Global Digital Assets Digest April 2023

1. IOSCO: Publication: IOSCO Board Priorities - Work Program 2023-2024

On 5 April 2023, IOSCO published its Work Program 2023-2024. This builds on ongoing priorities identified in the 2021-2022 Work Program, the internal workplans of the Board-level Financial Stability Engagement Group (FSEG) and other areas. Workstreams build on themes including strengthening financial resilience and supporting market effectiveness protecting Investors. IOSCO's Fintech Taskforce confirms that it will continue its policy-focused work on cryptoasset markets and activities in 2023 as set out in IOSCO’s July 2022 Cryptoasset Roadmap. IOSCO confirms that it will:

• issue a consultation report with recommendations for the regulation of cryptoassets in H1 2023 and will issue final recommendations in 2023; and
• issue a consultation report with recommendations for the regulation of DeFi in Q3 and will issue final policy recommendations by the end of 2023.

2. ECB: Blog: Oversight of crypto activities  

On 5 April 2023, the ECB published a blog by Elizabeth McCaul, Member of the Supervisory Board of the ECB, on the oversight of crypto activities. The blog refers to recent events in the cryptoassets sector and recent turmoil in the banking sector, arguing that  this serves as a reminder about the importance of sound regulation and effective supervision in maintaining financial stability. Ms McCaul also argues that the banking turmoil shows that contagion can go both ways (from the cryptoassets sector to banks but also vice versa). Ms McCaul notes that failures of banks can have repercussions for the operations of some crypptoasset trading platforms and crypto firms.

Ms McCaul argues that any regulatory framework should ensure that all cryptoasset service providers have sound governance and risk management arrangements in place, including binding external auditing and financial disclosure requirements. She argues that a global regulatory and supervisory framework for cryptoassets is in its infancy and notes the challenge for regulators in regulating firms that have no physical borders. Ms McCaul suggests that both MiCA and MiFID would merit a review, arguing that large and complex financial players need a consolidated supervisory approach to ensure detection of risks and to prevent regulatory arbitrage. Ms McCaul also refers to risks in relation to tokens issued by cryptoasset exchanges that are then retained in the portfolio of these exchanges. 

3. BIS: Speech by Haruhiko Kuroda: Evolution of payments - payment systems for "Neoteric Individuals" 

On 4 April 2023, BIS issued a speech by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Fintech Summit FIN/SUM 2023, Tokyo, in relation to payment systems. The speech summarises  the benefits that can accompany changes in payments systems. Mr Kuroda argues that the emergence of various stablecoins can be considered an unbundling of two payment functions: one for issuing liabilities/settlement assets; and the other for recording interest in settlement assets. The speech confirms that the Bank of Japan has decided to launch a pilot program in April 2023 in relation to a CBDC.

4. BIS: Speech by Denis Beau - Moving beyond the first generation of innovation and regulation for tokenized finance - the case of DeFi

On 4 April 2023, BIS published a speech by Denis Beau. The speech provides an overview on collaboration between the Banque de France,  ACPR and Monetary Authority of Singapore as well as the regulatory framework for digital assets. Mr Beau notes that fully "decentralised" services are excluded from the scope of the MiCA  and stresses the need to create a regulatory framework adapted to the specificities of DeFi. Mr Beau also refers to the use of DeFi innovation to serve the possible development of tokenised finance and to improve cross-border payments The speech argues that the resilience of the blockchain infrastructure supporting DeFi should be evaluated, as well as the security of the applications underlying DeFi "services". 

5. BIS: Speech by Andréa M Maechler and Thomas Moser: Swiss payments vision – an ecosystem 

BIS has issued a speech given by Swiss National Bank officials, Andréa M Maechler and Thomas Moser, at the Money Market Event in Zurich. The speech considers the future of cashless payments and the drivers of change in the payments systems, notably ongoing digitalisation and the increasing use of new technologies such as DLT. The speech discusses three principles for secure and efficient payments: close interrelationship between private money and central bank money; settlement of payments in central bank money; and seamless integration of payment systems, payment solutions and forms of money. The speech refers to potential benefits of DLT and the token ecosystem in terms of efficiency gains, but also notes the risks that DLT. The speech considers different types of money that could potentially be used as a means of payment in token transactions. Referring to Project Helvetia (investigation by BIS on the settlement of tokenised assets in central bank money), the speech explores three different types of token settlement: synchronised settlement, whereby a link to the SIC system synchronises the settlement of tokenised securities with the settlement of payments; integrated settlement, using a Swiss franc wholesale CBDC; and integrated settlement using private Swiss franc token money protected under bankruptcy law.

6. IOSCO: Final Report: Retail Market Conduct Task Force

On 30 March 2023, IOSCO published a final report on retail market conduct. This is in response to what IOSCO perceives as the changing retail trading landscape, influenced by changing macro conditions, demographic trends, and technological development. The report contains a section on digitisation, social media and retail trading (including a discussion on cryptoasset trends and associated risks). The report cites several issues in the cryptoassets sector that may make it unsuitable for most retail investors and also refers to opacity in price discovery of crypto-assets/financial instruments based on cryptoassets. The report also cites poor transparency and unclear disclosure obligations for cryptoasset platforms issuing tokens.

7. ESMA: Q&As on DLT Pilot Regime

On 30 March 2023, ESMA published an update to its Q&As in relation to the Regulation for a pilot regime for market infrastructures based on distributed ledger technology (see our guide for more information). This contains a question providing clarification in respect of market capitalisation of DLT shares that are not yet admitted to trading or traded on a trading venue, the tentative market. 

8. BCBS: Press release on initiatives

On 23 March 2023, the Basel Committee on Banking Supervision (BCBS) confirmed the outcome of meetings held in March 2023, as well details of initiatives it will be carrying out in 2023. The BCBS confirmed that following the publication of a prudential treatment for banks' exposures to cryptoassets in 2022 (see our briefing here), it had approved a workplan concerning mitigating the risks cryptoassets to the global banking system. The BCBS also plans to continue monitoring banks' cryptoasset activities and exposures, including their role as potential issuers of stablecoins and tokenised deposits, custodians of cryptoassets and interconnections with areas in the cryptoasset sector.

9. BIS: Report: Project Nexus: Enabling instant cross-border payments: Conclusions from a technical proof of concept between the Eurosystem, Malaysia and Singapore 

On 23 March 2023, BIS issued a report on Project Nexus. The report provides an overview of early experiments in relation to the interlinking of payment systems. Nexus is a blueprint to connect multiple instant payment systems into a cross-border network. It seeks to support the G20 roadmap on cross-border payments. The report follows the November 2022 Memorandum of Understanding in Regional Payment Connectivity.

The report summarises Phase II of the Project Nexus, which involved building a prototype to connect test IPS of the Eurosystem, Malaysia and Singapore. Test payments were initiated by mobile phone numbers/recipients' company registration numbers via the Eurosystem's TARGET Instant Payment Settlement (TIPS); Malaysia's Real-time Retail Payments Platform (RPP); and Singapore's Fast and Secure Transfers (FAST) payment system.

BIS confirms that the next stage of the initiative will involve collaboration between central banks and payment system operators of Indonesia, Malaysia, the Philippines, Singapore and Thailand on approaches to connecting their domestic payment systems through Nexus. BIS states that it hopes that Nexus can be implemented globally, and that it will seek to establish a Global Advisory Panel of central banks and payment system operators to advise on the project's development.

10. ECB: Annual Report on supervisory activities 2022  

On 21 March 2023, the ECB published its annual report on supervisory activities. Among other things, the report provides a summary of banking supervision in 2022; authorisations, enforcement and sanction procedures; and interinsututional cooperation. 

Notable points 

• ECB Banking Supervision participated in discussions on the regulatory scope and legislative proposals made in the context of the digital finance strategy for the EU, such as the MiCA.
• In 2022, ECB Banking Supervision supported the FSB’s efforts in priority areas, such as the G-SIB framework and cryptoasset activities.
• An important driver  of new licence applications (as in previous years) has been the increased use of digital innovations to provide services to EU clients. Most of the applications concerning business models involving cryptoasset activities and services were submitted by credit institutions based in Germany.
• The role of the ECB is to ensure that banks choosing to engage in cryptoassets markets do so safely and soundly. The ECB and relevant NCA apply the CRD criteria when assessing licensing requests in relation to cryptoassets activities and services.

11. BIS: Speech by Shaktikanta Das: Har payment digital

On 15 March 2023, BIS published a speech by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Digital Payments Awareness Week. The speech was given at the launch of Mission "Har Payment Digital" and provides an overview of developments in digital payments and payments infrastructure generally in India. The speech notes the impact of initiatives such as Unified Payments Interface (UPI), the Bharat Bill Payment System (BBPS), the National Electronic Toll Collection (NETC) System, the National Automated Clearing House (NACH) system and the PM-KISAN Scheme. Mr Das also notes steps adopted for "the internationalisation" of India's payment systems and cross border linkage of fast payment systems of India and Singapore. 

12. BIS: Speech by Mahesh Kumar Jain: The FinTech revolution in India - innovation, inclusion and regulation

On 15 March 2023, BIS published a speech by Deputy Governor, of the Reserve Bank of India, Mahesh Kumar Jain, at the International Research Conference entitled "FinTech: Innovation, Inclusion, and Regulation". The speech argues that the so-called FinTech revolution is marked by the increased use of computing power, new technologies and new business models. The speech argues that any approach to regulate FinTech should be informed by five key objectives: financial stability;  consumer protection; integrity of financial system; competition; and orderly development of sector concerned. The speech notes that India's presidency of the G20 has afforded it the opportunity to demonstrate leadership in digital payments systems, adding that India has contributed to innovations in cross-border payments. Mr Jain argues that India is well placed to direct discussions on cross-border interoperability of CBDCs and standards for effective interfacing, given the fact that India has piloted its CBDC. 

13. FCA: Business Plan 2023/2024

The FCA has published its Business Plan 2023/2024. This sets out key plans over the next 12 months to help deliver the commitments in the FCA's strategy.

The Plan makes a number of references to FCA's plans in relation to digital assets sector and confirms that:

• the FCA will look to make any necessary changes to changes to systems and procedures to prepare for proposals set out by Government in its February 2023 consultation (see our briefing here) on a future regulatory regime for cryptoassets;
• as of the 3 April 2023, the FCA had registered 41 cryptoasset firms under anti-money laundering rules;
• the FCA will ensure that it has effective oversight of firms communicating and approving financial promotions including qualifying cryptoassets when they are brought within the financial promotion perimeter and that firms only do so if they have the relevant competence and expertise; and
• the FCA will work with the Bank of England to support the Treasury’s objective of having the Financial Market Infrastructure Sandbox to test the use of DLT for settlement and trading up and running by the end of 2023.

14. Bank of England: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation: Global action to enhance cross-border payments

On 29 March 2023, the Bank of England published a speech given by Victoria Cleland, Executive Director for Banking, Payments and Innovation. The speech focuses on the importance of enhancing cross-border payments. Referring to the G20 Roadmap for cross-border payments and the FSB's 2023 report on priority actions in relation to cross-border payments, Ms Cleland stresses the importance of collaboration between various stakeholders from the private and public sector to improve cross-border payments.

Ms Cleland also refers to current Bank of England initiatives concerning payments infrastructure, such as the RTGS Renewal Programme and notes that significant progress is being made.

15. The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

On 27 March 2023, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 was published. This follows a July 2020 consultation issued by the Government (see our briefing here) containing proposals to amend the existing financial promotion rules.

The UK financial promotion regime prohibits any person from communicating an invitation or inducement to engage in investment activity or claims management activity in the course of business. The Government had proposed that the financial promotion restriction in section 21 of FSMA should apply to so-called "qualifying cryptoassets" (i.e. those cryptoassets that are not security tokens and are therefore not covered by existing financial promotion rules). The consultation was followed by a January 2022 Government response (see our briefing here) and a February 2023 Policy Statement issued on the same day that the Government published wide-ranging proposals in relation to the regulation of the cryptoassets sector (see Ashurst briefing here)

The Order:

• amends the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (2005/1529) by adding "qualifying cryptoasset" to the list of controlled investment subject to the financial promotion restriction; and
• creates a temporary, limited exemption to the financial promotion restriction for cryptoasset businesses (which are not authorised persons) on the FCA’s anti-money laundering register (cryptoasset business registered with FCA can, therefore, continue to approve their own financial promotions).

The Government has also published a schedule detailing how the instrument would amend existing legislation.

16. BoE: Minutes of the CBDC Engagement Forum - March 2023

On 27 March 2023, the Bank of England published the latest minutes of its CDBC Engagement. Forum Co-chairs sought feedback from Members on the format and functioning of the Engagement Forum over its first year and gathered views on how to maintain an appropriate level of engagement in the next phase.

The session also looked at the consultation paper on the digital pound (see our briefing here). There was some support for the proposal to build the digital pound as a public platform, with some attendees noting the potential for “pass-through” wallets (which would not hold digital pounds on their balance sheets) to promote innovation and wider participation in the payments landscape. Some attendees also argued that efficiencies could be created in ensuring coordination between the digital pound project and the New Payments Architecture.

17. HM Treasury: Answer to written question: Royal Mint: Non-fungible Token

On 27 March 2023, HM Treasury published an answer in relation to a written question concerning the issuance of a non-fungible token (NFT) by the Royal Mint. The answer confirms that Royal Mint will not be proceeding with the launch of an NFT, but will keep this under review. In an April 2022 Keynote Speech, John Glen, Economic Secretary to the Treasury, announced that Royal Mint had been directed to create an NFT.

18. Germany: Digital Finance Forum presents its Roadmap

On 21 March 2023, the Digital Finance Forum (DFF), established by the Federal Ministry of Fi-nance in March 2022, published its ideas in a roadmap. The 40 experts of the DFF developed the key elements and priorities for Germany as a financial centre. For the financial market regulation and supervision, DFF proposes amongst others the following changes: establishing a regulatory sandbox following the example of the FCA, implementation of MiCA, providing legal certainty for tokenized financial services and amending the German Electronic Securities Act (eWpG) to cover digital shares and more instruments.

19. HKMA: Speech by Darryl Chan

On 30 March 2023, HKMA published a speech delivered by Darryl Chan, Deputy Chief Executive. The speech provides an overview of important trends and developments in relation to digital assets. Mr Chan notes that in recent years, both the public and private sectors have undertaken a number of digital bond projects involving the use of DLT. Mr Chan also refers to Hong Kong's first tokenized government green bond issuance and argues that this demonstrates a flexible and favourable legal and regulatory environment for innovation.

20. National Australia Bank (NAB) Deploys ERC-20 AUD Stablecoin (AUDN)

In partnership with technology providers Blockfold and Fireblocks, NAB has deployed its own stablecoin (AUDN). The AUDN is an ERC-20 token and the bank completed its first intra-bank cross-border transaction on the Ethereum network. NAB has announced that the AUDN is planned to be fully backed one-to-one with the Australian dollar and kept in segregated, fully audited accounts to be managed as a liability of the bank.

21. Treasury: Digital Assets (Market Regulation) Bill

Opposition Senator Andrew Bragg has introduced a Private Member's Bill to Parliament. The Bill will seek to implement a licensing regime for digital asset activities, by introducing a licencing framework for the following activities: Digital Asset Exchanges; Digital Asset Custody Services; and Stablecoin Issuance.

It is proposed that the Australian Securities and Investment Commission (ASIC) will supervise and manage the issuing, variation and suspension of licences. Licensees must meet certain requirements before being granted a license. The proposed Requirements vary based on the activity that the Licensee wishes to carry out.

Digital Asset Exchanges

The proposed requirements to be met in order to obtain license include: the maintenance of a minimum amount of capital; the regulation of the conduct of the exchange’s participants; the procedures and monitoring of the exchange’s activities; the segregation of the exchange participants’ funds; cybersecurity; disclosure of information to the exchange’s participants; and record-keeping and other reporting.

Digital Asset Custody Services

The proposed requirements to be met in order to obtain license include: the designation of key personnel in Australia with certain responsibilities; the maintenance of a minimum amount of capital; the segregation of the exchange participants’ funds; disclosure of information regarding how customers’ funds are protected; and proper auditing, assurance and disclosure arrangements.

Stable Coin Issuance

The proposed requirements to be met in order to obtain license include: that licensees must hold the full amount of the face value of their liabilities for the stablecoins on issue in reserve, in accounts kept with an ADI in Australia; that licensees give APRA quarterly statements; that licensees be audited annually and that financial statements relating to the audit are made publicly available; that licensees make publicly available quarterly statements in relation to the size and composition of their assets in reserve for the stablecoins and issued stablecoins in circulation; and that licensees develop a tailored and appropriate plan to protect consumers from cybersecurity risks relating to stablecoins.

The Bill also offers a definition of "digital asset", drawing from international definitions, as 'a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology. There is currently no set definition of 'digital asset' in Australia or globally.

22. Reserve Bank of Australia: Central Bank Digital Currency Pilot Research Project

The Reserve Bank of Australia (RBA), in collaboration with the Digital Finance Cooperative Research Centre (DFCRC), is undertaking a pilot program to research the ability for a central bank digital currency to complement existing forms of money. The pilot will involve fourteen industry participants, (such as banks, fintechs and payments companies), demonstrating potential uses for CBDC. The participants will undertake testing with a digital version of central bank issued Australian dollars that is a real digital claim on the RBA. Each participant has a potential "use case" for CBDC to be tested over the course of the program.

A report on the outcome of the project is expected by mid-2023.

23. US Treasury Department: Risk assessment on DeFi Illicit Finance

On 6 April 2023, the US Treasury Department published the 2023 DeFi Illicit Finance Risk Assessment. The study looks at risks associated with what are commonly called DeFi services, focusing on how illicit actors are abusing these services as well as vulnerabilities unique to DeFi services. The study includes recommendations for U.S. Government actions to mitigate the illicit finance risks associated with DeFi services. The study aims to further the work outlined in Executive Order 14067 on “Ensuring Responsible Development of Digital Assets” (for more information see our briefing here).

24. Federal Reserve: Speech by Governor Michelle W. Bowman

On 14 March 2023, the Federal Reserve published a speech by Governor Michelle W. Bowman. Ms Bowman refers to recent turmoil in the banking sector, notably the closure of Silicon Valley Bank and Signature Bank. The speech refers to banks' response to the growing interest expressed by bank customers in relation to the cryptoassets, adding that designing clear regulatory expectations around safety and soundness has been hampered by a complex market. Ms Bowman notes that the absence of timely regulatory guidance poses challenges for banks with an interest in the cryptoassets sector. Ms Bowman cites recent Federal Reserve initiatives around regulatory expectations in relation to cryptoassets. Ms Bowman confirms that cryptoasset activities remain an important focus for the Federal Reserve and other bank regulators, adding that Federal Reserve staff will be looking to create guidance on cryptoasset activities such custody, trade facilitation, loans collaterised by cryptoassets and the issuance and distribution of stablecoins.

25. Federal Agencies: Joint statement on the resolution of Silicon Valley Bank

On 12 March 2023, the US Treasury, Federal Reserve and the FDIC confirmed they had approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank. The statement also confirmed that bank deposits above the current $250000 limit would be guaranteed. Depositors at the bank included issuers of stablecoins.

Later in March 2023, Vice Chair of the Federal Reserve, Michael S Barr, submitted remarks to US Senate Committee on Banking Housing and Urban Affairs and the Committee on Financial Services, US House of Representatives.

26. Board of Governors of the Federal Reserve System: Speech by Vice Chair for Supervision Michael S. Barr At the Peterson Institute for International Economics, Washington, D.C.

On 9 March 2023, Federal Reserve issued a speech by Michael S. Barr, Vice Chair for Supervision, entitled "Supporting Innovation with Guardrails: The Federal Reserve’s Approach to Supervision and Regulation of Banks’ Crypto-related Activities".

Notable points

• A key area of focus is how the regulatory framework can encourage innovation in addition to supporting the safety and soundness of financial institutions and broader financial stability.
• The technology underlying cryptoassets could bring new functionality/efficiencies to payment systems.
• The Federal Reserve has dedicated resources looking into the benefits of DLT and what it could do for reconciliation, clearing and settlement.
• Although some cryptoassets are described as decentralised, new centralised intermediaries have emerged that do not appear to be observing regulation and supervision. This is compounded by the lack of consolidated home country supervision and coordination with host supervisors (in circumstances where entities have chosen to operate in jurisdictions with less developed legal and regulatory frameworks).
• The overarching principle of the Federal Reserve's financial oversight is that activities that are fundamentally the same should be regulated the same, regardless of where or how the activity occurs or the terms used to describe the activity.
• The Federal Reserve's overall stance is that banks should take a careful and cautious approach to engaging in cryptoasset related activities and the crypto sector.
• It is important to prevent the emergence of new forms of unregulated private money (such as stablecoins) subject to classic forms of run risk, and with the associated spillovers and systemic implications for households, businesses, and the broader economy.

27. CFTC Testimony of Chairman Rostin Behnam before the U.S. Senate Committee on Agriculture, Nutrition, & Forestry

On 8 March 2023, the Testimony of Chairman Rostin Behnam before the U.S. Senate Committee on Agriculture, Nutrition, & Forestry was published. The speech provided an overview on the oversight provided by the Commodities Futures Trading Commission. Ms Behnam provided an overview of CFTC’s approach to regulation, as well as the impact of technology and innovation on markets and regulatory changes needed to address these changes. In particular, Ms Benham provided a summary of relevant legislation, such as the Commodity Exchange Act and her views on additional guidelines and resources that might be needed. Ms Behnam notes that the CFTC does not have direct statutory authority to comprehensively regulate cash commodity markets, adding that its oversight is limited to what she terms reactionary fraud and manipulation enforcement authority. Ms Benham comments that the CFTC has brought more than 70 enforcement actions involving digital asset commodities. Ms Benham also argues that increased retail participation in derivatives markets requires the CFTC to ensure that products offered are suitable and that disclosure information is adequate.

No updates in this month's edition.

No updates in this month's edition.