Global Digital Assets Digest: November 2023

Welcome to this bumper edition of the Global Digital Assets Digest. In Australia, we have news of the proposed regulatory framework for cryptoassets. In the UK, regulators have been very busy, issuing a number of documents in relation to the UK regulatory framework for cryptoassets. We also have the minutes of the latest CBDC Engagement Forum, as well as a landmark speech by Bank of England official.

In the US, we have a number of key speeches from officials. In Hong Kong, HKMA and the SFC have updated guidance for intermediaries wishing to engage in virtual asset-related activities. In Germany, there are a number of important communications in respect of the digital euro.

International regulators have issued further material in relation to cross-border payments, including the eagerly awaited CPMI final report on harmonised ISO 20022 data requirements. In the EU, further communications and consultations from the EBA and ESMA in relation to MiCA. 

Updates and Guidance: International Bodies

1. ECB: Blog: Extending the benefits of digital technologies to cross-border payments

2. CPMI: Report: Considerations for the use of stablecoin arrangements in cross-border payments

3. Joint EU-UK Financial Regulatory Forum: Joint Statement, October 2023

4. EBA/ESMA: Consultation paper on two sets of  joint guidelines on suitability assessments under MiCA

5. EBA consultations on draft technical standards under MiCA concerning government arrangements and white papers for ART issuers

6. CPMI: Interim report to G20: Linking fast payment systems across borders: considerations for governance and oversight

7. CPMI: Final report: Harmonised ISO 20022 data requirements for enhancing cross-border payments

8. BCBS: Consultation paper: Disclosure of cryptoassets exposures

9. ECB: Occasional paper: The future of DAOs in finance

10. EDPS/EDPB: Joint Opinion on the Digital Euro

11. ESMA: Statement: Timeline for MiCA and preparation for the transition

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Updates and Guidance: UK

12. BoE: Discussion paper: Regulatory regime for systemic payment systems using stablecoins and related service providers

13. FCA Discussion paper: Regulating cryptoassets Phase 1: Stablecoins (DP 23/4)

14. PRA: Dear CEO Letter: Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins

15. Economic Crime and Transparency Act 2023

16. FCA: Finalised non-handbook guidance on cryptoasser financial promotions (FG 23/3)

17. FCA: Statement: FCA joins forces with global regulators to foster digital innovation with Project Guardian

18. BoE: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation: ISO 20022: Reaping the benefits for the payments ecosystem

19. HM Treasury: Joint Statement: US - UK Financial Innovation Partnership Meeting

20. HM Treasury: Consultation outcome on Future financial services regulatory regime for cryptoassets

21. HM Treasury: Consultation outcome: Managing the failure of systemic digital settlement assets

22. HM Treasury: Policy paper: Update on Plans for the Regulation of Fiat-backed Stablecoins 

23. BoE: Speech by Jon Cunliffe, Deputy Governor, Financial Stability: Money and payments: a "black ships" moment 

24. FCA: Webpage: Cryptoasset registration: information for applicant

25. FCA: Statement warning about common issues with crypto marketing

26. BoE: Minutes of the CBDC Engagement Forum - September 2023

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Updates and Guidance: Europe

27. Speech of Joachim Nagel on prosperity through digital progress

28. Interview with Burkhard Balz on the digital euro

29. German Banking Industry Committee on the ECB's decision for starting the preparatory phase of the digital euro

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Updates and Guidance: APAC

30. HKMA: CBDC Expert Group

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

32. HKMA: e-HKD Phase 1 Report

33. SFC: Circulars on tokenisation of SFC-authorised investment products and intermediaries engaging in tokenised securities-related activities

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Updates and Guidance: Australia

34. Australian Government: New regulatory framework for digital asset platforms 

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Updates and Guidance: North America

35. Consumer Financial Protection Bureau: Federal oversight for digital wallet providers

36. SEC Division of Examination: 2024 Priorities

37. Federal Reserve: Opening remarks by Vice Chair for Supervision Michael S. Barr at the Economics of Payments XII Conference

38. FinCEN: New Regulation to Enhance Transparency in Convertible Virtual Currency Mixing

39. Federal Reserve:  Speech by Governor Michelle W. Bowman "Responsible Innovation in Money and Payments"

40. US Treasury: Remarks by Under Secretary for International Affairs Jay Shambaugh on new technologies and cross-border payments

41. California: New virtual currency laws signed by Governor Gavin Newsom

42. CFTC: Keynote Address of Chairman Rostin Behnam at the Futures Industry Association Expo 2023, Chicago, Illinois

43. CFTC: Statement of Commissioner Kristin N. Johnson regarding CFTC charges against co-founder and CEO of three crypto firms

44. Federal Trade Commission: Settlement reached with crypto company

45. SEC: "Partners of Honest Business and Prosecutors of Dishonesty”: Remarks by Gary Gensler Before the 2023 Securities Enforcement Forum

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Updates and Guidance: Middle East

None

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Press/Articles

None

Updates and Guidance: International Bodies

1. ECB: Blog: Extending the benefits of digital technologies to cross-border payments

The ECB has published a blog on the benefits of digital technologies to cross-border payments. 

Key points

• Many of the G20 targets on costs, speed, access and transparency have already been met in the euro area. The TARGET Instant Payment Settlement (TIPS) is a 24/7 settlement mechanism for instant payments and can serve as model outside of the EU.
• Many financial institutions are forced to grapple with differing legal and supervisory frameworks, regulations and central bank policies in relation to cross-border payments
• The G20 Roadmap for Enhancing Cross-Border Payments plays a key role in encouraging the cooperation and alignment of policy interests that is needed in relation to improving cross border payments.

2. CPMI: Report: Considerations for the use of stablecoin arrangements in cross-border payments 

On 31 October 2023, the CPMI issued a report in exploring the considerations and challenges concerning stablecoin arrangements in cross border payments. The focus of the report is on stablecoins denominated in single fiat currency, or pegged to one. It explores two key aspects in relation to stablecoins: the denomination of the stablecoin used in stablecoin arrangements or peg currency; and the on-and off ramps between stablecoin and the existing financial system.

Block 18 of the G20 Cross Border Payments Roadmap focuses on promoting the soundness of global stablecoin arrangements for cross border payments. CPMI argues that only a stablecoin meeting the minimum regulatory standards set out by standard setting bodies would be a viable payment option for enhancing cross-border payments. It notes that the use of hew types of payment infrastructure for cross border payments  (e.g. privately issued stablecoins) require more changes than other areas of the Cross Border Payments Programme.  The report concludes that benefits and drawbacks of stablecoins depend on design options and assumptions, and will differ across jurisdictions.

The CPMI advises the report to be read in the wider context of new technologies to support the Cross Border Payments Roadmap.

3. Joint EU-UK Financial Regulatory Forum: Joint Statement, October 2023

On 23 October 2023, the Joint Statement of the EU Joint EU-UK Financial Regulatory Forum in respect of its first meeting was published. In the meeting, participants discussed organisational aspects and practical arrangements for future regulatory cooperation under an MoU. The meeting also featured digital finance updates from the UK and EU in respect of developments on cryptoassets, stablecoins and respective legal and regulatory frameworks in relation to the digital pound and digital euro.

4. EBA/ESMA: Consultation paper on two sets of joint guidelines on suitability assessments under MiCA

On 20 October 2023, the EBA and ESMA issued a consultation paper in respect of two sets of joint guidelines issued pursuant to requirements under  Articles 42 and Article 84 of MiCA. This relates to  requirements in relation to the acquisition of direct/indirect qualifying holdings in an authorised issuer of ARTs or in an authorised CASP. 

The first set of guidelines relate to the suitability assessment of the members of the management body: These contain common criteria to assess the appropriate knowledge, skills and experience of members of the management body, as well as their good repute, honesty and integrity; and

The second set of guidelines on the suitability assessment of shareholders and members with qualifying holdings in issuers of ARTs or of CASPs. These outline a common methodology for  competent authorities to assess the suitability of shareholders and members with direct or indirect qualifying holdings for purposes of granting authorisation as issuers of ARTs or as CASPs.

The deadline for consultation is  22 January 2024.

5. EBA consultations on draft technical standards under MiCA concerning government arrangements and white papers for issuers

On 20 October 2023, the EBA issued a number of consultations under MiCA:

• RTS on approval of white papers for asset-reference tokens issued by credit institutions. These seek to harmonise the approval procedure in the EU by setting out steps and timeframes to be followed by credit institutions and by the relevant competent authority. Elements include: the application for approval of a white paper; the acknowledgment of receipt and processing of an application by the competent authority;  the assessment of completeness of a white paper; and the approval of the white paper.

• RTS on governance arrangements of the remuneration policy. These aim to ensure remuneration policies of issuers of significant ARTs and of significant EMTs promote sound and effective risk management.
• Draft Guidelines on internal governance arrangement for issuers of ARTs. These guidelines contain governance provisions relevant for issuers that aim to ensure management of risks associated with the activities of issuers of ARTs (such as operational risks, including fraud, cyber and compliance risks).

For more on MiCA, please see our briefing here. 

6. CPMI: Interim report to G20: Linking fast payment systems across borders: considerations for governance and oversight

On 18 October 2023, the CPMI issued a consultative report on governance and oversight for interlinking arrangements in respect of fast payment systems. This builds on an October 2022 CPMI report setting out how interlinking arrangements for payment systems could enhance cross-border payments. The report does not contain draft guidance or best practice, and it is not intended to be viewed as a preliminary framework.

The report contains 10 considerations in the following areas: initial structural conditions conducive for effective governance; specific governance design considerations and priorities considered important for FPS interlinking arrangements; and implications for design and conduct oversight in different jurisdictions.

7. CPMI: Final report: Harmonised ISO 20022 data requirements for enhancing cross-border payments 

On 17 October 2023, the CPMI published the final report in respect of harmonised ISO 20022 data requirements. These contain messaging standards to improve efficiency in the processing of cross-border payments. Fragmentation and mixed use of payment messaging standards are viewed as a major friction in cross-border payments, with harmonised ISO 20022 data requirements a deliverable in 2023 under the Cross-Border Payments Programme.  

The requirements apply to interbank payments, clearing and settlement messages, but are also relevant for the end-to-end cross-border payment chain. The requirements are the result of discussions within a joint task force of CPMI and industry ISO 20022 experts.

The report looks at the objectives of the harmonisation requirements, guiding principles shaping discussions of the joint taskforce; key aspects of the requirements (the core message set, general requirements and the data model); and an implementation plan for the requirements. 

The report encourages market participants to begin work on alignment of their ISO 20022 usage guidelines with the harmonisation requirements laid out in the report by end-2027 at the latest. 

On the same day, the ECB issued a statement in respect of the ISO 20022 report confirming plans for full alignment of TARGET Services with the harmonised ISO 20022 data requirements by the end of 2027 at the latest.

The BoE also issued a statement welcoming the ISO 20022 report on data requirements for cross-border payments. It confirmed plans to align the CHAPS ISO 20022 message usage guidelines with the CPMI ISO 20022 data requirements by end-2025, ahead of the end-2027 timeline. It also encouraged other market infrastructures involved in cross-border payments to also align with the requirements. 

8. BCBS: Consultation paper: Disclosure of cryptoassets exposures

On 17 October 2023, the BCBS issued a paper on the disclosure of cryptoasset exposures. This follows publication of finalised guidance on cryptoasset exposures (see Ashurst briefing here). Paragraph CO60.128 to SCO60.130 of the Basel Framework sets out the disclosure requirements applicable to banks' exposures to cryptoassets.

The consultation paper included a proposed new chapter of the Basel Framework: DIS55 Cryptoasset exposures. This consists of a standardised disclosure table and a set of templates for banks' cryptoasset exposures:

• Template CAE1: Cryptoasset exposures and capital requirements.
• Template CAE2: Accounting classification of exposures to cryptoassets and cryptoliabilities.
• Template CAE3: Liquidity requirements for exposures to cryptoassets and cryptoliabilities.

The BCBS explains that DIS55 will be subject to requirements in chapter DIS10 (e.g. scope of application; reporting location and frequency and timing of disclosures). 

The deadline for comments is 31 January 2024.

9. ECB: Occasional paper: The future of DAOs in finance 

On 17 October 2023, the ECB published a paper on the future of DAOs in finance. This paper looks at the rise of decentralised finance, noting many DeFI projects are built in the form of a DAO. The paper notes the absence of a legal and regulatory framework for DAO, despite the increase in numbers of DAO and tendency to undertake similar functions to regulated financial institutions/market infrastructures. Areas covered in the paper include: use cases of DAOs; benefits and drawbacks of DAO structure; potential applicable regulatory frameworks; and technological developments. The paper argues that regulatory initiatives such as MiCA may lead to a review of legal status, governance and operational models in respect of DAOs.

10. EDPS/EDPB: Joint Opinion on the Digital Euro

On 17 October 2023, the EDPS/EDPB issued a joint opinion in respect of the digital euro. This follows a request from the European Commission and the publication of a legislative package in respect of the digital euro earlier in 2023 (see our briefing here).

Notable points

• Tasks related to user management, transaction management and liquidity management should be as decentralised as possible. The suggestion that the digital euro will be distributed via regulated financial intermediaries rather than the Eurosystem is therefore to be welcomed.
• More clarification is needed in relation to the single access point of digital euro identifiers.
• A binding obligation should be introduced to ensure the "pseudonymisation" of all transaction data between the ECB and the national central banks (under the proposal, the ECB is to provide and manage the settlement infrastructure).
• There is a need to ensure a high level of privacy for low value online digital euro transactions, as well as offline digital euro payments. A privacy threshold for low value online digital payment transactions would thus be welcome.
• The EDPB and the EDPS welcome the requirement for the ECB to consult the EDPS before the adoption of measures and standards that have data protection implications.

11. ESMA: Statement: Timeline for MiCA and preparation for the transition 

On 17 October 2023, ESMA issued a statement in relation to the MiCA implementation timeline. The statement confirms work underway by ESMA and NCAs to promote supervisory convergence, common principles and best practices. 

Key points

• Rules on the provision of cryptoasset services will not enter into application until December 2024. The holders of cryptoassets and clients of cryptoasset service providers may not benefit from full rights and protections under MiCA until as late as 1 July 2026.
• To address the challenges posed by global crypto firms, ESMA and its members are undertaking a number of actions ahead of MiCA's application. This includes: encouraging convergence in application of MiCA's rules as early as possible; and consulting with the European Commission in respect of a common understanding on MiCA provisions. ESMA's expectations of NCAs include: sharing information on authorisation demands, especially concerning global crypto firms with complex and opaque group structures; preventing letter box entities being set up in the EU; and adopting appropriate enforcement action.
• Market participants should make adequate preparations to reduce the risk of disruptive business model adjustments. Work in this regard by entities in scope would involve informing NCAs and their clients of transition plans as early as possible; informing clients about the regulatory status of the cryptoassets and/or services they are offering; and aligning practices with MiCA. 

On the same day, ESMA published its letter addressed to Nadia Calviño, President of the Economic and Financial Affairs Council, focusing on designation of NCAs and the grandfathering clause under MiCA in respect of provision of cryptoasset services.

Updates and Guidance: UK

12. BoE: Discussion paper: Regulatory regime for systemic payment systems using stablecoins and related service providers 

On 6 November 2023, the BoE published a discussion paper on the regulatory regime for sterling-denominated stablecoins used in systemic payment systems. 

FSMA 2023 expands the BoE's powers over payment systems in Part 5 of the Banking Act 2009 to include payment systems using digital settlement assets (a category that includes stablecoins). The new regime applies to DSA payment systems (which facilitate or control the transfer of the digital settlement asset) and DSA service providers (including DSA issuers and custodians) recognised by HMT as being systemically important.

The discussion paper argues that stablecoins hold risks both as a form of money/money-like instrument, and in their use as a means of payment in systemic payment systems. The discussion paper follows a 2022 discussion paper (see our briefing here).

The proposed regime follows the principle of "same risk, same regulatory outcome" and is based on  international standards such as the Principles for Financial Market Infrastructures. Key proposals include: a requirement for issuers to fully back stablecoins with deposits at the BoE; and a requirement for wallet providers to ensure that coinholders’ legal rights and ability to redeem the stablecoins at par in fiat are protected at all times.

For more information, please see Ashurst briefing here.

13. FCA Discussion paper: Regulating cryptoassets Phase 1: Stablecoins (DP 23/4) 

On 6 November 2023, the FCA published a discussion paper in relation to regulating cryptoassets. This follows the publication of the Government's response to its February 2023 consultation paper on the regulation of cryptoassets. This confirmed that the Government is introducing cryptoasset regulation in phases, with the initial phase focusing on the use of fiat-backed stablecoins as a means of payment. 

The discussion papers sets out plans for the FCA to regulate the issuance and custody of fiat-backed stablecoins under FSMA, and the use of these stablecoins as a means of payment under the PSRs.

Requirements the FCA intends to impose include: custody and organisational requirements; conduct of business requirements; and prudential requirements (details to be contained in a new sourcebook (CRYPTOPRU). The discussion paper also provides further information in relation to  the proposed regime to govern fiat-backed stablecoins issued outside of the UK used for payments in the UK, which would involve an assessment by FCA-authorised firm ("payment arranger") against a set of standards.

The deadline for comments is 6 February 2024. The FCA will consider the feedback received to decide our next steps. 

The FCA, BoE and PRA also published a cross-authority roadmap paper on innovation in payments and money, which explains how UK authorities’ current and proposed regulatory regimes for issuers of different forms of digital money or money-like instruments will interact.

14. PRA: Dear CEO Letter: Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins

On 6 November 2023, the PRA published a Dear CEO letter from David Bailey, Nathanaël Benjamin and Vicky Saporta on innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins.

The letter is in response to regulator concerns about the potential risk of confusion if deposit taking entities offer e-money or regulated stablecoins under the same branding as their deposits. Points made in the letter in relation to minimising the risk of contagion include the following:

• deposit-taking entities should only provide innovations in digital money to retail customers in the form of deposits; and
• innovations in deposits undertaken by deposit takers  e.g. "tokenised" deposits should meet PRA’s rules for eligibility for depositor protection under the FSCS, and deposit-takers must also ensure they meet the single customer view and exclusions view requirements in relation to these deposits.

15. Economic Crime and Transparency Act 2023

The Economic Crime and Corporate Transparency Act 2023 has been published following Royal Assent. The legislation, which was first introduced in September 2022 (see briefing here for background) is wide ranging, covering a number of areas (see briefing here). Part 4 of the Act includes amendments to the Proceeds of Crime Act 2002 to make provision for a civil recovery regime in relation to cryptoassets.

For more information, please see Ashurst briefing here.

16. FCA: Finalised non-handbook guidance on cryptoasser financial promotions (FG 23/3)

On 2 November 2023, the FCA published finalised non-handbook guidance on cryptoasset financial promotions. This was first published in June 2023 (see our briefing here) alongside the FCA's Policy Statement on final rules in relation to cryptoasset financial promotions (PS23/6). The guidance does not create new obligations, but sets out how firms can ensure that financial promotions in respect of qualifying cryptoassets comply with FCA rules and are fair, clear and not misleading.

17. FCA: Statement: FCA joins forces with global regulators to foster digital innovation with Project Guardian 

On 31 October 2023, the FCA issued a press release about Project Guardian, an initiative involving the Monetary Authority of Singapore (MAS); the Financial Services Agency of Japan (FSA); and the Swiss Financial Market Supervisory Authority (FINMA). Areas under Project Guardian include: advancing discussions on legal policy and accounting treatment of digital assets; identifying potential risks and possible gaps in existing policies and legislation relevant to tokenised solutions; and exploring the common standards for the design of digital asset networks and best practices.  MAS also published a statement in relation to Project Guardian.

18. BoE: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation: ISO 20022: Reaping the benefits for the payments ecosystem

On 31 October 2023, the BoE published a speech by Victoria Cleland, Executive Director for Banking, before the UK Finance's Digital Innovation Summit. The speech looked at the importance of ISO 20022 messaging and how stakeholders can harness its benefits. The speech  stressed the importance of harmonisation, referring to the October 2023 CPMI report on harmonised data requirements of cross-border ISO 20022 messages.

Key points

• The current CHAPS ISO 20022 message usage guidelines already support most of the data requirements outlined in the CPMI report and the BoE will make some changes by end-2025 to ensure full harmonisation.
• The BoE has worked with Pay.UK to develop its ISO 20022 approach, and considers this will aid greater interoperability between CHAPS and the New Payments Architecture.
• Work is underway with a number of  high value payment system operators to create a Financial Market Infrastructure ISO 20022 implementation charter.
• The BoE's multiyear renewal of RTGS aims to create conditions for the growth of the payments industry. The BoE migrated CHAPS to ISO 20022 in June 2023. It is aiming for its core RTGS settlement engine to become fully ISO 20022-native for all service and account holders in 2024.
• Many financial institutions have yet to make core banking systems fully ISO 20022-compatible (although they are able to send and receive ISO 20022 messages).
  

 19. HM Treasury: Joint Statement: US - UK Financial Innovation Partnership Meeting

On 30 October 2023 the US Treasury and HM Treasury issued a Joint Statement in respect of the fourth official meeting of the US-UK Financial Innovation Partnership meeting held in September 2023. The FIP was launched in 2019 to improve US and UK engagement on financial innovation issues. The statement notes that participants provided an update on cryptoasset legislation, regulation and enforcement. There was also discussion in relation to priorities under G20 Roadmap for Enhancing Cross-Border Payments. The UK also discussed its new digital securities sandbox.

20. HM Treasury: Consultation outcome on Future financial services regulatory regime for cryptoassets 

On 30 October 2023, HMT published the response document to its February 2023 consultation on a regime for cryptoassets. This sets out details in relation to a proposed phased approach to implementation,  whereby Phase 1 would cover the regulation of activities relating to fiat-backed stablecoins used for payment, while Phase 2 would cover the broader cryptoasset regime. The response confirms plans to expand the list of "specified investments" in  the RAO and require firms carrying out relevant activities involving cryptoassets by way of business to be authorised by the FCA under Part 4A of FSMA. 

Notable aspects

• Further guidance on the intended outcomes for NFTs, utility tokens, security tokens and other data objects following feedback.
• Approach towards market abuse obligations on cryptoasset exchanges, modified in light of feedback, and possible staggered implementation for cross-venue data sharing obligations
• Authorisation is not to be automatically granted to MLR registered firms under the new regime.

For more information, please see our briefings here and here.

21. HM Treasury: Consultation outcome: Managing the failure of systemic digital settlement assets

On 30 October 2023, HM Treasury published the response to its 2022 consultation on managing the failure of systemic digital settlement assets (including stablecoin) firms (see our briefing here): This set out proposals for managing the failure of systemic digital settlement asset (including stablecoin) firms by applying a modified Financial Market Infrastructure Special Administration Regime (FMI SAR) to these firms. 

The Government plans to introduce regulations to implement the following proposals: introduce the FMI SAR as the primary regime for systemic DSA firms which are not banks; introduce an additional objective for the FMI SAR on the return or transfer of customer funds and custody assets; empower the BoE to direct administrators, and to introduce further rules to ensure the additional objective can be effectively implemented when applied to systemic DSA firm; and require the BoE to consult with the FCA prior to seeking an administration order/directing administrators in respect of systemic DSA firms subject to regulatory requirements imposed by both the BoE and FCA.

For more information, please see our briefings here and here.

22. HM Treasury: Policy paper: Update on Plans for the Regulation of Fiat-backed Stablecoins  

On 30 October 2023, HMT issued a policy paper providing an update on its legislative approach for bringing fiat-backed stablecoins into the UK’s regulatory perimeter for financial services. This sets out the roles of the FCA, PRA and BoE in respect of regulation of stablecoin issuers and custodians, and systemic digital settlement asset payments systems and service providers.
For more information, please see our briefings here and here.

23. BoE: Speech by Jon Cunliffe, Deputy Governor, Financial Stability: Money and payments: a "black ships" moment  

On 26 October 2023, the BoE published a speech by Jon Cunliffe, Deputy Governor,  given at the Economics of Payments XII Conference at the Federal Reserve Board. The speech, titled "Money and payments: a ‘black ships’ moment ?", surveys the regulatory landscape in the aftermath of the announcement of the launch of the Libra digital currency. It focuses on: the G20 Roadmap on Cross Border Payments; the BoE's CBDC (see our briefing here); and the UK regulation of systemic  payment systems using stablecoins (see our briefing here).

Key points

• The announcement about a potential digital currency highlighted existing weakness in cross-border payments and the need to remove frictions in wholesale retail and remittance payments across borders.
• The CPMI and FSB have produced a number of reports looking at the key frictions and actions for the public and private sector in relation to the cross border payments framework, with the first annual report being delivered to G20 Finance Ministers and Central Bank Governors in October 2023.
• Areas where progress is needed include: upgrades to central bank and private sector payment systems (a number of countries are developing and upgrading RTGS);  implementation of data standards for cross-border ISO 20022 payment messages and development of harmonised standards for APIs; facilitating and promoting the interlinking of fast payments needs; and a more effective, coordinated regulatory framework for cross border payments (a key area of focus includes updating the FATF recommendation on wire transfers).
• The consultation paper on the CBDC has garnered over 50000 responses, falling into two categories: comments containing high level concerns about privacy programmability and the decline of cash; and comments on the proposed platform model and other key design features. It is impossible for BoE to predict the scale and speed of take-up by households and firms. The BoE will seek to refine its estimate of possible take-up and calibration of limits in the next phase of the development of the CBDC.
• A number of countries have brought stablecoins used as payments into the regulatory framework. The BoE will not seek to hinder innovation, provided the risks can be managed. 
• The BoE has proposed limits for the CBDC to manage possible financial stability risks from rapid transitions and it would make sense to adopt a similar approach for stablecoins.

24. FCA: Webpage: Cryptoasset registration: information for applicants

On 26 October 2023, the FCA published a new webpage about the FCA's requirements and expectations of cryptoasset businesses for AML/CTF regime registration.

The FCA has provided responses to several FAQs regarding:

• getting registration applications ready;
• associated individuals; and
• the stages post-submission.

25. FCA: Statement warning about common issues with crypto marketing

On 25 October 2023, the FCA published a statement on the common issues with crypto marketing, in light of the new cryptoassets financial promotions regime:

• promotions making claims about the "security", "safety" or ease of using crypto asset services without highlighting the risk involved;
• risk warnings not being sufficiently visible due to small fonts, colouring that is difficult to read, or non-prominent positioning; and
• firms failing to provide customers with adequate information on the risks associated with the promotions of specific products.

The FCA expects authorised firms that approve the financial promotions of cryptoasset firms to ensure compliance with their regulatory obligations. The FCA confirms that it will take action in the event of non-compliance. 

26. BoE: Minutes of the CBDC Engagement Forum - September 2023

On 20 October 2023, the CBDC Engagement Forum published the minutes of its latest engagement forum.

Matters discussed

• The importance of continued public engagement on the digital pound as well as objectives for the design phase in respect of the digital pound.
• Project Rosalind, a joint project with BIS Innovation Hub London centre, created to design an API prototype for retail CBDC.
• Engagement Forum refresh and the creation of two working groups, on offline payments and retailer needs.
• New members to the Forum following an open and competitive application process.

Updates and Guidance: Europe

27. Speech of Joachim Nagel on prosperity through digital progress

On 31 October 2023, Joachim Nagel, President of the German Central Bank (Deutsche Bundesbank) held a speech at Ludwig Erhard Lecture titled "Is it time for a prosperity update? – Productivity, competition and stable money in the digital age". 

Nagel pointed out the importance of the digital euro in an increasingly digital world. According to him, the digital euro would give the additional option to pay securely, cost effectively and with guaranteed privacy. Furthermore, the digital euro could result in greater competition in cross-border payments. Therefore, he welcomes the decision of the Governing Council of the ECB to start the preparatory work for a digital euro. However, Nagel emphasised that with the start of the preparatory work, the Governing Council has not decided whether a digital euro will actually be introduced. A stable legal framework must be established first. This could take another four to five years. 

28. Interview with Burkhard Balz on the digital euro

On 19 October 2023, an interview with Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank), was published by the Frankfurter Allgemeine Zeitung on the digital euro.

According to Balz, the current start of the preparatory phase by the Governing Council of the ECB is a further step towards the introduction of the digital euro as a legal tender. Balz emphasises the particular relevance of informing EU citizens about the project. As currently planned, every citizen will have a digital wallet or an alternative (e.g. chip card), in which the digital euro can be stored and with which payments can be made online or offline. The digital euro is intended to be an attractive alternative to cash, making payments more convenient, cost-efficient and quickly. However, according to Balz, the gradual introduction of the digital euro will probably take years due to the complexity of the topic, the legislative process and the requirements of an extensive test phase for all financial intermediaries involved. 

29. German Banking Industry Committee on the ECB's decision for starting the preparatory phase of the digital euro

On 18 October 2023, the German Banking Industry Committee (Deutsche Kreditwirtschaft, DK) published a press release on the decision of the ECB to start the preparatory phase of the digital euro.
DK views the preparatory phase positively. Tanja Müller-Ziegler, Member of the Board of the Federal Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V., BVR),  states that a properly designed digital euro can offer added value for the economy and society. According to Müller-Ziegler, the ECB should take the legislative framework into account in continuing the preparatory phase. Müller-Ziegler also welcomed the fact that the ECB has clearly spoken out against abolishing cash. The preparation phase could support extensive and well-informed debates on the introduction of the digital euro and its design, which is necessary for the alignment of the needs of the various private and public stakeholders. In order to avoid risks for the financial market stability and for the lending capacity of credit institutions, DK considers a quantitative impact analysis for different design options of the digital euro to be imperative. In the view of DK, an appropriate design of the digital euro would be best achieved by a digital form of cash. 

Updates and Guidance: APAC

30. HKMA: CBDC Expert Group

On 20 October 2023, the HKMA announced the establishment of the CBDC Expert Group and the signing of MOUs with five Hong Kong local universities to strengthen collaboration and knowledge exchange with the academic community on CBDC research.  Members of the group include experts from multiple disciples covering business, computer science, economics, finance and law, who will support the HKMA’s exploration of key policy and technical issues surrounding CBDC, and offer advice, training sessions, and workshops regarding CBDC and related fintech topics.  The group has already commenced on two research papers regarding: privacy issues pertaining to CBDC; and the interoperability CBDCs. 

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

On 20 October 2023, the HKMA and the SFC issued a joint circular to provide an update to the guidance for intermediaries wishing to engage in virtual asset-related activities, including: distribution of virtual asset-related products; provision of virtual asset dealing services; provision of asset management services in respect of virtual assets, and provision of virtual asset advisory services.  
The circular is published in light of the latest market developments and supersedes the previous joint circular published on 28 January 2022.  Intermediaries are advised to notify the SFC (and the HKMA, where applicable) in advance if: (a) they intend to engage in any activities involving tokenised securities and virtual assets; or (b) they intend to make any changes to these activities currently conducted (including changes in the type of clientele served).  Intermediaries already providing virtual asset dealing services to non-qualified corporate professional investors and individual professional investors, and wishing to continue providing such services are advised to align with the updated requirements within a three-month transition period (by 20 January 2024) before the full implementation of the expected requirements in the circular.

32. HKMA: e-HKD Phase 1 Report

On 30 October 2023, the HKMA published the e-HKD Pilot Programme Phase 1 Report setting out the key findings of the 14 pilots under Phase 1 of the e-HKD Pilot Programme as well as the next steps of the e-HKD Pilot Programme.

Points to note

• Phase 1 pilots showed that e-HKD could add value to the payment ecosystem in Hong Kong through programmability, tokenisation and atomic settlement, which could reduce time and cost in transactions and possibly enable new types of economic transactions.
• The HKMA has not decided on whether and when to introduce an e-HKD.  The learnings from Phase 1 will help refine the HKMA's approach to the possible implementation of e-HKD and raise areas for future study.

33. SFC: Circulars on tokenisation of SFC-authorised investment products and intermediaries engaging in tokenised securities-related activities

On 2 November 2023, the SFC issued two circulars setting out further guidance on: allowing tokenisation of SFC-authorised investment products; and regulatory expectations for intermediaries engaged in tokenised securities-related activities.  

Adopting a "see-through approach" and the overarching principle of "same business, same risks, same rules", the SFC is prepared to allow primary dealing (i.e. subscription and redemption) of tokenised SFC-authorised investment products with underlying products that are compliant with the product authorisation requirements and additional safeguards for the risks associated with the tokenisation process.  The circulars supersede the SFC's previous statement on security token offerings dated 29 March 2019, such that the "professional investors-only" restriction for security tokens has been removed.  

Intermediaries dealing with traditional financial instruments (e.g. bonds or funds) that utilise DLT in their security lifecycle (Tokenised Securities) would still be subject to existing legal and regulatory requirements of the traditional securities markets, including the prospectus regime under the Companies (Winding up and Miscellaneous Provisions) Ordinance, the offers of investments regime under Part IV of the Securities and Futures Ordinance, as well as the considerations for engaging in Tokenised Securities-related activities set out in the circulars.

Updates and Guidance: Australia

34. Australian Government: New regulatory framework for digital asset platforms

In October 2023, the Australian Government released a proposal paper titled "Regulating Digital Asset Platforms". The paper effectively proposes to leverage existing Australian financial services laws by expanding them so that they would apply to "digital asset facilities" – defined as facilities for holding or backing digital assets.

The purpose of the framework is to regulate access to digital assets for Australians and Australian businesses by applying minimum standards to digital asset platforms, whilst also still supporting innovation in the use of digital assets.

The framework proposes that persons providing financial services in Australia in relation to a digital asset facility would need to hold an Australian Financial Services Licence (AFSL) if they hold over a certain threshold of Australian assets – over $1,500 AUD for an individual or $5 million AUD in aggregate. Digital asset facilities would be required to meet minimum standards that largely replicate the minimum standards that apply to financial products and services that hold assets (see ASIC Regulation 133 for an overview on how ASIC interprets the obligations on existing asset holders). 

A separate framework is also proposed in the paper to protect consumers interacting with service providers dealing with digital assets that are not classed as financial products (defined as "financialised functions"). 

The paper also considers at length the different approaches that have emerged out of the EU, Canada, the United Kingdom and Singapore, noting that some jurisdictions have initiated bespoke regulatory frameworks, while others are seeking to modernise existing regulatory frameworks.

Consultations on the paper close on 1 December 2023, and exposure draft legislation is expected to be released in 2024.

For more information, please see Ashurst's Financial Services update here.

Updates and Guidance:North America

35. Consumer Financial Protection Bureau: Federal oversight for digital wallet providers

In November 2023, the Consumer Financial Protection Bureau announced proposals to supervise larger non-bank companies offering services such as digital wallets and payment apps. The rule would ensure that entities in scope observe the same rules as other financial entities already supervised by the Consumer Financial Protection Bureau. It follows an October 2021 speech by CFPB Official, Rohit Chopra, on digital payments. 

36. SEC Division of Examination: 2024 Priorities

In November 2023, the SEC Division of Examinations published its 2024 Priorities. The document outlines the key risks, examination topics and priorities for the upcoming year.

The Division carries out examinations, inspections of SEC-registered investment advisers, investment companies, broker dealers and other market participants. It highlights practices, services and products that pose a greater risk to investors or to the integrity of US capital markets.

The Division states that it will continue monitoring and carrying out examinations of registrants in light continued turbulence in cryptoasset markets. These examinations  of registrants will look at the offer, sale, trading in, and other activities in cryptoassets or related products. In respect of cryptoassets that are funds or securities, the Division will look at whether advisers are complying with relevant custody requirements. For DLT, the Division will consider whether associated technological risks have been addressed. 

37.Federal Reserve: Opening remarks by Vice Chair for Supervision Michael S. Barr at the Economics of Payments XII Conference

On 27 October 2023, the opening remarks of Vice Chair for Supervision, Michael S. Barr, at the Economics of Payments XII Conference, Federal Reserve Board was published. The speech highlights the many functions carried out by the Federal Reserve as a supervisory agency, as well as operator of key parts of the payment infrastructure. Mr Barr also refers to the introduction of the FedNow Service in July.

Main points

• Research on CBDC is looking at end-to-end system architecture e.g. security and maintenance of ledgers, tokenization and custody models.
• International collaboration and coordination are essential in the payments system, and the Federal Reserve is in support of initiatives in this regard such as the G20 Roadmap on Cross Border
• Payments innovation should support and promote broad access and financial inclusion.
• The Federal Reserve wants to ensure that stablecoin offerings operate within an appropriate federal prudential oversight framework to prevent threats to financial stability/ payments system integrity."
• The Federal Reserve has not yet made a decision on the issuance of a CBDC, and such a decision would need clear support from the executive branch and be authorised via legislation from Congress.

38.FinCEN: New Regulation to Enhance Transparency in Convertible Virtual Currency Mixing

On 20 October 2023, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a Notice of Proposed Rule Making in relation to international convertible virtual currency mixing (CVC mixing). The Notice is in response to concerns about the lack of transparency in relation to international CVC mixing activity. The proposed rules would require financial entities in scope to implement recordkeeping and reporting measures.

39.Federal Reserve:  Speech by Governor Michelle W. Bowman "Responsible Innovation in Money and Payments"

On 17 October 2023, the Federal Reserve published a speech made by Governor Michelle W. Bowman at the Roundtable on Central Bank Digital Currency, Harvard Law School Program on International Financial Systems. In the speech, Ms Bowman outlined her vision for responsible innovation in payments and argued that this involved incorporating proven successful aspects of the existing framework in US banking system within established guardrails.

Main points

• The benefits, risks and trade-offs of a potential US CDBC should continue to be monitored, as should international CBDC developments that could have implications for the US.
• Policymakers need to consider how the design of an intermediated CBDC with private sector providers could ideally eliminate related disruption to wider US financial system.
• Activities presenting the same risks need to be subject to same regulation in order to ensure consumer protection, so as to allow competition for banks on a level playing field.
• The Federal Reserve continues engagement with stakeholders and it continues its research on emerging technologies, including those that could be supported by future Federal Reserve-operated payment infrastructures.
• Research conducted by technologists at the Board and Reserve Banks includes work on risk associated with digital assets and programable platforms that could support payment infrastructure improvements.

40. US Treasury: Remarks by Under Secretary for International Affairs Jay Shambaugh on new technologies and cross-border payments

On 17 October 2023, the US Treasury published Remarks by Under Secretary for International Affairs Jay Shambaugh on New Technologies and Cross-Border Payments at the Harvard Law School and the Program on International Financial Systems. The speech focused on CBDCs and wider cross border payments landscape and covered: international payments innovation; US objectives, values and interests most relevant to cross-border payments innovations; and the Treasury's priorities for improving cross-border payments.

Main points

• The US is strongly in favour of the G20 Roadmap to Enhance Cross-border payments. The Roadmap has seen progress in areas such as remittance, but there is room for improvement in some areas. 
• The private and public sector has been actively engaged in addressing challenges concerning cross-border payments, with many projects building on new technologies. Some initiatives in this regard are aimed at upgrading legacy payment systems, while other initiatives focus on interlinking fast payment systems between jurisdictions.
• Stakeholders need to note legal, regulatory and governance challenges underpinning core frictions in cross-border payments.
• There needs to be public sector investment to create a foundation for private sector innovation,  so as to prevent existing frictions from re-emerging.  
• There needs to be a balance between investment in legacy systems and experimentation with new technologies. The Federal Reserve has launched FedNow for instant retail payments and it is planning to introduce ISO 20022 messaging standard in its legacy Fedwire real-time gross settlement system.
• Cross-border payments solutions need agreement on issues such as terms of access, payment messaging standards, payment system liquidity and liquidity risk management.
• Areas that need attention include frictions caused by differences in the treatment of bank and non-bank payment service providers; and the application of different data frameworks to cross-border payments.

41. California: New virtual currency laws signed by Governor Gavin Newsom

In October 2023, California Governor, Gavin Newsom, signed two pieces of legislation concerning the regulation of digital assets: The California Digital Financial Assets Law (AB 39); and The California Digital Financial Asset Transaction Kiosk Law (SB-401). The first piece of legislation seeks to regulate digital assets in the state, containing licensing requirements and details on enforcement action.

42. CFTC: Keynote Address of Chairman Rostin Behnam at the Futures Industry Association Expo 2023, Chicago, Illinois

The CFTC published a keynote address by CFTC Chairman, Rostin Behnam, at the Futures Industry Association Expo 2023. The speech looked progress made since Mr Benham's February 2023 speech on the regulatory agenda for 2023 and 2024 and cites key figures in relation to fraud and illegal involving digital assets: The speech also referred to resolution of three actions involving operators of DeFi platforms and the first enforcement brought by the CFTC in relation to "Pig Butchering".

43.CFTC: Statement of Commissioner Kristin N. Johnson regarding CFTC charges against co-founder and CEO of three crypto firms

On 12 October 2023, the CFTC issued a statement by Commissioner Kristin N. Johnson in relation to the filing of a complaint in the United States District Court for the Southern District of New York against a co-founder and CEO of three crypto firms. Ms Johnston argues that the case supports various statements made in the past in relation to minimising information asymmetries in the digital assets sector and improving disclosure and transparency. Ms Johnson argues that transparency lessens the risk of fraud and manipulation.

44.Federal Trade Commission: Settlement reached with crypto company

On 12 October 2023, the Federal Trade Commission announced that it had reached a settlement with a crypto company and would be banning the company from handling consumers' assets. The ban prevents the company from offering, marketing or promoting any product that could be used to deposit, exchange, investor or withdraw any assets. The agency  announced that it was filing a suit against the CEO of the company in relation to assurances made to customers about availability of Federal Insurance. 

45.SEC: "Partners of Honest Business and Prosecutors of Dishonesty”: Remarks by Gary Gensler Before the 2023 Securities Enforcement Forum

The SEC has published remarks made by SEC Chairman, Gary Gensler, made before the 2023 Securities Enforcement Forum. The speech provides an overview of individuals Mr Gensler considers were crucial in the creation, development and interpretation of US securities law. He argues that enforcement can be viewed through five themes: Economic Realities; Accountability; High-Impact Cases; Process; and Positions of Trust. Mr Gensler discusses the application of US securities law to crypoasset markets and cryptoasset intermediaries.

Updates and Guidance: Middle East

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Press/Articles

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Contributors: Julian Pipolo, Ankita Rao, Tobias Bauerfeind, Cornelius Hille, Victoria Meyer, Gréta Müller, Daphne Chung, Oscar Tsoi