Legal development

Global Digital Assets Digest September 2024

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    Welcome to this month's Global Digital Assets Digest. Regulators have been quieter this month, but there's news from the UK on legislation giving effect to recommendations of the Law Commission for England and Wales. In the US, there are some interesting speeches from regulators, as well as news on a groundbreaking decision concerning digital assets. In Australia, there are changes to the AML/CTF regime.

    Updates and Guidance: International Bodies

    1. Joint Statement on the US-UK Financial Regulatory Working Group – September 2024

    2. ECB: Report: Update on the work of the digital euro scheme’s Rulebook Development Group

    3. ESMA: Report: Trends, risks and vulnerabilities (No. 2, 2024)

    4. BIS: Opening remarks by Mr Eddie Yue, Chief Executive of HKMA at the launch ceremony for Project Ensemble Sandbox, Hong Kong

    5. IMF: Fintech Note: CBDC data use and privacy protection

    6. IMF: Fintech Note: Cyber Resilience of the CDBC ecosystem

    Updates and Guidance: UK

    7. House of Lords: Property (Digital Assets etc) Bill

    8. FCA: Charges brought against individual running a network of illegal crypto ATMs

    9. PSR: Annual Report 2023 to 2024

    10. FCA: Annual Report and Accounts 2023/24

    Updates and Guidance: Australia

    11. AML/CTF Amendment Bill introduced into Parliament

    Updates and Guidance: North America

    11. OCC: Remarks by Acting Comptroller of the Currency before the Joint EBA and ECB International Conference “Evolving Bank Supervision”

    12. Federal Reserve: Speech by Governor Christopher J. Waller: Interlinking Fast Payment Systems

    13. CFPB: Consumer advisory on virtual worlds

    14. US Treasury: Semi-annual agenda

    15. FINRA: Update on Member firms' cryptoasset activities

    16. Southern District of New York: Final ruling on SEC v Ripple Labs Inc

    Updates and Guidance: Middle East

    17. Qatar: Digital Assets Framework

    18. Abu Dhabi: Consultation paper on issuance of fiat referenced tokens

    Press/Articles

    19. Bahamas: Digital Assets and Registered Exchanges Act 2024

    20. UAE: Dirham pegged stablecoin

    21. The Payments Association: Bringing Digital Assets to the masses: How Fintech can Unite Web3 and Daily Spending

    Updates and Guidance: International Bodies

    1. Joint Statement on the US-UK Financial Regulatory Working Group - September 2024

    On 10 September 2024, the US-UK Financial Regulatory Working Group issued its September 2024 joint statement in respect of its tenth official meeting, which took place on 3 September 2024. Key items on the agenda included digital finance, with the discussion focusing on the role of tokenisation in international capital markets and payments landscape. The Working Group also discussed the G20 Cross-Border Payments Roadmap.

    2. ECB: Report: Update on the work of the digital euro scheme’s Rulebook Development Group

    On 5 September 2024, the ECB published a report on the digital euro scheme’s Rulebook, together with a letter from Piero Cipollone, Member of the Executive Board.

    The report provides an update on the work of the digital euro scheme’s Rulebook Development Group (RDG) since the last update in January 2024. Legislative proposals in respect of the key features of the digital euro were published in June 2023 (for more information, see our briefing here). The digital euro scheme rulebook is one of the deliverables in respect of the preparation phase of the digital euro. The RDG was set up in 2023 and consists of stakeholders from payments ecosystem.

    The rulebook will contain a single set of rules, standards and procedures to standardise digital euro payments and aims for users’ experience and perception of a digital euro to be the same.

    The work of the RDG in 2024 consisted of two main streams of activity: the review of the first draft of the intermediate version of the rulebook as it stood at the beginning of the year; and continuing the process of drafting additional sections of the rulebook and developing existing ones further.

    3. ESMA: Report: Trends, risks and vulnerabilities (No. 2, 2024)

    On 29 August 2024, ESMA published its second risk monitoring report of 2024 containing key risk drivers currently facing EU financial markets, together with a Statistical Annex.

    Notable points

    • The first half of 2024 saw continued surge in cryptoasset markets, fuelled by the SEC's approval of spot Bitcoin ETPs in the US (for more information, see Global Digital Assets Digest February 2024 edition).
    • Trading volumes have continued to recover since the "crypto-winter" (for more information, see Global Digital Assets Digest November 2022 edition).
    • Bitcoin alone accounts for over 50% of the total crypto market capitalisation, while Tether accounts for about 70% of stablecoins’ total size.
    • There is a growing presence of neo brokers in the EU, with cryptoassets among the most commonly offered products.
    • Investment products offering exposure to cryptoassets remain small in size (ESMA identified 77 EEA investment funds providing exposure to cryptoassets as of March 2024).

    4. BIS: Opening remarks by Mr Eddie Yue, Chief Executive of HKMA at the launch ceremony for Project Ensemble Sandbox, Hong Kong

    On 29 August 2024, BIS published remarks by Mr Eddie Yue, Chief Executive of HKMA, on of Project Ensemble Sandbox and digital assets in Hong Kong. In the speech, Mr Yue explains that Project Ensemble Sandbox covers the full life cycle of a tokenised asset transaction and will cover cross-border payment functionalities, noting that the initiative allowed industry participants to explore the use case for tokenised assets in a controlled environment.

    The speech also noted the impact of digital money on the financial landscape and argues that HKMA has played an important role in the research and innovation in relation to CBDCs, citing projects such as mBridge and e-HKD.

    5. IMF: Fintech Note: CBDC data use and privacy protection

    On 30 August 2024, the IMF published a Fintech Note on the trade-offs between CBDC data use and privacy protection. The document notes that CBDC data use could undermine the trust and adoption of a retail CBDC if risks are poorly managed, citing examples such as data leakages, data abuses, cyberattacks. The document notes differing approaches to privacy in jurisdictions. It emphasises the importance of institutional arrangements, data collection, access and storage policies, design choices, and technological solutions. It argues that better use can be made of CBDC data via robust transparency and accountability arrangements, sound policies, and adoption of privacy-by-design approaches.

    6. IMF: Fintech Note: Cyber Resilience of the Central Bank Digital Currency Ecosystem

    On 27 August 2024, the IMF published a Fintech Note IMF on cyber resilience of the CBDC ecosystem. The research is based on live CBDCs and experiments undertaken by central banks and international institutions for domestic use. It draws from cybersecurity and resilience frameworks from standard-setting bodies. The note looks at: digital risks,(including cyber risks) and their impact on an interconnected CBDC ecosystem; advantages and disadvantages of commonly considered design options in a domestic, retail CBDC implementation; and best practices for developing a cyber-resilient CBDC ecosystem.

    Updates and Guidance: UK

    7. House of Lords: Property (Digital Assets etc) Bill

    On 11 September 2024, the Property (Digital Assets etc) Bill was introduced into the House of Lords. The Bill gives effect to recommendations of the report by Law Commission for England and Wales, which recognised that "a thing will not be deprived of legal status as an object of personal property rights" because it is neither a thing in possession nor a thing in action. The Commission consulted on a draft of the Bill in February 2024 and published a report with a draft Bill in July 2024 (see Ashurst Global Digital Assets Digest August 2024 edition)

    The Government has also published a response to the Law Commission's report on digital assets. This refers to the second recommendation made in the 2023 report on setting up an expert group on control of digital assets. The response also refers to work being undertaken by HM Treasury in relation to statutory amendments to the Financial Collateral Arrangements Regulations, as well as the multi-disciplinary project on a "statutory framework for the entering into, operation and enforcement of certain crypto-token and crypto asset collateral arrangements".

    For more information, please see our briefing here.

    8. FCA: Charges brought against individual running a network of illegal crypto ATMs

    On 10 September 2024, the FCA published details in relation to its first criminal prosecution relating to unregistered cryptoasset activity under the MLRs. The FCA also confirmed that this was the first charge brought against a person accused of running a network of crypto ATMs in the UK.

    9. PSR: Annual Report 2023 to 2024

    On 9 September 2024, the PSR published its Annual Report 2023 to 2024. The report provides an overview of PSR’s activities and how it met its commitments made in its Annual Plan 2023/24 in respect of: the New Payments Architecture; digital payments; and digital currencies and cryptoassets (this includes monitoring market developments to identify new payment systems using cryptoassets; and regulating the Sterling Fnality Payment System).

    10. FCA: Annual Report and Accounts 2023/24

    On 5 September 2024, the FCA published its Annual Report and Accounts 2023/24, which sets out progress made by the FCA over the past year. The report details the leading role the FCA plays in standard setting bodies such as IOSCO, as well as key action taken in relation to cryptoassets (such as the extension of the financial promotion perimeter to include promotions of certain cryptoassets and action in relation to finfluencers).

    Notable points

    • The FCA issued 450 consumer alerts against firms illegally promoting cryptoassets in the first 3 months of the rules going live.
    • Over 87% of crypto registrations were withdrawn, rejected or refused for weak money laundering controls.
    • More than 110 global regulatory peers have adopting the sandbox model introduced by the FCA.

    Updates and Guidance: Europe

     

    Updates and Guidance: APAC

     

    Updates and Guidance: Australia

    11. AML/CTF Amendment Bill introduced into Parliament

    On 11 September 2024, the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024 was introduced into the House of Representatives. This follows two separate consultations on proposed reforms to Australia’s AML/CTF laws by the Attorney-General's Department. The measures seek to ensure that Australia's AML/CTF laws align with international standards set by the FATF. Measures include extending the "Travel Rule" to remittance service providers and virtual asset service providers, for both domestic and cross border value transfers; and extending the AML/CTF regime to virtual assets.

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

    Updates and Guidance: North America

    12. OCC: Remarks by Acting Comptroller of the Currency before the Joint EBA and ECB International Conference “Evolving Bank Supervision”

    On 3 September 2024, the OCC published remarks made by acting Comptroller of the Currency, Michael Hsu, before the Joint EBA and ECB International Conference "Evolving Bank Supervision".

    Key points

    • Banks and the banking system have grown considerably in size and complexity over the past 30 years.
    • Non-financial risks have steadily increased in importance. This is alongside the rise of online and mobile banking and associated digitalisation.
    • The dynamic nature of the interaction between banks and non-bank financial institutions and Fintechs has given rise to very complex linkage between banking and commerce. This raises questions about roles, interdependencies and exposures of banks to non-banks.
    • Supervision needs to be able to adequately cover non-financial risks as it does in respect of financial risks.
    • Agility and the ability to learn are more important to a supervisor's credibility than consistency and experience.
    • The OCC's 2027 Strategic Plan identifies “agility and learning” and “credibility and trust” as key objectives. Organisational changes implemented by the OCC in response to the changing environment include the setting up of the Office of Financial Technology (see Global Digital Assets Digest January 2024 edition for more information).

    13. Federal Reserve: Speech by Governor Christopher J. Waller: Interlinking Fast Payment Systems

    On 28 August 2024, the Federal Reserve published a speech by Governor Christopher J Waller at the Global Fintech Fest, Mumbai, India. The speech looked at payments innovation and the coordinating role that public agencies such as the Federal Reserve can play in improving cross-border payments.

    Key points

    • There has been widespread adoption of the FedNow Service since it was implemented in 2023, with approximately 1000 depository institutions on the network.
    • The Federal Reserve is looking to expand operating hours on the Fedwire Funds Service (its real-time gross settlement system), and by adopting ISO 20022.
    • There are legal, compliance settlement and governance challenges to achieving interoperability.
    • Challenges could be addressed via multilateral arrangements for interlinking, as bilateral links across the globe will not be practical.

    14. CFPB: Consumer advisory on virtual worlds

    The CFPB has issued a consumer advisory on virtual worlds. This follows an April 2024 report on banking in video games and virtual worlds. That report noted that video games and virtual worlds were increasingly resembling traditional banking and payment systems, but did not appear to provide the same level of consumer protections. The CFPB confirms that it will continue to monitor the market and its similarities to traditional banking and payment systems.

    15. US Treasury: Semi-annual agenda

    On 16 August 2024, the US Treasury published its Semi-annual agenda. The agenda provides information about regulatory activities. It also includes plans to make amendments to the definition of "money" under the Bank Secrecy Act to include cryptoassets in certain reporting obligations. According to the agenda, the proposal will "ensure that the rules apply to domestic and cross-border transactions involving convertible virtual currency, which is a medium of exchange (such as cryptocurrency) that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status".

    16. FINRA: Update on Member firms' cryptoasset activities

    This update includes themes identified by FINRA related to member firms and their affiliates’ crypto asset activities. This is based on a review of information provided by member firms in response to Notices and a 2023 cryptoasset questionnaire, as well as information collected by FINRA through its ongoing regulatory operation.

    FINRA states that engagement with firms has helped it to identify trends related to cryptoassets sector and firms: cryptoasset firms are involved in a variety of activities, such as private placements of cryptoassets and operating as ATS to facilitate trading in cryptoasset securities; some member firms have parent companies/affiliates engaged in a variety of other cryptoasset related activities (FINRA also identified member firms, their affiliates, or parent companies with strategic partnerships or arrangements with companies engaged in crypto asset-related activities); and some member firms undertaking cryptoasset related activities have encountered challenges with some FINRA rules.

    17. Southern District of New York: Final ruling on SEC v Ripple Labs Inc

    On 7 August 2024, the Southern District of New York published its ruling in relation to SEC v Ripple Inc. This follows a summary judgment decision published in July 2023.

    The SEC had pursued action against Ripple, arguing that the sale of XRP was unregistered offers and sales of securities (in violation of the Securities Act). The aspect of the action covered by the judgment refers to sales of XRP to hedge funds and institutional buyers.

    Updates and Guidance: Middle East

    18. Qatar: Digital Assets Framework

    The Qatar Central Bank and the Qatar Financial Centre Regulatory Authority (QFCRA) have launched the QFC Digital Assets Framework in respect of the creation and regulation of digital assets in the QFC. This is in line with goals set out in the Third Financial Sector Strategic Plan.

    The Framework follows consultation with stakeholders and the launch of the QFC Digital Assets Lab in October 2023. The Framework provides a structure for entities to apply to carry out token service provider activities. It also covers tokenisation process; the legal recognition of property rights in tokens and underlying assets; custody arrangements; and the legal recognition of smart contracts.

    19. Abu Dhabi: Consultation paper on issuance of fiat referenced tokens

    On 20 August 2024 the financial services authority (FSRA) of the Abu Dhabi Global Market published Consultation Paper No.7 2024 on a proposed regulatory framework for the issuance of fiat referenced tokens. This follows the introduction of the original cryptoasset framework in 2018 and relevant guidance.

    The FRSA is to base the framework on current practice in other jurisdictions, such as EU MiCA (for more information, see Ashurst briefing here and here) and the UK regulatory framework (for more information, see Ashurst briefings here). The framework will treat the issuing of FRTs as a distinct regulated activity and an FRT as distinct from virtual asset. The consultation also covers: reserve assets; stress testing; white paper issuance; minimum capital requirements.

    The ADGM is also reviewing existing regulatory framework to see if there are any relevant amendments are needed.

    Press/Articles

    20. Bahamas: Digital Assets and Registered Exchanges Act 2024

    It has been reported that Bahamas has enacted the Digital Assets and Registered Exchanges Act 2024. This legislation has been introduced following high profile cases involving crypto firms headquartered in the jurisdiction. The legislation builds on DARE 2020, introducing a number of changes to reflect changing regulatory landscape. The Securities Commission of Bahamas notes that the legislative framework now covers a wider range of digital asset services, including advisory or management services, digital asset derivatives and staking services. The legislation also introduces enhanced requirements for digital asset exchange requirements, covering investor consumer protection requirements.

    21. UAE: Dirham pegged stablecoin

    It was reported that Tether is planning to develop a UAE Dirham-pegged stablecoin in collaboration with Phoenix Group. The majority of stablecoins are pegged to US dollar. According to reports, Tether will aim for licensing under the UAE's Payment Token Services Regulation and tokens would be backed by UAE based reserves.

    22. The Payments Association: Bringing Digital Assets to the masses: How Fintech can Unite Web3 and Daily Spending

    This article looks at the role Fin Tech companies can play in relation to the adoption of blockchain-based technology, arguing that this can be achieved via partnerships with digital asset infrastructure providers. The article argues that this is especially the case in relation to those working in advanced payment technology. The article notes that advanced payment technology providers are already adopting tokenisation, digital wallets, and cloud-native technology to develop a link to traditional payment networks.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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