptoassets likely requires new processes, controls, and training.
    • Circle agrees with the conclusions on the digital assets industry reached by the Kalifa review (see Ashurst briefing), which called for a functional and technology-neutral approach and expressed support for the concept of "same risk, same regulation" in relation to regulating cryptoassets.
    16. UK Finance: Speech by Bob Wigley, Chair of UK Finance at the UK Finance annual dinner 2022

    In November 2022, UK Finance published a speech by Bob Wigley, Chair of UK Finance, at the UK Finance annual dinner 2022. The speech provided an overview of key regulatory themes, as well as developments in 2022. Mr Wigley argues that that the Government and regulators have been reactive rather than proactive in relation to cryptoassets and calls for the creation of a Digital Tokenisation Taskforce. The Taskforce would include UK Finance, the Investment Association, Association of British Insurers, the Law Society, HM Treasury, the FCA, PRA and key market participants.

    17. Bank of England: Speech by Jon Cunliffe, Deputy Governor, Financial Stability: Reflections on DeFi, digital currencies and regulation

    On 21 November 2022, the Bank of England issued a speech by Jon Cunliffe, Deputy Governor, providing an overview of the regulation of the digital assets sector and his views on the ongoing turmoil in the cryptoassets sector.

    Key points

    • Transparency in corporate structures and the relationships between them is the key foundation for regulating conflicts of interests.
    • Lending, brokering, providing an exchange platform, clearing and settlement perform different economic functions that carry different risks. Regulation requires separate, independent governance to ensure adequate risk management.
    • There are stringent requirements in place in relation to acceptable collateral. A firm accepting its own unbacked crypto asset as collateral for loans and margin payments can create extreme "wrong way" risk.
    • The merits of the development of decentralised finance in which functions like lending, trading, clearing take place through software protocols built on the permission-less blockchain are still unclear.
    • Tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as digitalisation increases, but could potentially improve the financial system.
    • The Financial Services and Markets Bill 2022-23 is addressing some of the regulatory concerns that have been highlighted by observers.
    • The Bank still plans to issue a consultative report around the end of 2022 setting out the next steps in relation to a CDBC.
    18. Law Commission Digital Assets Consultation Paper: a summary of Ashurst's response

    Ashurst has published a summary of its response to the Law Commission's July 2022 consultation paper on the legal treatment of digital assets (see our briefing here). The response to the Consultation Paper consists of overarching considerations and observations, as well as direct responses to specific issues and questions raised by the Consultation Paper. Areas covered include the following: statutory reform (including whether to introduce a statutory codification of digital assets as property under the law of England); international harmonisation; co-ordination of digital assets initiatives in the UK; recognising digital assets as "data objects" under the law of England and Wales; and custody of crypto tokens.

    Ashurst supports a statutory codification of digital assets as property and advises against an overly prescriptive approach.

    19. House of Lords (Fraud Act 2006 and Digital Fraud Committee): Report

    The House of Lords has issued a report on digital fraud. Drawing on input from academics, experts, industry leaders and government representatives, the report explores the role digitalisation has played in the fraud chain (the fraud train tracks the development of fraud from the first approach by the fraudster through to the point when a criminal "cashes out").

    The report argues that the UK’s position as a digitalised, global financial hub, the enthusiastic adoption of the Faster Payments system and the emergence of cryptoassets has meant an increase in digital fraud.

    The report identifies ways in which crypto-fraud can be committed, including "rug pull" scams, whereby scammers persuade investors to put money into a new crypto token before disappearing with their money. It also notes that a similar process can be followed during an Initial Coin Offering scam in which the "latest" token is promoted by someone offering an investment that is essentially worthless.

    Key points made by the report include the following:

    • regulators should focus more tightly on the "on and off-ramps" that facilitate the transfer of funds from traditional banks into and out of crypto-based wallets;
    • the Government should work with the private sector to integrate better KYC checks into the cryptoasset account set-up process;
    • the Home Office should urgently bring forward measures in the Economic Crime and Corporate Transparency Bill;
    • the Online Safety Bill should be brought forward, as it contains measures to prevent fraudulent content and scam advertising from appearing on online platforms and to hold tech companies accountable when they fail; and
    • the Payment Systems Regulator look into whether the speed with which certain payments can be made should be subject to a delay.
    20. DCMS Committee: Inquiry into the future of the NFT market

    On 4 November 2022, the DCMS Committee launched an inquiry into the operation, risks, and benefits of NFTs and the wider blockchain. The Committee notes that the NFT regulation in the UK is largely non-existent and that the inquiry into NFTs and the Blockchain is likely to explore whether more regulation is needed, ahead of a Treasury review.

    Views are sought on the following questions:

    • whether the UK’s light-touch NFT regulation sufficient;• the potential harms to vulnerable people of NFT speculation;
    • whether blockchains offer security to British investors; and
    • the potential benefits to individuals and society of NFT speculation.

    The closing date for comments is 6 January 2023.

    Updates and Guidance: Europe

    21. Belgium: FSMA Communication on plan on crytpoassets

    On 22 November 2022, Belgium's Financial Services and Markets Authority (FSMA) issued a Communication outlining when cryptoassets fall within the scope of the prospectus rules and/or the MiFID conduct of business rules. The Communication comes with a stepwise plan.

    The Communication outlines the various steps that may aid the classification of cryptoassets, as well as the consequences of a classification. FSMA states that the documents have been published in response to queries it received seeking clarity.

    22. Germany: BMF publishes Ordinance on requirements on Electronic Securities Registers

    On October 28, 2022, the Federal Ministry of Finance (Bundesministerium der Finanzen, "BMF") published an Ordinance on requirements of electronic securities registers (Verordnung über An-forderungen an elektronische Wertpapiere, "eWpRV"). The eWpRV specifies the requirements of the Electronic Securities Act (Gesetz über elektronische Wertpapiere, "eWpG"), in particular the general requirements of the establishment and maintenance of electronic securities registers, documentation obligations, participation and inspection conditions and regulations on the types of entries for registrars.

    Updates and Guidance: APAC

    23. Singapore: Ongoing cases and disputes

    Zipmex

    On 2 December 2022, it was announced that cryptocurrency exchange Zipmex (which has been undergoing restructuring in Singapore since August) would be getting a $100 million venture capital buyout. According to reports, V Ventures, a Thailand-based venture capital firm and a subsidiary of Thoresen Thai Agencies Pcl, is offering $30 million in cash and the remainder in crypto tokens. A share sale agreement detailing the deal terms was presented, according to a court hearing on 2 December 2022 in Singapore. The purchaser has however not been identified. The crypto received from the deal will be used to gradually unlock Zipmex customers’ frozen wallets.

    Three Arrows Capital

    On 2 December 2022, the liquidators for Three Arrows Capital (3AC) managed to seize $35.6 million from the collapsed crypto hedge fund's bank accounts in Singapore, three months after obtaining approval from the Singapore High Court to begin investigating and probing 3AC's assets in the jurisdiction. According to a presentation used in the court hearing, liquidators have also recovered $2.8 million from forced redemptions of investments, as well as an unspecified number of crypto tokens and non-fungible tokens.

    24. Singapore: Responses to Parliamentary Questions in light of cryptoasset turmoil

    On 30 November 2022, the responses to parliamentary questions were published in relation to the impact of the turmoil in the cryptoassets sector on regulatory measures and the Singaporean financial system. The responses were provided by Mr Lawrence Wong, Deputy Prime Minister and Minister for Finance and Deputy Chairman of MAS, on behalf of Mr Tharman Shanmugaratnam, Senior Minister and Minister in charge of MAS.

    Notable points

    • Regulators draw a sharp distinction between growing an innovative and responsible digital asset ecosystem and speculation in cryptocurrency
    • MAS has consistently warned the retail public not to deal in cryptocurrencies.
    • Recent collapses of cryptocurrency platforms should herald much-needed rationalisation in the cryptocurrency space.
    • The Government does not prescribe guidelines on the allocation of specific assets or asset classes, whether for cryptocurrencies or other assets so far as investment entities are concerned.
    • MAS has outlined its approach to regulating financial institutions providing cryptocurrency services, also known as digital payment token (DPT) service providers. MAS has recently issued a consultation on introducing basic investor protection measures into the DPT regime and will finalise the proposals and implement appropriate regulatory measures following feedback.
    25. Singapore: Responses to Parliamentary Question on the proposed trial of a digital Singapore dollar

    On 28 November 2022, the responses to parliamentary questions were published in relation to the proposed trial of a digital Singapore dollar. The responses were provided by Mr Tharman Shanmugaratnam, Senior Minister and Minister in charge of MAS.

    Notable points

    • A digital Singapore dollar is essentially money that can be digitally programmed to impose conditions under which the money can be spent.
    • MAS has collaborated with the industry to initiate a few trials to test the potential applications of such a digital Singapore dollar, and is currently evaluating the advantages of using digital Singapore dollars over e.g. pure e-voucher systems.
    • MAS has stated that it plans to continue these collaborations with industry participants to enhance user experience, while ensuring security and privacy.

    26. Singapore: Responses to Parliamentary Question on prudential treatment of Singapore banks' crypto asset exposure

    On 28 November 2022, the responses to parliamentary questions were published in relation to: the MAS' requirements as to the prudential treatment of Singapore banks’ crypto asset exposure; and the risk-weighting requirements applicable to crypto asset exposures in assessing Singapore banks’ capital adequacy. The responses were provided by Mr Tharman Shanmugaratnam, Senior Minister and Minister in charge of MAS.

    Notable points

    • Singapore-incorporated banks’ exposures to cryptoassets are insignificant, contributing less than 0.05% of their total risk weighted assets.
    • Pending the finalisation of a framework for the prudential treatment of banks' exposures to cryptoassets (by the BCBS and the MAS), Singapore-incorporated banks are required by the MAS to apply a 1250% risk weight for exposures to riskier cryptoassets such as Bitcoin and Ether i.e. the highest risk weight under the BCBS’ capital framework.
    • Based on MAS’ minimum total capital adequacy requirement of 10% for systemically important banks incorporated in Singapore, this means that Singapore-incorporated banks are required to hold $125 of capital against an exposure of $100 to a cryptoasset like Bitcoin.
    • For less risky cryptoassets, such as tokenised corporate bonds that meet a set of conditions to ensure that they pose the same level of financial risks as traditional corporate bonds, the prudential treatment is similar to that applied to the traditional non-tokenised asset
    27. Temasek: Statement and FAQs in light of cryptoasset turmoil

    On 17 November 2022, Singaporean state holding company, Temasek Holdings, published a webpage in relation to the impact of the collapse of a cryptocurrency exchange. Temasek later published frequently asked questions in light of additional queries.

    The webpage states that Temasek does not have direct exposure to cryptocurrencies and also details Temasek's approach to due diligence and its risk return framework.

    Whilst noting the impact of the ongoing turmoil, Temasek stresses the transformative potential of blockchain applications and decentralised technologies.

    28. MAS Launch of Ubin

    On 3 November 2022, the MAS announced the launch of Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale central bank digital currency ("CBDC"). While the MAS has assessed that there is no urgent need for a retail CBDC in Singapore at this juncture, it has expressed its hopes of strengthening the nation's capabilities to use digital currency-based infrastructure for cross-border transactions.

    As part of Ubin+, therefore, the following projects will be undertaken with international partners:

    • Foreign Exchange and Liquidity Management: Project Mariana: this is a collaborative initiative that explores the exchange and settlement of Swiss franc, Euro and Singapore dollar wholesale CBDCs with an automated market maker (AMM) arrangement;
    • Interoperability between DLT and non-DLT payment systems: the MAS, together with more than 17 central banks and global commercial banks, will participate in SWIFT’s CBDC Sandbox to explore cross-border interoperability across digital currencies based on DLT and non-DLT payment systems; and
    • Connectivity across heterogenous digital currency networks: the MAS is studying possible mechanisms to maintain connectivity across CBDC and other heterogenous digital currency networks, as well as the use of smart contracts to optimise efficiency and reduce counterparty risks in the settlement of cross-border transactions.
    29. MAS First Industry Pilot for Digital Asset and Decentralised Finance Goes Live

    On 2 November 2022, the MAS announced that the first industry pilot under the MAS' Project Guardian (that explores potential decentralised finance (DeFi) applications in wholesale funding markets) has completed its first live trades. Foreign exchange and government bond transactions against liquidity pools comprising of tokenised Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen (JPY) and Singapore Dollar (SGD) were conducted.

    Notably, a live cross-currency transaction involving tokenised JPY and SGD took place successfully. A simulated exercise involving the buying and selling of tokenised government bonds was also conducted.

    More industry pilots have been launched to test the application of asset tokenisation and DeFi across a broader range of use cases in the financial sector. In particular, the MAS is launching two new industry pilots – one in trade finance and another in wealth management.

    Updates and Guidance: Australia

    30. AISC: Suspension of financial services licence of cryptoassets firm

    On 15 November 2022, the Australian Securities & Investments Commission (ASIC) announced that it had suspended the Australian financial services licence of FTX Australia Pty Ltd until 15 May 2023 after it was placed into voluntary administration on 11 November 2022.

    The statement confirms that FTX Australia can continue to provide limited financial services that relate to the termination of existing derivatives with clients until 19 December 2022. FTX Australia’s licence had permitted it to deal in, make a market for and provide general advice relating to derivatives and foreign exchange contracts to retail and wholesale clients.

    Updates and Guidance: North America

    31. CFTC: Testimony at the United States Senate Committee on Agriculture, Nutrition and Forestry

    On 1 December 2022, the United States Senate Committee on Agriculture, Nutrition and Forestry published the testimony of Rostin Behnam, Chairman Commodity Futures Trading Commission, at a hearing.

    Key points made in the speech include the following:

    • comprehensive regulation of trading platforms is of crucial importance in order to protect the largely retail customer base of speculative digital commodity markets;
    • the current patchwork of federal and state-based regulation is not suitable for comprehensively regulating digital assets;
    • the CFTC does not have direct statutory authority to comprehensively regulate cash digital commodity markets and its jurisdiction is limited to fraud and manipulation enforcement authority;
    • the CFTC has asked Congress for clear authority to impose its traditional regulatory regime over the digital asset commodity market;
    • the CFTC has been supportive of legislative initiatives concerning digital assets that have envisaged a shared responsibility for the SEC (SEC would have oversight for security tokens) and the CFTC (CFTC would apply market based rules to more limited subset of commodity tokens); and
    • platforms should be restrained by conflicts of interest rules and mandatory separation. Adoption of conflicting roles, such as operating an exchange while also trading against customers on that exchange, should be prohibited.
    32. OCC: Acting Comptroller of the Currency, Michael J. Hsu, Remarks at the Financial Literacy and Education Commission’s Public Meeting “Careful and Cautious with Crypto”

    On 17 November 2022, the OCC published a speech given by Acting Comptroller of the Currency, Michael J. Hsu, at the Financial Literacy and Education Commission’s Public Meeting urging consumers to exercise caution in relation to cryptoassets. In the speech, Mr Hsu notes that the rise in cryptoassets has been driven by retail customers and facilitated by a robust online community, adding that community pressure to “holdl,” to “buy the dip,” to “not give in to FUD” can make rational decisions difficult. He comments that the OCC adopted a “careful and cautious” approach to crypto activities by national banks and adds that this helped lessen the risk of contagion from crypto to the banking system.

    33. Senate Committee on Banking, Housing and Urban Affairs: Written testimonies from regulators

    On 17 November 2022, Senate Committee on Banking, Housing and Urban Affairs published the written testimonies of officials at various US regulators for the Committee Hearing "Oversight of Financial Regulators: A Strong Banking and Credit Union System for Main Street".

    • Testimony of Michael J. Hsu, Acting Comptroller, Office of the Comptroller of the Currency: Mr Hsu confirms that the OCC has adjusted its bank information technology examinations in response to technological innovations to include assessments of artificial intelligence and distributed ledger technology. Mr Hsu notes that the OCC has adopted a “careful and cautious” approach to crypto in the federal banking system, citing Interpretive Letter 1179, which calls for supervised entities not to engage in certain crypto activities unless they demonstrate that the activities can be performed in a safe, sound, and fair manner. He adds that in light of ongoing turbulence in the cryptoassets sector, the approach has proven to be prudent one.
    • Testimony of Honorable Michael S Barr, Vice Chair of Supervision, Board of Governors of the Federal Reserve System: Michael S Barr states that the Federal Reserve is working closely with the OCC and the FDIC to assess the risks and opportunities posed by a range of cryptoasset related activities, and to clarify which activities are legally permissible and can be conducted by banks. Mr Barr also states that legislative action on cryptoassets in general, and stablecoins in particular, would help promote responsible innovation and protect the financial system. Mr Barr also refers to the Federal Reserve’s Supervision and Regulation report, which also contains a discussion on cryptoassets sector and the banking system in general.
    • Testimony of Martin J Gruenberg, Acting Chairman of Federal Deposit Insurance Corporation: Mr Gruenberg notes that the FDIC has been monitoring the rising interest in cryptoasset related activity, culminating in a Financial Institution Letter (FIL), issued in April 2022, asking banks supervised by the FDIC to notify it if they are engaging in, or planning to engage in, cryptoasset related activities. He confirms that the FDIC will release case-specific supervisory feedback in due course. Mr Gruenberg also comments that the FDIC has, in the past, issued letters ordering some crypto firms to cease and desist from using misleading statements with regard to deposit insurance. He argues that despite turbulence in the cryptoassets market, DLT may have meaningful applications and public utility.
    34. Warren, Ocasio-Cortez, Lawmakers: Questions concerning "revolving door" between regulatory agencies and crypto industry

    This statement reports that U.S. Senators Elizabeth Warren and Sheldon Whitehouse and U.S. Representatives Alexandria Ocasio-Cortez, Jesús “Chuy” García, and Rashida Tlaib have sent letters to several US regulatory authorities (including the SEC and the CFTC) seeking information about "the revolving door between financial regulatory agencies and the cryptocurrency industry". The statement notes that over 200 government officials have moved between public service and crypto firms in recent years.

    35. Statement by Secretary of the Treasury, Janet L. Yellen on recent crypto market developments

    On 16 November 2022, a statement by Secretary of the Treasury, Janet L. Yellen, in relation to cryptoassets sector was published. The statement calls for more effective oversight of the cryptocurrency markets, adding that the Treasury Department has been working with its regulatory partners to identify risks in cryptoassets. The statement notes that risks identified include comingling of customer assets, lack of transparency, and conflicts of interest. Whilst noting that the spill over from the current turmoil has been limited, the statement warns against complacence, arguing that a recent report by the Financial Stability Oversight Council warned that further interconnections of the traditional financial system and crypto markets could raise broader financial stability concerns.

    36. CFTC: Affiliate withdraws CFTC application to offer disintermediated retail crypto derivatives

    On 14 November 2022, the CFTC confirmed that LedgerXLLC, d/b/a FTX US Derivatives had withdrawn its application with the CFTC to offer clearing of margined crypto derivatives products directly to participants (as opposed to clearing through a futures commission merchant). The request had been originally submitted in December 2021.

    37. Federal Reserve Bank: Report on first phase of US Wholesale Central Bank Digital Currency (wCBDC)

    In November 2022, the Federal Reserve Bank of New York issued a report on the first phase of Project Cedar, a multi-phase research initiative for a theoretical US Wholesale Central Bank Digital Currency (wCBDC) led by the New York Innovation Center (NYIC). The NYIC was established in partnership with the Bank for International Settlements Innovation Hub (BISIH) and looks into central bank-related opportunities through technical research, experimentation, and prototyping, to drive advancements in central banking and enhance the functioning of the global financial system. Project Cedar Phase I involved the simulation of a foreign exchange spot trade and introduced a wholesale central bank digital currency prototype to test whether using blockchain technology could improve speed, cost, and access to cross-border wholesale payments.

    Updates and Guidance: Middle East

    No updates in this month's edition.

    Press/Articles

    38. FT article: Blockchain may have a green future regardless of crypto

    This article in the Financial Times argues that despite the recent turmoil in the cryptoassets sector, the benefits of underlying technology should not be overlooked. The article cites initiatives such as Project Genesis - an initiative involving Goldman Sachs, the Hong Kong Monetary Authority and the Banks of International Settlements - involving the use blockchain and digital tokenisation to assist investors purchasing climate related bonds monitor carbon credits. The article argues that many stakeholders consider initiatives such as Project Genesis as an example of deploying blockchain to solve real world problems and revolutionising capital markets.

    39. FT article: UK high street lenders toughen crypto stance on fraud concerns

    This article in the Financial Times states that UK high street lenders are toughening their stance in relation to cryptocurrencies, adding that a number of taken action to limit customers from purchasing cryptocurrencies and restricting payments to exchanges in some cases.

    40. Guardian China circles El Salvador’s economy as country edges toward crypto plunge

    This article published in the Guardian provides an update on El Salvador and its decision to adopt Bitcoin as legal tender. The article notes that in January 2023, El Salvador will have to pay $688 million as part of a Eurobond amortization and notes that earlier in 2022, President Bukele had suggested that the country would issue bitcoin-denominated bonds to pay off national debts.

    41. Arabian Business: Abu Dhabi launches a crypto and blockchain body

    This article reports that Abu Dhabi has launched a crypto and blockhain association called Middle East, Africa & Asia & Blockchain Association (MEAACBA). The body, a not-for-profit organisation, is supported by the Abu Dhabi Global market (ADGM).

    Contributors: Qiqing Goh and Gréta Muller and Cornelius Hille.

    image

    Stay ahead with our business insights, updates and podcasts

    Sign-up to select your areas of interest

    Sign-up