Global Digital Assets Digest: March 2023

1. ESMA: Guidelines on standard forms, formats and templates to apply for permission to operate a DLT market infrastructure

On 8 March 2023, ESMA published translations of its guidelines on standard forms, formats and templates to apply for permission to operate a DLT market infrastructure. The publication will trigger the start of the period of 2 months in which national competent authorities in each member state must confirm whether they comply or intend to comply with the guidelines. ESMA published the final report in relation to the guidelines in December 2022.

2. BIS: Report: Project Icebreaker: Breaking new paths in cross-border retail CBDC payments

On 6 March 2023, the BIS issued a report on Project Icebreaker, a project launched to consider the potential benefits and challenges of using retail CBDC in cross-border payments. The project was a collaboration between the Bank of Israel, Norges Bank, Sveriges Riksbank and the BIS Innovation Hub Nordic Centre.

The project looked at the technical feasibility of carrying out cross-border/cross-currency transactions between different DLT-based CBDC proofs of concept, looking at interlinking retail CBDCs via a so-called hub-and-spoke solution. In this model, a cross-border transaction is broken up into two domestic payments, one in each domestic system. FX providers submit FX rates to the Icebreaker hub, which selects the best rate to be presented to the payer. Issues considered are: settlement risk and speed; competition and transparency; interoperability and scalability.

The report notes that implementing the icebreaker model in the real world would require a number of technology, policy and legal considerations to be addressed and that the icebreaker model could serve as a platform for introducing payments innovations (such as delivery versus payment and programmable money use cases) that could be considered when developing cross-border capabilities in CBDC systems. Key recommendations for a central bank considering enabling a cross border payments in an implementation of a retail CBDC system include the following: consider ways to incorporate conditional settlement e.g. HTLC; and consider ways to provide instant rCBDC liquidity for FX providers 24/7/365.

3. IMF: Trust Bridges and Money Flows A Digital Marketplace to Improve Cross-Border Payments

On 3 March 2023, the IMF issued the report "Trust Bridges and Money Flows: A Digital Marketplace to Improve Cross-Border Payments". The paper begins by looking at money and trust networks underpinning domestic payment systems, as well as the role of trust in relation to cross-border payments. It considers how trust networks adapt once money becomes digital, arguing that the move towards digital money may lessen the need for bilateral trust relationships.

The paper calls for a common settlement asset and a common settlement platform for cross-border transactions, owing to different currencies and different banking systems. The paper states that cross-border payments could be improved by: a global clearinghouse eliminating the need for a complete set of bilateral trust relationships; and a model for a marketplace to trade tokenised money across borders.

4. ECB: Disclosure report: TARGET2-Securities assessment against the principles for financial market infrastructures

On 2 March 2023, the ECB issued a disclosure report on TARGET2-Securities (T2S), the settlement infrastructure owned by the Eurosystem enabling the simultaneous exchange of securities and cash on a delivery-versus payment basis in central bank money. The report assesses T2S against the Principles for Financial Market Infrastructures (PFMI) of the Committee on Payment and Market Infrastructures and the International Organisation of Securities Commissions (CPMI-IOSCO). Areas covered include the following: settlement finality; central securities depositories; exchange-of-value settlement systems; participant default rules and procedures; operational risk; access and participation requirements; FMI links; efficiency and effectiveness communication procedures and standards; disclosure of rules, key procedures and market data/

Prior to its go-live, a comprehensive pre-assessment was performed on the T2S project in 2015.

5. IMF: Elements of effective policies for cryptoassets

On 23 February 2023, the IMF issued a board paper aiming to provide guidance to IMF member countries on key elements of an appropriate policy response to cryptoassets. The paper addresses questions outlined by IMF member countries on benefits and risks of cryptoassets and operationalises principles outlined in the Bali Fintech Agenda.

The directors of IMF considered that significant risks have emerged in relation to cryptoassets and that a comprehensive, consistent and coordinated response was needed in relation to the cryptoassets sector, given the extra-territorial nature of crypto assets and its providers.

The paper argues that the elements that can assist in developing a comprehensive, consistent and coordinated policy response include: guarding against excessive capital flow volatility and maintaining effectiveness of capital flow management measures; establishing legal certainty of crypto assets and addressing legal risks; developing and enforcing prudential, conduct, and oversight requirements to all crypto market actors; establishing a joint monitoring framework across different domestic agencies and authorities; and establishing international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.

The paper calls for the Fund to work closely with standard-setting bodies and to align its approach with the initiatives and standards set by the standard-setters.

6. FSB: Report: G20 Roadmap for Enhancing Cross-border Payments: Priority actions for achieving the G20 targets

On 23 February 2023, the FBS published a report detailing actions for the next phase of the G20 Roadmap for Enhancing Cross-border Payments. In 2020, G20 leaders endorsed the RoadMap for Enhancing Cross-border Payments and quantitative targets were set to meet the Roadmap. The FSB coordinates the implementation of the Roadmap through its Cross-Border Payments Coordination Group (CPC) and reports on progress to the G20.

The FSB then issued a prioritisation plan and engagement model for taking the Roadmap forward. The report details the specific actions that will be taken under the three priority themes to move forward the Roadmap and achieve the targets by the 2027 target date: payment system interoperability; legal, regulatory and supervisory frameworks; and cross-border data exchange and message standards. The FSB states that work on themes not included within these priorities may either be paused in 2023, to be picked up again later where relevant, or in some cases will continue to be taken forward by relevant bodies outside the Roadmap.

7. BIS: Bulletin: Crypto shocks and retail losses

On 20 February 2020, BIS issued a bulletin on crypto shocks and retail losses. This builds on a new database and focuses on the following areas: trading behaviour by large and small investors around the world during the Terra/Luna and other meltdowns; whether users made or lost money on their investments on average; and whether the market turmoil in crypto and decentralised finance had any discernible effects on financial conditions in the broader financial markets outside the crypto universe.

Key points

• New data set on retail holdings of cryptoassets reveals that in the wake of the Terra/Luna collapse and the high-profile bankruptcy of an exchange, crypto trading activity increased markedly, with large and sophisticated investors selling and smaller retail investors buying.
• Data on major cryptoasset trading platforms over August 2015–December 2022 show that a majority of crypto app users in nearly all economies made losses on their bitcoin holdings.
• Despite the large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.

8. ECB: Announcement on launch of TARGET2

On 20 February 2023, the ECB issued a statement confirming that the go-live date for the T2-T2S consolidation project would be 20 March 2023.

TARGET2 is the real-time gross settlement (RTGS) system operated by the Eurosystem, processing and settling payments concerning bank-to-bank commercial transactions and is designed to ensure the efficient processing of cross-border payments in euro. Central banks and commercial banks can submit payment orders in euro to TARGET2, where they are processed and settled in central bank money, i.e. money held in an account with a central bank.

T2S is a platform for securities settlement in the EU using a common platform based on harmonised rules and practices. The T2-T2S consolidation project will consolidate both the technical and the functional aspects of TARGET2 and TARGET2-Securities (T2S). TARGET2 will be replaced by a new system, T2, with the aim being to optimise liquidity management across all TARGET Services and offer enhanced and modernised services to the market.

9. IMF: Cryptoassets and CBDCs in Latin America and the Caribbean: Opportunities and risks

On 17 February 2023, the IMF issued a working paper on cryptoassets and CBDCs in Latin America and the Caribbean (LAC). The paper provides an overview of the nature of cryptoassets, as well as regulatory responses from international standard setters. The report argues that most LAC countries are concerned about the impact of cryptoassets on financial stability and integrity. It notes that policy responses have differed in the region, ranging from the introduction of Bitcoin as legal tender in El Salvador, to prohibition in many other countries concerned about the impact on financial stability, currency/asset substitution, tax evasion, corruption, and money laundering. The paper states that while some countries have not yet introduced any laws regarding digital currency trading or exchanges, most economies are considering regulation. It notes that certain LAC countries (such as Argentina, Brazil and Colombia), have made significant progress towards establishing a regulatory framework.

In relation to CBDCs, the paper notes the following: most central banks in the region are analyzing CBDC; in many cases, both a retail and a wholesale CBDC are being considered (most central banks, however, do not have concrete plans to issue a CBDC; and only Jamaica is reportedly very likely to issue a wholesale CBDC in the next few years, while Brazil and Mexico foresee issuing a CBDC over the medium-term).

10. BIS (CPMI): Technical Report: Operational and technical considerations for extending and aligning payment system operating hours for cross-border payments: An analytical framework

On 17 February 2023, the CPMI issued a technical report setting out an analytical framework to assist central banks and operators planning to extend real-time gross settlement (RTGS) system operating hours. Limited RTGS system operating hours can lead to delays in cross-border payments settlement and policy makers consider that an extension and alignment of payment system operating hours across jurisdictions could help speed up cross-border payments, particularly between jurisdictions with considerable time zone difference.

The technical report outlines a systematic three-step approach and builds on the CPMI report "Extending and aligning payment system operating hours for cross-border payment", proposing an analytical framework for central banks and RGTS system operators to help determine the most appropriate approach to extending operating hours. It evaluates related technical and operational issues and designing and in implementation plan. For the short-term, it argues that increasing operating hours on current operating days would be the most achievable option and that other end-states could be considered in the medium to long-term.

11. FSB: Report on the financial stability risks of decentralised finance

On 16 February 2023, the FSB issued a report on decentralised finance. The report looks at the impact of the (DeFi) turmoil in cryptoassets market. The report concludes that DeFi does not differ significantly from traditional finance in the functions it performs or the vulnerabilities to which it is exposed. The report states that DeFi is mainly self-referential, meaning that its products and services interact with other DeFi products and services rather than with the traditional financial system.

The report notes that due to pseudonymity, financial intermediation in DeFi largely rests on the use of collateral and on the leverage that such usage entails. It states that leverage in DeFi is also difficult to gauge, in part because borrowed funds are often used as collateral for other loans, giving rise to “collateral chains” (akin to re-hypothecation). The report argues the specific characteristics of DeFi’s may result in some vulnerabilities e.g. operational fragilities, liquidity and maturity mismatches, leverage and interconnectedness and that these may play out at different times than in traditional finance.

Action points

• The FSB will explore the growth of tokenisation of real assets, as this could increase linkages between cryptoasset markets/DeFi, TradFi and the real economy.
• The FSB, in collaboration with standard-setting bodies and regulatory authorities, will explore approaches to fill data gaps to measure and monitor interconnectedness of DeFi with TradFi.
• The FSB will explore the extent to which its proposed policy recommendations for the international regulation of cryptoasset activities may need to be enhanced to acknowledge DeFi-specific risks and facilitate the application and enforcement of rules.

The report is referred to in the letter from FSB Chair to G20 Finance Ministers and Central Bank Governors: February 2023 outlining the FSB's priorities for 2023.

12. EBA: speech by Jose Manuel Campa on embedding responsible innovation

On 8 February 2023, the EBA published a speech by Jose Manuel Campa. The speech reflects on progress made since the European Commission published the Digital Finance Strategy in 2020 (see our briefing here). The speech calls for financial institutions to have a culture encouraging a positive attitude towards the application of innovative technologies coupled with a risk mitigation approach.

Referring to the 2024 application date of MiCA, Mr Campa encourages firms in scope during the transition phase to seek to design their procedures, reserves and so on as if MiCA were already in force, so as to prevent potentially costly changes at a later date. Mr Campa argues that this will also help to promote a "compliance mindset" of issuers to potential users of tokens. Mr Campa states that the EBA's consultation phase in relation to the majority of technical standards and guidelines under MiCA will begin in October 2023. Mr Campa also confirms that the EBA will amend existing AML/CFT guidelines, including the fund transfers guidelines and the ML/TF Risk Factors Guidelines, to outline common regulatory expectations on the management of financial crime risk in the context of cryptoasset services.

13. FCA: Press release on further action against unregistered crypto ATMs in London

On 8 March 2023, the FCA announced that it had used its powers under the Money Laundering Regulations 2017 (SI 2017/692) to inspect sites in London suspected of hosting illegally operating crypto ATMs. Cryptoasset exchange providers, including crypto ATM operators, must be registered with the FCA and comply with UK Money Laundering Regulations 2017.

The FCA had previously warned operators of crypto ATMs in the UK to close machines or face enforcement action.

14. House of Commons (Treasury Committee): Oral evidence: Crypto-asset industry

On 28 February 2023, the House of the Commons Treasury Committee published oral evidence provided in relation to its inquiry into the cryptoassets industry. Witness included: Sarah Breeden, Executive Director, Financial Stability Strategy and Risk at Bank of England; Sir Jon Cunliffe, Deputy Governor for Financial Stability at Bank of England; and Sasha Mills, Executive Director, Financial Market Infrastructure at Bank of England. The evidence relates mostly to the Bank of England's consultation on the digital pound (see our briefing here).

Areas discussed include the following:

• background to the development of the Bank of England's February 2023 consultation paper on a digital pound;
• the benefits and risks of a digital pound; and
• security, resilience and privacy considerations in relation to the digital pound; and financial inclusion benefits arising from the digital pound.

In March 2023, written evidence from Charles Randell, former FCA Chair, was published. This provided commentary on the UK government’s consultation and call for evidence about the future financial services regulatory regime for cryptoassets (see our briefing here).

15. Bank of England: RTGS – CHAPS Tariff Consultation Response

On 13 February 2023, the Bank of England published a response in relation to is April 2022 consultation paper. RGTS. The April 2022 consultation contained a proposals for a revised RTGS – CHAPS tariff framework in light of the changing payments landscape, new players in the industry and the Bank of England’s transformational programme to renew the Real-Time Gross Settlement (RTGS) service.

Key points

• The Bank is in the process of renewing the RTGS service, with a move to enhanced ISO 20022 for CHAPS payments in June 2023, followed by the introduction of the new core settlement engine in Summer 2024.
• The Bank will use gross values processed to determine the allocation of shared RTGS costs across payment systems, using the proposed tranches and allocation multiplier outlined in the April 2022 consultation. The Bank considers that the feedback provided has given an indication of industry’s views on areas such as allocation of shared RTGS costs and the CHAPS fee structure.
• Given the continuing evolution of the payments landscape, the Bank will carry out regular reviews to ensure the RTGS and CHAPS tariff frameworks remain appropriate. Any substantive changes to the way in which RTGS or CHAPS are used would trigger a review, with the framework reassessed against the tariff principles and any material proposed amendments subject to consultation.

16. Bank of England: Consultation Response: Roadmap for the Real-Time Gross Settlement service beyond 2024

On 13 February 2023, the Bank of England issued its response in relation to its consultation paper on a roadmap for the Real-Time Gross Settlement service beyond 2024. This follows an April 2022 consultation paper setting out the Bank's long-term vision for the renewed RTGS service to serve as an open platform for the UK financial services industry to encourage safe and efficient settlement in central bank money.

The Bank states that respondents agreed that the Bank had considered the right features for RTGS beyond 2024.

The Bank intends to start a process of industry "co-creation" to explore business cases for priority features: resilient channels to connect to RTGS; and extended RTGS operating hours and synchronisation. It states that these areas would not only assist in enhancing domestic payments, but would also support some of the objectives contained in the Financial Stability Board’s roadmap.

17. LawtechUK: UKJT Legal Statement on Digital Securities

On 9 February 2023, the UK Jurisdiction Taskforce of LawtechUK published a legal statement looking into whether English private law can support the issuance and transfer of equity or debt and other contractual securities using a system deploying blockchain or distributed ledger technology. The Statement finds that English law does not necessarily require statutory intervention to support new asset classes or financial structures, as the existing framework supports the most common use cases for digital securities. The statement argues that the inherent flexibility of English law allows it to adapt to accommodate commercial need. The statement argues that digital equity securities of UK companies may pose challenges, owing to requirements under the Companies Act 2006 relating to share transfer and registration.

18. Germany: BaFin explains its understanding of Non-Fungible-Token in BaFin Journal

On 8 March 8, 2023, BaFin published a specialist article on the legal nature and classification of non-fungible-token (NFT) subject to German regulatory law. BaFin elaborates several possible application scenarios and clarifies that the particular assessment depends on the individual specifications of the relevant NFT. BaFin also gives details about their technical understanding of NFTs and potential licence requirements, as well as money laundering risks and relevance.

19. France: Senate: roundtable on the issue of regulation and innovation in the field of cryptoassets

On 1 March 2023, Bertrand Peyret, Deputy Secretary General of the ACPR, along with Marie-Anne Barbat-Layani, Chair of the AMF, Faustine Fleuret, Chair of association for crypto asset development ("ADAN"), and Nicolas Louvet, CEO of Coinhouse, participated in a roundtable discussion on regulation and innovation in the field of cryptoassets organised by the Senate Finance Committee.

During this discussion, the Deputy Secretary General of the ACPR recalled France's early choice to regulate cryptoassets, in particular with the implementation of reinforced registration for digital assets services providers ("DASPs"), which includes an important cybersecurity component. Upcoming developments relating to the entry into force of MiCA were also noted. Also stressed was the importance of the fight against money laundering and terrorist financing, with Mr Peyret noting that control over registered DASPs would be strengthened in 2023.

The recording is available here in French.

20. French National Assembly: Adoption of the so called 2022-2023 DDADUE bill

On 28 February 2023, the French National Assembly adopted the so called 2022-2023 DDADUE Bill (accessible here in French) issued from the consensus reached by the joint committee (commission mixte paritaire).

This Bill includes in particular provisions impacting the French current DASP regime by creating a "reinforced" registration procedure with the AMF. In order to be registered as DASP under this new regime, service providers will have to meet additional requirements (in addition to those under the current registration regime) including:

• having a resilient and secure IT system to avoid cyber-attacks;
• having an internal conflict of interest policy in place;
• having clear and non-misleading communication to customers;
• having an adequate security system in place; and

• complying with specific requirements depending on the service on digital assets provided.

This Bill also includes provisions: to adapt French law to the DLT Pilot Regime Regulation; and authorising the French Government to take measures to adapt French law to MiCA within a maximum of one year.

21. France: AMF: Announcement on application of the EU DLT Pilot Regime from 23 March 2023

On 23 February 2023, the AMF published a press release (accessible here in English) to remind stakeholders that: the application date of the EU regulation no. 2022/858 on a pilot regime for market infrastructures based on DLT (DLT Pilot Regime Regulation) is soon approaching; ESMA published recent documents in relation to the Regulation; and the French national legal framework is in the process of being adapted in order to align it with the European Pilot Regime framework and to clarify the role of the French national competent authorities.

22. Germany: Association of German Banks: Report on the project "Tokenise Europe 2025"

On 15 February 2023, the Association of German Banks (Bundesverband Deutscher Banken, "BdB") published the report on the project "Tokenise Europe 2025". The project was launched by BdB and the European Commission. The report summarizes what a tokenised Europe would look like, explains tokenisation and its importance for Europe's industrial transformation and digital sovereignty and finally recommends actions to be taken in order to foster the token economy.

23. France: ACPR announced its supervisory priorities for 2023

On 15 February 2023, the ACPR published a press release in which it defined its priorities for ensuring the stability of the financial system (accessible here in French).

In this document, the ACPR notably specifies that in relation to AML-TF it will notably carry out inspection campaigns targeting DASPs and participate in the negotiation of the "AML package" presented by the European Commission in 2021.

24. Germany: BaFin amends guidance notice on the German Payment Services Supervision Act regarding cryptoassets

On 14 February 2023, BaFin amended its guidance notice on the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG) (Merkblatt - Hinweise zum ZAG). The amendments elaborate inter alia on the term of cryptoassets. BaFin classifies bitcoins and similar crypto-currencies as financial instruments (more precisely as units of account and cryptoassets) and clarifies that cryptoassets may qualify as electronic money within the meaning of the ZAG.

25. France: COLB: National analysis of money laundering and terrorist financing risks in France

On January 2023, the French Anti-Money Laundering and Counter-Terrorist Financing Policy Board (Le Conseil d'orientation de la lutte contre le blanchiment des capitaux et le financement du terrorisme – COLB) published an updated report on the national AML-TF risks, which takes into account the FATF recommendations and benefited from the contributions of professionals from all sectors of activity subject to the fight against AML-TF. This updated report enables entities subject to AML-TF obligations to better identify the risks they face in their respective activities with illustrative examples. It also highlights the mitigating measures taken by France to deal with such risks. A whole chapter is dedicated to Banking, Financial Services and Insurance and another to Financial Innovations (including digital assets).

See the report here in French.

26. SFC: Consultation paper on the proposed regulatory requirements for virtual asset trading platforms in Hong Kong

On 20 February 2023, the Securities and Futures Commission (SFC) launched a consultation on proposed requirements for operators of virtual asset trading platforms. The SFC considers that the recent turbulence in cryptoassets markets underline the importance of a robust regulatory framework,

The Hong Kong SAR Government published a consultation document in November 2020 to seek views on legislative proposals to introduce a licensing regime for VASPs under the Anti-Money Laundering Ordinance and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO) (AMLO VASP regime). This proposed, in particular, that centralised VA trading platforms offering trading of non-security tokens in Hong Kong should be licensed and regulated by the SFC AMLO. VASP regime will come into effect on 1 June 2023.

To prepare for the commencement of the AMLO VASP regime, the SFC is conducting a consultation on the proposed regulatory requirements to be imposed on licensed VA trading platforms. The proposed requirements under the AMLO VASP regime are based on the requirements under the existing Securities and Futures Ordinance regime.

The SFC plans to publish lists on its website detailing the different regulatory statuses of VA trading platforms.

27. Treasury: Internal documents indicate new crypto laws at least a year away

Internal documents from the Treasury reveal that new laws regulating cryptocurrency are more than a year away.

This was based on the Treasury's briefing to the Treasurer, which was made public under the Freedom of Information laws and provided to The Australian Financial Review.

The briefing also discloses other target milestones, which include the release of consultation papers in the second quarter of 2023 and stakeholder roundtable sessions regarding licensing and cryptocurrency custody rules in the third quarter.

Aside from the timetable, other documents reveal that the Treasury has established a separate "crypto policy unit" within the organisation.

According to one department's briefing, the Treasury anticipates frustration from consumer groups and businesses due to the perceived delay in regulatory protection. However, it also believes that there is no immediate rush to implement regulations due to weakened investor demand caused by rising interest rates and recent disasters in the crypto market, such as FTX's collapse.

28. ASIC expands on the identification of crypto in its 2023 enforcement priorities

The Australian Securities and Investments Commission (ASIC) has expanded its enforcement priorities for 2023, highlighting its focus on investor harms involving crypto-assets.

ASIC's announcement closely follows the release of its latest enforcement and regulatory report (REP 757), which highlights the regulator's actions during the last quarter of 2022. Of significance, ASIC laid 173 criminal charges between July and December 2023 which resulted in the imposition of AU$76.3 million in civil court penalties, bringing the total quantum of civil penalties imposed by ASIC in 2022 to AU$222.1 million.

The regulator's focus on misconduct surrounding cryptoassets comes as no surprise. In the two year period from June 2020 to June 2022, ASIC received over 2,200 reports of misconduct regarding crypto-assets or crypto scams. The regulator has also taken several enforcement actions in the crypto industry last year. Examples include interim stop orders made against Holon Investments for non-compliant target market determinations, and civil penalty proceedings initiated against Web3 Ventures Pty Ltd (Block Earner) for allegedly providing unlicensed financial services with its cryptocurrency products and for operating an unregistered managed investment scheme.

29. OCC: Acting Comptroller discusses trust in global banking and lessons for crypto

On 6 March 2023, the OCC published remarks made by Acting Comptroller of the Currency, Michael J. Hsu, in relation to measures needed to build and maintain trust in global banking and the lessons that this may hold for the cryptoassets sector. Mr Hsu's speech provided an overview of the emergence of a comprehensive, consolidated supervision of internationally active banking groups.

In his speech, Mr Hsu drew parallels between the regulatory and supervisory failures that led to the collapse of the Bank of Credit and Commerce International (BCCI) and the collapse of current crypto exchanges. He argues that both cases involved a fragmented supervision by a combination of state, federal and foreign authorities, and that in both cases, there was an absence of a lead/home regulator responsible for developing a consolidated and holistic view of the firms. Mr Hsu also cites a lack of an established framework for sharing of information between regulators in relation to firms' operations and risk controls. Mr Hsu notes the absence of consolidated supervision for crypto exchanges and argues that in order to be trust worthy, global crypto firms need a lead regulator with authority and responsibility over the enterprise as a whole.

Mr Hsu also expressed support for the BCBS prudential standards for crypto-asset exposures. (see our briefing here).

30. US Treasury: Joint Statement on the U.S.-EU Financial Regulatory Forum

On 13 February 2023, the US Treasury released a statement in relation to the U.S.-EU Joint Regulatory Forum that took place on 7-8 February 2023. The Forum involved representatives from ESMA, EIPA and the ECB, SEC, FDIC and CFTC. The Forum emphasized close ongoing EU and U.S. cooperation in a range of areas, focusing on themes including operational resilience and digital finance. Discussions touched on the recent turbulence in the cryptoassets sector, as well as regulatory and enforcement efforts in the U.S. and EU relating to cryptoassets. Also discussed were developments concerning the potential adoption of central bank digital currencies.

31. Federal Bank Regulatory Agencies: Joint statement on liquidity risks resulting from crypto-asset market vulnerabilities

On 23 February 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the "Agencies") issued a joint statement highlighting liquidity risks to banking organizations associated with certain sources of funding from cryptoasset-related entities and some effective practices to manage those risks.

The joint statement highlights key liquidity risks and some effective practices to monitor and appropriately manage those risks. The statement reminds banking organizations to apply existing risk management principles; it does not create new risk management principles.

32. SEC: Enhanced Safeguarding Rule for Registered Investment Advisers

On 15 February 2023, the Securities and Exchange Commission (the Commission) proposed rule changes to enhance protections of customer assets managed by registered investment advisers. If adopted, the changes would amend and redesignate rule 206(4)-2, the Commission’s custody rule, under the Investment Advisers Act of 1940 and amend certain related recordkeeping and reporting obligations.

The proposed rules would exercise Commission authority under section 411 of the Dodd-Frank Act by broadening the application of the current investment adviser custody rule beyond client funds and securities to include any client assets in an investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets. Like the current rule, the proposed rule would entrust safekeeping of client assets to qualified custodians, including, for example, certain banks or broker-dealers.

Additionally, the proposal retains the current requirement for an adviser with custody of client assets to obtain a surprise examination from an independent public accountant to verify client assets, but it would modify the audit provision to expand the availability of its use, enhance investor protection, and facilitate compliance.

Finally, the proposal would update and enhance related recordkeeping requirements for advisers and amend Form ADV to align reporting obligations with the proposed rule and to improve the accuracy of custody-related data available to the Commission, its staff, and the public

33. FDIC: Letters issued to entities demanding ceasing of false or misleading representations about deposit Insurance

On 15 February 2023, the Federal Deposit Insurance Corporation (FDIC) announced that it had issued letters demanding certain entities cease and desist from making false and misleading statements about FDIC deposit insurance and take immediate corrective action to address these statements. The FDIC also directed two websites to remove similar statements about the FDIC-insured status. Statements were made implying certain entities were FDIC–insured and that FDIC insurance would protect customers’ cryptocurrency in the event of failure.

34. United States Senate Committee on Banking, Housing and Urban Affairs: Statements published in relation to Digital Assets Committee Hearing

The United States Senate Committee on Banking, Housing and Urban Affairs has published statements in relation to a Committee Hearing on why financial system safeguards are needed for digital assets

Statement from Lee Reiners, Policy Director Duke Financial Economics Center, Duke University

In this statement, Mr Reiner discusses options for regulating the cryptoassets sector so as to protect investors and maintains financial stability. The statement: sets out why a comprehensive regulatory regime is needed by describing crypto’s negative impacts; argues that the fallout from collapse of exchanges was isolated within the crypto sector due in part to the actions of the SEC and federal banking agencies; and discusses options for regulating cryptocurrency that do not involve Congress imposing traditional financial regulatory safeguards on the cryptoassets sector (e.g. banning cryptocurrency, regulating cryptocurrency as gambling, and using existing regulatory authorities to regulate crypto without additional legislation).

Mr Reiner argues that the best option is for Congress to carve out cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws. Mr Reiners also explains in detail how Congress can give the SEC exclusive authority to regulate all aspects of the crypto industry and provide greater certainty to market participants. Mr Reiners also recommends Congress grants the SEC the authority to regulate stablecoins like money market mutual funds, with strict requirements that stablecoin reserves be held in cash and Treasury securities, and that these reserves be subject to periodic audits and disclosures. He also explains how Congress can impose such discrete requirements on crypto intermediaries and examines why treating crypto exchanges as self-regulatory organizations is a mistake.

Statement from Linda Jeng, J.D Georgetown University Law Center

In this statement, Ms Jeng argues that we are in a key moment for the transition to a digital economy and at a decision point for building a legal and regulatory foundation that will determine the digital future for decades to come. Ms Jeng sets out why regulation is needed urgently for: supporting the evolution to Web3; creating a clear and supporting environment for innovation; ensuring consumer access and maintaining a competitive edge. She then outlines recommendations based on building blocks. Mr Jeng warns against drawing the wrong lessons from the crisis, arguing that just as banking was not banned after the collapse of Lehman Brothers, it is wrong to argue that crypto is dead. She states that recent collapses are not an example of failure of technology and argues that decentralised finance can by design lessen the fallout from centralised bad actors.

35. United States Senate Committee on Banking, Housing and Urban Affairs: Written testimony from Yesha Yadav

As part of the Committee Hearing on why financial system safeguards are needed for digital assets, the United States Senate Committee on Banking, Housing and Urban Affairs also published a written statement from Yesha Yadav.

In the statement, Ms Yadav calls for a public mandate for private self-regulation, whereby cryptocurrency exchanges, as self-regulatory organizations (SROs), are required by regulators to write rules for, supervise as well as discipline the marketplace. Under the framework, crypto exchanges would come within federal regulation systematically. To designate an SRO, authorities would initially vet a firm for its capacity to perform oversight (i.e. checking the firm’s internal governance, risk management, legal and compliance).

Ms Yadav also offers some suggestions for adapting the current structural model adopted by many top exchanges to make it more conducive to oversight: outright prohibitions on exchanges offering certain services; structural separation of key units (reforms could look at separating out the main units of an exchange to ensure strong walls between different functions, as well as consider separate capitalisation and staffing). Ms Yadav notes that the NYSE has hived off its regulatory functions from its trading and commercial arms to ensure due process.

36. CFTC: Opening statements before the Global Markets Advisory Committee

On 13 February 2023, the CFTC published remarks by Commissioners Caroline D. Pham and Kristin N Johnson before the Global Markets Advisory Committee.

• Commissioner Caroline D. Pham. Ms Pham refers to past warnings she made about a lack of regulatory clarity, and the importance of ensuring robust risk management and compliance in the cryptoassets sector. Referring to May 2022 speech warning about the dangers of an inadequate regulatory framework for the cryptoassets sector, Ms Pham confirms that she has since proposed public roundtables with SEC Commissioner Hester Peirce, and proposed a comprehensive framework for responsible digital asset markets, as well as the first-ever CFTC Office of the Retail Advocate. She also states that she has called for the CFTC to aggressively use its Dodd-Frank authority for enforcement. She stresses the importance of US policymakers understanding developments at the international level and in other regions of the world, as well as understanding the use cases for digital assets.
• Commissioner Kristin N Johnson. Ms Johnson argues that recent collapses and turmoil in the sector involved devastating losses experienced by retail customers lured into high-risk transactions by marketing schemes, with some of these customers assuming that were protected but ending up unsecured creditors.. Ms Johnson argues that the CFTC has a wealth of knowledge and experience which could be used to assist standard setters building cryptocurrency regulatory frameworks. This includes experience in disclosures, prohibiting abusive and disruptive trading practices, establishing execution and settlement requirements, applying oversight to intermediated and disintermediated market structures and developing best practices for the custody of digital assets.

37. US Treasury: Remarks by Under Secretary for International Affairs Jay Shambaugh at Afore Consulting’s 7th Annual FinTech and Regulation Conference

On 8 February 2023, the US Treasury published remarks by Jay Shambaugh, Under Secretary for International Affairs, at Afore Consulting’s 7th Annual FinTech and Regulation Conference. The speech provided an overview of common challenges faced by EU and UK in relation to the financial regulatory framework. The speech also touched on challenges faced in responding to the growing importance of the digital assets sector and responding to the turbulence in the cryptoassets sector.

Key points

• Regulatory and law enforcement agencies are investigating and enforcing against malpractices in the cryptoassets sector.
• Although spillover from cryptoassets to broader financial system has remained limited, the risk is still present and it is for this reason Financial Stability Oversight Council has called on U.S. regulatory agencies to enforce their existing authorities and work together to address regulatory arbitrage and has called for Congress to pass legislation giving the federal financial regulators additional powers to regulate digital asset markets where there are gaps, including via a comprehensive federal prudential framework for stablecoin issuers.
• The FSB's October 2022 proposed framework for global stablecoin arrangements and crypto-asset activities and markets represents a significant action in reducing the threat that digital assets pose to global financial stability.
• Although no decision has been made on whether to issue a U.S. CBDC, the US is building capacity to support one and considering important design choices to maximize its potential benefits (e.g. improving financial inclusion and equity).
• The US is committed to working with partners across the globe on the international dimensions of payments innovations, including CBDCs.
• At the G20, the US is committed to making progress in relation to core priorities under the Roadmap for Enhancing Cross-Border Payments.

38. SEC Division of Examinations Announces 2023 Priorities

The Securities Exchange Commission's Division of Examination has published its 2023 priorities. These are published annually to provide insights into the SEC's approach, including areas of potential risk to investors. Emerging technologies and cryptoassets form part of a list of priorities and the Division confirms that it is intending to carry out examinations of broker dealers and RIAs using emerging financial technologies. Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practice.

No updates in this month's edition.

No updates in this month's edition.