Legal development

Global Digital Assets Digest: January 2024

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    Welcome to the first Global Digital Assets Digest of the year. In this edition, we have news in relation to the UK Digital Securities Sandbox, with secondary legislation published to implement the regime. There's also the latest minutes from the CBDC Engagement Forum.  In Hong Kong, there are a number of publications from the SFC in relation to the regulation of virtual assets.

    Updates and Guidance: International Bodies

    1.EBA: Consultation paper on two sets of guidelines on internal policies, procedures and controls to ensure the implementation of EU and national restrictive measures

    2. IOSCO: Final Report with policy recommendations for DeFI

    3. SMSG: Advice to ESMA concerning ESMA's second consultation paper on technical standards specifying certain requirements of MiCA

    4. IOSCO: Statement on online harm

    5. BCBS: Consultation on cryptoasset standard amendments

    6. BIS: Report on high-level technical requirements for a functional CBDC architecture

    7. ESAs: Report: Update on the functioning of innovation facilitators – innovation hubs and regulatory sandboxes

    Updates and Guidance: UK

    8. BoE: Minutes: Minutes of the CBDC Technology Forum - October 2023

    9. UK Parliament: Answers to written question: Cryptoasset firms access' to bank accounts

    10. The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023

    Updates and Guidance: Europe

    11. Deutsche Bundesbank: Speech of Burkhard Balz on the project digital euro

    Updates and Guidance: APAC

    12. HKMA & FSTB: Consultation on regulatory regime for stablecoin issuers

    13. SFC & HKMA: Joint circular on virtual asset related activities

    14. SFC: Circular on funds with exposure to virtual assets

    Updates and Guidance: Australia

    15. Australian Transaction Reports and Analysis Centre (AUSTRAC) increases non-registration penalties for digital currency exchanges

    16. Treasury: Crack down on the distribution channels for unlicensed investment schemes

    Updates and Guidance: North America

    17. CFTC: Technology Advisory Committee January 2024 Meeting

    18. CFTC: Report on DeFi by Digital Assets and Blockchain Technology Subcommittee

    19. FDIC: Statement by Vice Chairman Travis Hill on the FDIC Sign and Advertising Final Rule

    20. CFPB: Statement of CFPB Director on the Final Rule to protect the FDIC Name and Logo from bad actors

    21. U.S Treasury: Remarks by Deputy Assistant Secretary for International Financial Markets Nicholas Tabor on Digital Money in Seoul, South Korea

    22. CFTC: Statement of Chairman Rostin Behnam in support of application for registration as a DCO

    23. CFTC: Statement of Commissioner Kristin N. Johnson calling for CFTC rules to address vertical integration

    24. OCC: Annual Report for 2023

    Updates and Guidance: Middle East

    25.UAE: Revisions to Anti-Money Laundering and Sanctions Rules and Guidance

    Press Articles

    None

    Updates and Guidance: International Bodies

    1. EBA: Consultation paper on guidelines on internal policies, procedures and controls to ensure the implementation of EU and national restrictive measures

    On 21 December 2023, the EBA published a consultation paper in relation to two sets of guidelines on internal policies and procedures  to enable PSPs and CASPs to comply with restrictive measures.

    The revised Wire Transfer Regulation applies from 30 December 2024, with article 23 requiring the EBA to set out guidelines on internal policies, procedures and controls to ensure implementation of EU and national restrictive measures when carrying out transfers of funds and cryptoassets under the Recast Wire Transfer Regulation.

    Restrictive measures, which comprise individual measures and sectoral measures, are binding on any person/entity under the jurisdiction of member states.

    The first set of draft guidelines outlines common, regulatory expectations on the role of senior management, internal governance and risk management in relation to restrictive measures under the CRD IV Directive, PSD2 and the 2EMD.

    The second set of draft Guidelines, addressed to PSPs and CASPs, outlines how PSPs and CASPs can comply with restrictive measures when carrying out transfers of funds and cryptoassets (including KYC and due diligence).

    The deadline for comments is 25 March 2024. Both sets of guidelines are expected apply from 30 December 2024.

    2. IOSCO: Final Report with policy recommendations for DeFI

    On 19 December 2023, IOSCO published its final policy recommendations on  DeFi, together with an umbrella note explaining linkages between DeFi recommendations and November 2023 crypto and digital asset recommendations.

    The report contains nine high-level policy recommendations designed to follow a “lifecycle” approach in addressing the key risks. The Recommendations cover six key areas: understanding DeFi arrangements and structures; achieving common standards of regulatory outcomes; identification and management of key risks; clear, accurate and comprehensive disclosures; and enforcement of applicable law; and cross-border cooperation.

    3. SMSG: Advice to ESMA concerning ESMA's second consultation paper on technical standards specifying certain requirements of MiCA

    On 18 December 2023, SMSG published technical advice to ESMA in relation to ESMA's October 2023 consultation paper on technical standards under MiCA. SMSG's advice replies to specific questions raised in the consultation paper, as well as providing more general  commentary.

    Notable points

    • Proportionality: SMSG understands the rationale behind proposals concerning business continuity and considers that balance needs to be achieved between a safe crypto ecosystem and hindering new entrants.
    • Governance: SMSG is supportive of the approach proposed in Article 2 of the draft RTS, including proposed responsibilities of CASP’s management body. There is no need to set up a business continuity function to provide oversight of obligations in the RTS.
    • Measures for permissionless DLTs: SMSG supports the proposed requirement for CASPs to communicate externally with their clients when a service disruption involving a permissionless DLT occurs.
    • White paper: White paper information could include information on the actual use of the funds following the issuance (i.e. not just at the time of the white paper).

    4. IOSCO: Statement on online harm

    On 15 December 2023, IOSCO published a statement on online harm. IOSCO notes that online harm can take various forms and includes online promotion of risky investments, as well as  investment scams involving digital assets. The statement notes that online harm is not tied to particular products or services. Critical threats cited include the global reach of online harm; the rapid expansion of online harm and ease of performing; online promotion and distribution of illegal products and services; enforcement challenges created by online harms; and the sophisticated nature of perpetrators and practices.

    Retail investors are encouraged to review existing ISOCO materials and resources on investor protection, and to be vigilant when carrying out online activities. Action for regulators include carrying out prevention and enforcement activities and robust and effective investor online harm awareness, as well as education preventative initiatives.

    5. BCBS: Consultation: Cryptoasset standard amendments

    On 14 December 2023, BCBS issued a consultation containing targeted changes to its December 2022  standard on banks' exposures to cryptoassets (SCO60). The standard outlines capital requirements applicable banks’ holdings of cryptoassets (including stablecoins), with stablecoins required to meet certain criteria in order be included in the Group 1b category.

    A Group 1b classification usually means that the stablecoin exposures will be subject to the requirements of the existing capital framework. The consultation focuses on two key aspects concerning whether a stablecoin makes it into Group 1b: the appropriate composition of a stablecoin’s reserve assets; and  whether there are statistical tests that can be used to reliably identify low-risk stablecoins.

    The proposals provide further information in relation to: the makeup of reserve assets backing stablecoins. Proposed amendments include: requiring banks to carry out due diligence (to involve statistical/other tests demonstrating that the cryptoasset maintains a stable relationship in comparison to a reference asset) to ensure adequate understanding of the stabilisation mechanism and its effectiveness.

    Annex 1 to the consultation contains technical amendments to the standard covering: stabilisation mechanism effectiveness; settlement finality; and group 2a hedging criteria.

    Following a review into whether permissionless blockchains should be included in Group 1, the BCBS confirms that it will not be proposing to allow cryptoassets that use permissionless blockchains in Group 1.

    6. BIS: Report on high-level technical requirements for a functional CBDC architecture

    On 12 December 2023, the Consultative Group on Innovation and the Digital Economy (CGIDE), a body set up to enhance greater cooperation in technological innovation and the digital economy in the Americas, published a report containing high-level technical requirements for a retail CBDC architecture. It is intended to serve as reference material for stakeholders and does not serve as  policy position of CGIDE members. The high level technical requirements are split into five categories: cyber resilience requirements; modular design; core functions; operational requirements; cyber resilience requirements; and requirements related to third party services. The first stage of the project focuses on clearing and settlement considerations. The second stage of the project, which is planned for Q2 2024, will look at in interoperability, cross-border payment functionalities, risk management and business continuity issues.

    7. ESAs: Report: Update on the functioning of innovation facilitators – innovation hubs and regulatory sandboxes

    On 11 December 2023, the ESAs published a report on the functioning of innovation facilitators i.e. innovations hubs and regulatory sandboxes. This forms part of the 2023 work programme for the ESAs, which includes contributing to the European Forum for Innovation Facilitators (EFIF), an initiative chaired by the ESAs under the framework of the Joint Committee of the ESAs.

    The report follows a 2019 report and provides an update of the design and operation of innovation facilitators, as well as challenges. The report notes that as of October 2023, there were 41 innovation hubs and 14 regulatory sandboxes. The report states that EEA countries innovation hubs are widespread across the EEA, while regulatory sandboxes are active in only a limited number of countries.

    The report presents a number of recommendations to NCAs, the ESAs and the European Commission in order to improve the role and  efficiency of innovation facilitators.

    Recommendations for NCAs include the following: enhance the understanding of the concerns/ interests of participating firms; and widen broaden the scope of innovations captured, including at the cross-sectoral level.

    Updates and Guidance: UK

    8. BoE: Minutes of the CBDC Technology Forum - October 2023

    On 4 January 2024, the minutes of CBDC Technology Forum, held in October 2023, were published.

    Points to note

    • A summary of responses to Consultation Paper on the digital pound (see our briefing here), as well as feedback on the Bank’s Technology Working Paper on the digital pound is planned for publication in the near future.
    • Temporary subgroups of Members have been created to look further into the design options for the digital pound architecture.
    • The BoE has set up a hypothetical transaction privacy model, a model intended to serve as a guide to discussions but not representing policy decisions for the digital pound. This was achieved using publicly available information.

    9. UK Parliament: Answers to written question: Cryptoasset firms access' to bank accounts

    On 21 December 2023, the UK Parliament website published responses of Baroness Vere of Norbiton  to questions posed in relation to crypto firms' access to UK bank accounts. 

    Ms Norbiton notes that the FCA’s interim report on  (UK Payment Accounts: Access and Closures) outlined areas the Government would be looking into further. She also confirms that the Government acknowledges concerns regarding how banks’ decisions affect access to accounts and consumer payments to cryptoasset firms, but cautions against government intervention in the commercial decisions of banks.

    10. The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023

    On 18 December 2023, the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 (SI 2023/1398) were published. The Regulations introduce the first Financial Market Infrastructure sandbox, the Digital Securities Sandbox (DSS). Sections 13 to 17 of, and Schedule 4 to FSMA 2023 (see our briefing here), give HM Treasury the power to create Financial Market Infrastructure sandboxes through Statutory Instruments.  The Regulations follow a July 2023 consultation and a November 2023 consultation outcome.

    The Regulations outline a framework for the regulators to operate the DSS. Areas covered by the Regulations include the following:

    • the activities and financial instruments in scope (as well as the relevant regulator for these activities);
    • eligibility criteria to apply to participate in the Sandbox and to become a Sandbox Entrant; and
    • relevant legislation being modified, disapplied or applied to new entities in the DSS.

    The legislation being temporarily applied, modified and disapplied within the DSS will be UK financial services legislation, including FSMA 2000, Companies Act 2006, the Uncertificated Securities Regulations 2001, and the UK Central Securities Depositories Regulation 2014.

    The deadline for comments is 28 March 2024.

    For more on the DSS and the Regulations, please see our briefing here.

    Updates and Guidance: Europe

    11. Deutsche Bundesbank: Speech of Burkhard Balz on the project digital euro

    On 29 December 2023, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank) delivered a speech on the digital euro at an event organised by the the Hannover Stock Exchange.

    According to Balz, the digital euro is an important step in order to adapt the euro to the future. The idea is to create a sort of "digital cash", so that citizens would be able to pay anytime, anywhere and in all payment situations using one method - the digital euro. Balz emphasized that the privacy of the citizens deserves great consideration and therefore, when making payments, the identity of the users would remain hidden. For this purpose, the developers are currently working on the technical infrastructure, in order to find out whether it is already possible to offer a token-based infrastructure at the front-end without taking excessive technological risks. Regarding the introduction of the digital euro, a phased approach is planned, beginning with the first version which would support person-to-person (P2P) and online payments. This will be followed by the expansion stage, enabling citizens to use the digital euro at the checkout-counter and in payment transactions with public cash registers. The drafting of the Digital Euro Scheme Rulebook started on 1 November 2023, representing the completion of the joint efforts to draft a set of rules for the digital euro.

    Updates and Guidance: APAC

    12. HKMA & FSTB: Consultation on regulatory regime for stablecoin issuers

    On 27 December 2023, the Financial Services and the Treasury Bureau (FSTB) and the HKMA jointly issued a public consultation paper on the proposed regulatory regime for issuers of fiat-referenced stablecoin (FRS).  The legislative proposal has taken into account the feedback received in response to the "Discussion Paper on Crypto-assets and Stablecoins" published by the HKMA on 12 January 2022, and includes the following features:

    • introducing a new piece of legislation to implement a licensing regime requiring FRS issuers who issue, or actively market their issuance of, a Hong Kong dollar-referenced stablecoin in Hong Kong to be licensed by the HKMA;
    • requiring that FRS can only be offered by specified licensed entities (i.e. licensed FRS issuers, authorised institutions, licensed corporations and licensed virtual asset trading platforms), and only FRS licensed by the HKMA can be offered to retail investors;
    • prohibiting the advertising of:

    (i)  FRS issuance by unlicensed entities; or
    (ii)  non-specified licensed entities' offering of FRS.

    • providing the necessary powers for the authorities to adjust the parameters of in-scope stablecoins and activities having regard to the rapid VA market development; and 
    • providing a transitional arrangement to facilitate the implementation of the regulatory regime.

    The consultation period ends on 29 February 2024.  To facilitate the communication of supervisory expectations and obtaining feedback on the proposed regulatory requirements, the HKMA will introduce a sandbox arrangement for entities having a genuine interest in and a reasonable plan on issuing FRS in Hong Kong.  According to the HKMA press release, relevant details of the sandbox arrangement will be announced separately.

    13. SFC & HKMA: Joint circular on virtual asset related activities

    On 22 December 2023, the SFC and the HKMA issued a joint circular on intermediaries engaging in virtual asset (VA) related activities.  This joint circular supersedes the previous one issued on 20 October 2023, with updated requirements focusing on the distribution of virtual asset funds (VA funds).  The SFC has indicated in the circular that they are open to accept applications for the authorisation of VA funds other than VA futures exchange-trading funds, including VA spot exchange-traded funds.  Pursuant to the updated circular, VA funds authorised by the SFC for public offering will not be subject to the "professional investors only" restriction.  Intermediaries are also exempted from the suitability requirement, or the minimum information and warning statements requirements for VA funds traded on the SEHK without solicitation or recommendation (exemption not available for VA funds traded off-exchange).  In any event, intermediaries should still conduct a virtual asset-knowledge test prior to effecting the transaction for the client.

    14. SFC: Circular on funds with exposure to virtual assets

    On 22 December 2023, the SFC issued a circular regarding the authorisation requirements for investment funds with exposure to VAs (i.e. funds that has over 10% direct/indirect exposure of their net asset value to VAs) (SFC-authorised VA Funds) for public offerings in Hong Kong.  This circular updates and supersedes the previous Circular on Virtual Asset Futures Exchange Traded Funds issued on 31 October 2022, reflecting the evolving landscape of VAs and their increasing popularity among both retail and professional investors in Hong Kong.  The updated circular cover areas including: (i) eligible underlying VAs, (ii) investment strategy, (iii) transactions of spot VAs, (iv) custody arrangements, (v) valuation approach, (vi) service providers, and (vii) disclosure and investor education. 

    For the distribution of SFC-authorised VA Funds, the circular refers to the joint circular on intermediaries’ virtual asset-related activities, subject to any additional requirements or conditions imposed by the SFC as necessary.  Funds intending to have VA exposure of more than 10% of their net asset value must consult with and obtain approval from the SFC.

    Updates and Guidance: Australia

    15. Australian Transaction Reports and Analysis Centre (AUSTRAC) increases non-registration penalties for digital currency exchanges 

    As of 9 November 2023, legislative amendments have been implemented which increase penalties for businesses providing "designated services" (as defined by AUSTRAC) that fail to enrol under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). This will impact crypto exchanges and other digital currency exchanges which were deemed as providing 'designated services', thus requiring registration with AUSTRAC. "Designated services" include a range of business activities, including activities in the digital currency exchange sector, and are defined in section 6 of the AML/CTF Act.

    If a business has provided a designated service for at least 28 days but has failed to enrol with AUSTRAC, it faces penalties which accrue daily and continue to accrue until enrolment or the provision of designated services ceases. Under these new amendments, the penalties for not registering have increased to $313 per penalty unit, with some civil penalty orders being up to 20,000 units for an individual or 100,000 units for a body corporate.

    16. Treasury: Crack down on the distribution channels for unlicensed investment schemes

    Assistant Treasurer Stephen Jones has indicated that the Australian government intends to crack down on the distribution channels for unlicensed investment schemes, with consultation underway on a new code of conduct for social media companies, telecommunication companies and banks concerning their obligations to address these schemes. Alongside ASIC, the Treasury has taken down 3000 websites in the past 4 months, half of which were fake investment opportunities (as opposed to simply being unlicensed). Recently, the Treasury has also been investigating why a consumer warning against "Hyperverse" (a crypto investment scheme that saw widespread losses to consumers globally by selling ultimately worthless investment products) was not issued in Australia, despite consumer warnings being issued in relation to its investment products in multiple jurisdictions including the UK, New Zealand, Canada, Germany, and Hungary as early as 2021. 

    Updates and Guidance: North America

    17. CFTC: Technology Advisory Committee January 2024 Meeting

    On 8 January 2024, the CFTC's Technology Advisory Committee held a meeting. Areas covered in the meeting include issues relating to digital assets and blockchain technology. At the meeting Carole House and Dan Awrey, co-chairs of the Subcommittee on Digital Assets and Blockchain Technology, presented the Subcommittee���s draft report on DeFi.  The CFTC later issued a statement by Commissioner Christy Goldsmith Romero in relation to the report.

    18. CFTC: Report on DeFi by Digital Assets and Blockchain Technology Subcommittee

    On 8 January 2024, the CFTC's Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee issued a report on DeFi. The report calls for effective engagement between government and industry, across regulatory and other strategic initiatives, to respond adequately to the emergence of DeFi.

    Recommendations contained in the report include the following: survey the existing regulator perimeter to determine whether DeFi products and services are within the U.S. financial regulatory perimeter and to decide if the regulatory perimeter needs to be expanded; and identify and evaluate the range of potential policy responses to address risks.

    19. FDIC: Statement by Vice Chairman Travis Hill on the FDIC Sign and Advertising Final Rule

    On 20 December 2023, the FDIC published a statement by Vice Chairman, Travis Hill, in respect of the Final Rule to amend the FDIC’s regulations on use of the official FDIC sign and insured depository institutions’ advertising statements. The FDIC has indicated that the rule is in part a response to instances of misuse of the FDIC’s name or logo/false or misleading representations about deposit insurance. The FDIC states that the rule complements the "Know your Risk. Protect your Money." public awareness campaign.

    Mr Hill confirms that he will be voting in favour of the rule but notes that the FDIC has decided not to include a proposed definition of cryptoassets in the final rule, and that the FDIC indicated that the Final Rule does not indicate whether a financial product using blockchain–related technology falls within the statutory definition of a "deposit" under the FDI Act. Mr Hill stresses the importance of progress being made in relation to confirming the circumstances that tokenised deposits, dollar tokens, and other similar products should be treated and reported as "deposits".

    20. CFPB: Statement of CFPB Director on the Final Rule to protect the FDIC name and logo from bad actors

    On 20 December 2023, the Consumer Financial Protection Bureau published a statement made by CFPB Director, Rohit Chopra, on the FDIC Final Rule to update the framework concerning official FDIC signs and advertising requirements. The statement emphasises the importance of the role of consumer protection agencies in preventing unfair, deceptive, or abusive acts or practices. Mr Chopra refers to 2022 guidance on the consequences of the misuse of FDIC logo/false advertising.

    21. U.S Treasury: Remarks by Deputy Assistant Secretary for International Financial Markets Nicholas Tabor on Digital Money in Seoul, South Korea

    On 20 December 2023, the US Treasury published remarks by Deputy Assistant Secretary for International Financial Markets Nicholas Tabor on the future of money. The speech looks at cross-border payments, noting that there is "no clean slate" in payments and that challenges persist despite changes to payments architecture. Mr Tabor notes that  some progress has been made since the publication of the G20 Roadmap on Cross-Border payments and that work needs to focus on identifying and dealing with frictions.

    Key points

    • The most important payments innovations are never solely, or even primarily, technological.
    • Cross-border payments touch on a wide range of domestic and international policy issues, such as  banking regulation, transparency and privacy, national security, economic and financial inclusion. It needs engagement and collaboration between a wide set of public and private actors.  The work of the US Treasury, Biden Administration complements that of the Federal Reserve.
    • The US Treasury has a working group on the future of money and payments, looking at the impact of new payment technologies on wider US policy objectives. 
    • Principles for Financial Market Infrastructures  can reduce risks and reduce frictions between new and legacy systems.

    22. CFTC: Statement of Chairman Rostin Behnam in support of application for registration as a DCO  

    On 18 December 2023, the CFTC published a statement by Chairman, Rostin Behnam, in support of an application for the registration of a derivatives clearing organization (DCO). Mr Behnam comments that vertically integrated DCOs are not new to the CFTC, with many being approved in the past. The statement confirms that Mr Benham is satisfied with steps adopted.

    23. CFTC: Statement of Commissioner Kristin N. Johnson calling for CFTC rules to address vertical integration

    On 18 December 2023, the CFTC published a statement by CFTC Commissioner, Kristin N. Johnson, calling for the CFTC to begin formal rulemaking to address vertical integration. Ms Johnson notes the conflict of interest and financial stability concerns that arise from market structures characterised by a single parent company operating with an affiliated market-maker, exchange, and clearinghouse. The statement cites several examples where Ms Johnson has discussed the issue of vertical integration, and also refers to the 2022 Financial Stability Oversight Council call to action requesting regulatory agencies to review the impact of vertical integration. Ms Johnson argues that risk management, disclosure and transparency are among the critical issues arising in vertically integrated market structures. The statement argues for the CFTC to consider additional rules containing expectations on the policies and procedures for vertically integrated structures to have in place to enable compliance with CFTC conflicts of interest regulations.

    24. OCC: Annual Report for 2023

    On 11 December 2023, the OCC issued its Annual Report for 2023. This outlines the OCC's strategic priorities and initiatives (among other things), as well as the condition of the federal banking system. The report highlights the OCC’s work to advance its four priorities, including adapting to digitalisation. The report refers to the 2022 FSOC Report on Digital Asset Financial Stability Risks and Regulation, as well as the joint statements put out by federal banking agencies in relation to the digital assets sector. The report also refers to the Office of Financial Technology, which has been set up to ensure that the OCC stays abreast of developments and can engage and collaborate effectively with relevant stakeholders.

    Updates and Guidance: Middle East

    25. UAE: Revisions to Anti-Money Laundering and Sanctions Rules and Guidance

    On 21 December 2023, the Financial Services Regulatory Authority (FSRA) confirmed changes were made to its Anti-Money Laundering and Sanctions Rules and Guidance. Changes have been made to provisions concerning wire transfers in order to reflect that the FATF's Travel Rule applies to virtual assets.

    Press/Articles

    None

    Contributors: Tobias Bauerfeind, Senior Associate; Julian Pipolo, Senior Associate; Cornelius Hille, Associate; Daphne Chung, Associate; Gréta Müller, Junior Associate; Elizabeth Sheridan, Referendar; Ankita Rao, Trainee; Oscar Tsoi, Trainee.

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