Global digital digest November 2022

1. BIS: Speech by Governor of the People's Bank of China on CBDC

On 31 October 2022, BIS issued a speech by Yi Gang, Governor of the People's Bank of China, at the Hong Kong FinTech Week 2022. The speech looked at the workings of E-CNY, China's version of CBDC, the role that CBDCs can play in promoting faster, cheaper and more transparent cross-border payments.

Key points

• e-CNY is mainly focused on cash and mainly meeting the needs of domestic retail payments. It aids the development of inclusive finance, and improves the efficiency of the currency and payment systems.
• Privacy protection and financial security were considered during the design of the e-CNY.
• e-CNY adopts a two-tiered system: the PBOC supplies e-CNY to authorised operators and processes inter-institutional transaction information only; and authorised operators only collect the personal information necessary for the exchange and circulation services to the public.
• A balance needs to be achieved between protecting privacy and combating illicit activities.
• PBOC is collaborating with the Hong Kong Monetary Authority and some other monetary authorities on CBDC.

2. European Commission introduces proposed Regulation on instant credit transfers in euro

On 26 October 2022, the European Commission introduced the Regulation amending the Single Euro Payments Area Regulation and the Cross-Border Payments Regulation as regards instant credit transfers in euro. The Regulation seeks to make instant payments in euro available to all citizens and businesses holding a bank account in the EU and EEA countries.

Key aspects of the proposed Regulation are as follows:

• making instant euro payments universally available (EU payment service providers already offering credit transfers in euro would be obliged to also offer an instant version within a defined period);
• making instant euro payments affordable;
• increasing trust in instant payments; and
• removing friction in the processing of instant euro payments while preserving the effectiveness of screening for persons that are subject to EU sanctions.

The proposal contains phased implementation deadlines.

The initiative is an important step in the EU Retail Payments Strategy published in October 2020 (see Ashurst briefing).

3. ISDA: Speech by Chief Executive at ISDA Crypto Forum 2022

On 24 October 2022, ISDA published a speech by Scott O’Malia, ISDA Chief Executive, at the ISDA Crypto Forum 2022. The speech highlights areas of focus for ISDA in relation to cryptoassets: the development of legal standards; and a risk-appropriate capital framework.

Key points

• Recent volatility in the cryptoassets sector have raised questions as to what would happen in a bankruptcy situation (e.g. what rights do crypoasset investors have in the event of the bankruptcy of an exchange or wallet provider).
• ISDA is looking to amending its standard contractual framework for the OTC crypto derivatives market. Its Digital Assets Legal Group is making considerable progress in producing standard terms.The ISDA Digital Assets Legal Group has also been looking at events such as forks, which may result in two distinct versions of the blockchain code with different values. It has also considered the impact of airdrops and pricing disruptions.

• ISDA, along with other trade associations, has made known its concerns in relation to the BCBS proposed framework for the prudential treatment of cryptoasset exposures: unless amendments are made to the proposed framework, banks could be precluded from responding to customer demand for intermediation in cryptoassets.

4. EBA: Call for interest for two expert groups and a call for input in relation to work under the recast Funds Transfers Regulation

On 21 October 2022, the EBA announced that it has launched the following in relation to its work under the EU Recast Funds Transfers Regulation: a call for expression of interest to the EBA’s Technical Expert Group on crypto asset service providers and AML (TEG-CASPs/AML); a call for expression of interest to the EBA’s Technical Expert Group on restrictive measures regimes and targeted financial sanctions (TEG-RMRs); and a call for input on the 2017 joint guidelines to prevent the abuse of fund transfers for ML/TF purposes.

The TEG-CASPs/AML Group will provide input on the financial crime risks to which CASPs are exposed and challenges that market participants may face when implementing the revised TFR. They will also be expected to advise on how these risks and challenges could be addressed.

The TEG-RMRs Group will assist the EBA in its mandate to provide guidance on the internal policies, procedures and controls PSPs and CASPs have to put in place to comply with restrictive measures regimes for the purposes of the recast TFR. This will consist of technical input on: controls implemented by market participants to enable them to comply with restrictive measures regimes and targeted financial sanctions; and challenges that market participants may face when implementing those controls.

5. IOSCO: Publication: Annual Report 2021

On 21 October 2022, IOSCO published its annual report. The report provides a lookback at key themes and contains a report from outgoing chair, Ashley Alder. The report notes that IOSCO has made progress in workstreams including cryptoassets and work undertaken in collaboration with the FSB.

Key points

• Digitalization and financial innovation continued to impact financial markets, giving rise to conduct risks associated with, for example, social media and digitalization of retail market distribution and crypto assets.
• The cryptoassets sector is witnessing the emergence of different market structures with actors providing bundled services, as well as cross-border enforcement challenge.
• The work of the FTF covering crypto, digital assets and decentralized finance will contribute towards IOSCO’s efforts in analyzing and responding to market integrity and investor protection concerns within.

6. Eurosystem: Announcement on rescheduled start of renewed wholesale payment system

On 20 October 2022, the ECB issued a press release confirming that the launch of the new real-time gross settlement (RTGS) system and its central liquidity management model (T2) had been postponed by four months, from 21 November 2022 to 20 March 2023. The press release explains that the decision is in light of the importance and systemic nature of T2.

7. G20: Publication: G20 Chair’s Summary Fourth G20 Finance Ministers and Central Bank Governors Meeting Washington DC, 12-13 October 2022

On 18 October 2022, the Summary of the Fourth G20 Finance Ministers and Central Bank Governors Meeting was published following a meeting in October 20222. The statement contains several points to note in relation to financial services and digital assets in general.

Points to note

• The G20 welcomes continued work on the use of CBDCs to facilitate cross-border payments and in the G20 TechSprint 2022, a joint initiative with the BIS Innovation Hub.
• The G20 welcomes the final guidance by the BIS CPMI and IOSCO which confirms that the Principles for Financial Market Infrastructures apply to systematically important stablecoin arrangements.

8. BIS: Speech by Burkhard Balz: The European payment industry in challenging times

On 17 October 2022, BIS issued a speech by Burkhard Balz. Member of the Executive Board of the Deutsche Bundesbank, at the Payments Association's conference held in Madrid.

Key points

• Payments are becoming increasingly "embedded" in fully digital transaction value chains and "enriched".
• Big Tech players are leveraging their existing digital platforms with large customer bases to enter new markets.
• There is a danger for banks of being sidelined as interchangeable settlement agents with the advent of stablecoins issued by a Big Tech. Big Techs in Europe currently rely on cooperation with banks for the settlement of payments.
• Turbulence in relation to stablecoin highlights potential issue when panicked consumers wishing to convert stablecoins back into real money due to a loss of confidence create a run like scenario. This risk might further increase as a result of strong interdependencies between stablecoins and other crypto assets in Decentralised Finance markets.
• By the end of the investigation phase in autumn 2023, the Eurosystem will decide whether to launch a realisation phase on a digital euro. The introduction of a digital euro could follow in autumn 2026.

9. EU: Digital Markets Act published in the Official Journal

On 12 October 2022, the EU Digital Markets Act (DMA) was published in the Official Journal. The DMA is primarily aimed at limiting the power so-called gatekeepers and, along with the Regulation on a Single Market For Digital Services (Digital Services Act), forms part of a package introduced in December 2020 by the European Commission to address harm caused by online platforms. Where a firm meets the criteria for gatekeeper designation, it will be under a number of obligations. For more information on the DMA, please see Ashurst briefing here.

10. FSB: Letter from Klaas Knot, Chair, to G20 Finance Ministers and Central Bank Governors

On 11 October 2022, the FSB issued a letter from Klaas Knot, Chair, to G20 Finance Ministers and Central Bank Governors. The letter was submitted to G20 Finance Ministers and Central Bank Governors (FMCBG) ahead of their meeting on 13-14 October. It outlines the work the FSB is undertaking to tackle current financial stability issues. The letter outlines the report submitted to the October G20 FMCBG on a regulatory framework for cryptoassets. It also refers to a number of reports that the FSB has issued.

The letter notes that a lot work remains outstanding in relation to data, operationalising recommendations, further policy work on DeFi and implementation. It also states that authorities need to develop a better understanding of the broader macro-financial implications of cryptoassets, including for macroeconomic stability.

11. FSB: Consultive report on high-level recommendations of the regulation, supervision and oversight of “Global Stablecoin” arrangements

On 11 October 2022, the FSB issued a consultative report "High-level Recommendations of the Regulation, Supervision and Oversight of Global Stablecoin Arrangements". This follows the October 2020 report containing high level recommendations and a review of the recommendations by the FSB. The report describes the findings from this review and covers: recent market developments and the characteristics of existing stablecoins; recent policy developments, including regulatory initiatives and recent work of the standard setting bodies; and proposals to revise the recommendations. The FSB aims to finalize updated high-level recommendations by July 2023.

Notable proposed amendments to the recommendations

• The revised recommendations extend the scope to stablecoins with the potential to become GSCs.
• The introduction to the revised recommendations references the FSB’s recommendations for cryptoassets and markets issued in October 2022 (these cover the cryptoasset ecosystem in general). The two sets of recommendations are intended to complement each other.
• Accompanying text to revised recommendation 2 now provides that where a GSC arrangement relies on trading platforms or other intermediaries to perform critical functions, including some or all of its stabilisation function, authorities should require that those intermediaries fall within the regulatory, supervisory and oversight perimeter wherever possible.
• Accompanying text to revised recommendation 2 now provides that authorities should also aim to regulate and supervise custodial wallet service providers providing services related to GSCs to address operational, reputational, financial and market protection risks that may arise from the storage of users’ private keys and tokens, and from the other activities that these entities could perform.
• Accompanying text to revised recommendation 2 now provides that in addition to prudential requirements, authorities should require GSC arrangements to have comprehensive liquidity risk management practices and contingency funding plans.

12. FSB: Consultation on regulation, supervision and oversight of cryptoasset activities and markets

On 11 October 2022, the FSB issued a consultative document on the regulation, supervision and oversight of cryptoasset activities and markets. In line with the G20 mandate, the FSB examined regulatory and supervisory issues raised by cryptoasset activities. The document contains a set of high-level recommendations which apply to any type of cryptoasset activities and associated issuers, service providers that may pose risks to financial stability. They are intended to complement the FSB's recommendations on global stablecoin arrangements.

The document also sets out the key issues and challenges in developing a comprehensive and consistent regulatory approach that captures all types of cryptoasset activities and summarises current policy initiatives at the jurisdictional and international levels.

The FSB will finalise the proposed recommendations by mid-2023 in light of feedback from the public consultation. The FSB is encouraging all interested stakeholders to participate in the consultation. The FSB intends to continue monitoring developments and risks in cryptoassets and to set out an approach for the coordination of international regulatory and supervisory approaches for cryptoasset activities. The FSB confirms that it is also analysing developments and potential risks to financial stability stemming from decentralized finance and will consider in 2023 whether additional policy work is warranted based on findings.

13. ESMA: Strategy 2023-2028 and Work Programme for 2023

On 10 October 2022, ESMA issued its strategy for 2023-2028. ESMA's Strategy is structured around the following key areas: fostering effective financial markets and financial stability; strengthening supervision and supervisory convergence of EU financial markets; enhancing retail investor protection; enabling sustainable finance; and facilitating technological innovation and effective use of data. Key plans in relation to digital assets include the following:

• ESMA will also consider the impact of decentralised finance and cryptoassets, notably related to trading and settlement, on financial stability;
• ESMA will look at the risks posed among others by new and innovative products or services (e.g. cryptoassets or non-fungible tokens); and
• ESMA will contribute to the development of specific regulatory requirements for cryptoassets service providers including from a retail investor perspective.

ESMA also published its work programme for 2023 and set out developments in respect of the digital assets sector.

14. FSB: Note on enhancing cross-border payments

On 10 October 2022, the FSB issued a note outlining the next steps relation to cross-border payments in relation to the G20 roadmap for enhancing cross-border payments. The FSB notes that the roadmap has now reached an inflection point and needs to progress to practical projects to enhance payment arrangements.

The note confirms that FSB and other stakeholders will focus and prioritise future work on the roadmap in the following areas:

• Payment system interoperability and extension: work on this priority will focus on improvement of payment system interoperability, extension of RTGS operating hours and access policies. Relevant building blocks under this priority include: improving (direct) access to payment systems (BB10); extending and aligning operating hours (BB12); and pursuing interlinking of payment systems for cross-border payments (BB13).
• Legal, regulatory and supervisory frameworks: work under this priority will focus on the promotion of an efficient legal, regulatory and supervisory environment for cross-border payments while maintaining their safety, security, and integrity. Relevant building blocks under this priority include: aligning regulatory, supervisory and oversight frameworks (BB4); and applying AML/CFT rules consistently and comprehensively (BB5).
• Cross-border data exchange and message standards: work under this priority will focus on facilitating cross-border data exchange and increasing the use of standardised messaging formats for cross-border payments. Relevant building blocks under this priority include: reviewing the interaction between data frameworks and cross-border payments (BB6); adopting a harmonized ISO 20022 version for message formats (including rules for conversion/mapping) (BB14); and harmonising API protocols for data exchange (BB15).

The FSB confirms that it will incorporate the actions into an updated roadmap, which it will deliver at the G20 Finance Ministers and Central Bank Governors meeting in 2023. The FSB confirms that it intends to publish an update on its planned framework for monitoring progress toward the G20 targets for cross-border payments in November 2022.

15. FSB: Report on the progress made during the second year of the roadmap

On 10 October 2022, the FSB published a report on the progress made during the second year of the roadmap on cross-border payments. The report states that the work in 2021 and 2022 has focused on establishing the foundational elements of the roadmap. It notes that bodies leading the various building blocks of the roadmap have published consultative or final reports offering specific proposals, best practices, or guidance across numerous building blocks. The annex to the report contains information collated by the CPMI on steps taken by individual jurisdictions in support of a number of building blocks in the roadmap.

16. BIS: Report on new regulatory framework for Big Tech

On 7 October 2022, BIS issued a report on a regulatory framework for Big Tech. It looks at recent Big Tech initiatives in financial services including crypto-related initiatives.

The paper notes that technological innovation and the rise of Big Techs present a number of opportunities, but may also present certain risks that need to be addressed by appropriate policy action. It states that activities related to the issuance or operationalisation of stablecoins have only recently received regulatory attention, and summarises regulatory initiatives in this regard.

17. Recast Wire Transfer Regulation: Agreed text of proposed Regulation

On 5 October 2022, the Council of the EU published an information note (13215/22) and a letter sent to the Chair of the European Parliament Economic and Monetary Affairs Committee (ECON) concerning the recast Wire Transfer Regulation.

The letter confirms a draft overall compromise package has been agreed by the Council's Permanent Representative Committee. The Council and the European Parliament reached a political agreement on the recast revised WTR in June 2022.

The recast Wire Transfer Regulation implements the so-called travel rule in respect of cryptoasset transfers. It was introduced by the European Commission in July 2021 as part of a EU package of legislative measures (see our briefing here).

18. SWIFT blueprint for CBDC

In October 2022, SWIFT outlined its blueprint for a global CBDC network. This follows an 8-month trial involving some national central banks and a number of commercial banks. It forms part of SWIFT's agenda for enabling instant, frictionless and interoperable cross-border transactions.

Interlinking CBDCs for seamless cross-border payments

SWIFT notes that many CBDC projects use different technologies and are focused on domestic use. It argues that changes need to occur for the potential of CBDCs to be fully realised across borders. SWIFT, in collaboration with Capgemini, looked at CBDC-to-CBDC transactions between different DLT networks based on Quorum and Corda technologies, as well as fiat-to-CBDC flows between the networks and a real-time gross settlement system.

Tokenised assets

In collaboration with a number of financial institutions and SETL, SWIFT looked at 70 scenarios simulating market issuance and secondary market transfers of tokenised bonds, equities and cash.

19. Financial Services and Markets Bill 2022-23: Notice of amendment to bring cryptoassets within FSMA

On 26 October 2022 a notice of amendment in relation giving the Treasury the power to regulate cryptoassets more broadly, rather than just stablecoins, was published. The Financial Services Bill is making its way through the UK legislative process. It contains some provisions in respect of the cryptoasset sector, namely the regulation of stablecoins used as a means of payment. The Notice of Amendment proposes bringing cryptoassets within regulatory perimeter under the Financial Services and Markets Act 2000, with the result that they would be subject to similar regulatory oversight that traditional securities are subject to under FSMA.

The Financial Services and Markets Bill 2022-23 completed its committee stage in the House of Commons on 3 November 2022 and Parliament published a revised version of the Bill, as amended in the committee stage.

20. FCA: Discussion Paper: Big Tech (DP 22/5)

On 25 October 2022, the FCA issued a discussion paper on the competition impacts of Big Tech's entry and expansion into retail services. The focus of the paper is on Big Tech firms’ potential impacts on competition in retail financial services markets, The paper examines plausible Big Tech entry/expansion strategies in the UK in four UK financial services sectors: payments, deposit taking, consumer credit and insurance. It defines the payments sector broadly, to mean any infrastructure, technology or service that facilitates or enables the transfer of digital funds. In relation to expansion into the payments sector, the discussion paper notes that Big Tech firms could facilitate the adoption of payments through a non-card payment channel by integrating alternative payment options directly into digital wallets and that cryptoassets may also be used as a widespread means of payment in the future.

Ashurst will be publishing a briefing looking at the key issues raised in this discussion paper in due course.

21. Bank of England: Speech by Carolyn Wilkins on governance of decentralised finance

On 19 October 2022, the Bank of England published a speech by Carolyn Wilkins, External member of the Bank of England’s Financial Policy Committee.

Notable points

• Certain aspects of "cryptogovernance" create opportunity: the possibility of organisational structures based on a greater degree of decentralised decision making than in traditional finance; and encouraging growth by presenting decision making as a game or an activity in which participants have something at (or to) stake.
• The so-called merge of Ethereum showed what can be achieved under the right circumstances and also advanced governance in some ways: the ultimate decision to move to the Beacon chain was a pre-programmed, automated event without any human intervention; the Merge would not have succeeded if a critical mass of ETH holders had not staked their ETH to the Beacon Chain, either directly or via staking pools like Lido and Coinbase.
• Despite claims to the contrary, there are important concentrations of power in decentralised finance - the governance of critical decisions is not completely decentralised, even in a permissionless blockchain. This raises issues about accountability.

22. FCA: Publication: Consumer Investments Strategy – 1 year update

On 18 October 2022, the FCA issued a one year update in relation to its Consumer Investments Strategy. The FCA also issued its consumer investments data review.

In the strategy, the FCA refers to various workstreams, including its workstreams on strengthening financial promotions regime. It refers to its recent policy statement in this area, noting that final rules for cryptoasset promotions will be in place once the Treasury makes relevant enabling legislation.

The data review observed a marked increase in supervisory cases opened involving investment scams or higher risk investments and stated that this was due in part to more cases being referred to the FCA Cryptoasset Supervision Team concerning potentially unregistered cryptoasset businesses and potential scams. The FCA refers to its ScamSmart Warning List Tool, which notes a 55 per cent increase in checks on cryptocurrency offers.

23. FCA: Transcript: Transcript of Annual Public Meeting 2022

On 18 October 2022, the FCA issued the transcript of its annual public meeting. In the meeting, FCA CEO, Nikhi Rathi, answered various questions put forward by the public to the FCA. Mr Rathi also provided an overview of FCA activities in the last year, including FCA actions to fairly regulate firms, businesses and consumers operating with cryptoassets; and the FCA's future strategy surrounding the regulation of crypto assets. There was also a discussion about the benefits of DLT and the fact that the FCA had supported 56 firms with DLT based innovations, and was working with the Treasury in the development of a financial market infrastructure sandbox.

24. Law Commission: Launch of a review into private international law and digital assets

On 18 October 2022, the Law Commission announced it as was launching a review into how private international law applies to digital assets and other emerging technology (such as digital assets and electronic trade documents). The Law Commission confirms it will develop reform proposals in a public consultation paper, due to be published in the second half of 2023.

The Commission notes that the rise of new digital technologies has thrown up a number of conflict of laws issues, leading to legal uncertainty for users, organisations and governments.

25. FMLC: Minutes of FMLC Meeting 28 July 2022

On 3 October 2022, the Financial Markets Law Committee published minutes of a meeting it held in July 2022. The meeting covered a number of areas including the Financial Services and Markets Bill 2022-23, as well as the treatment of Decentralised Autonomous Organisations (DAOs). It was noted that members had agreed to establish a Working Group to consider how English law might treat DAOs and associated “governance tokens. It was noted that FMLC had taken relevant steps to ensure that its work would complement that of the Law Commission and recent developments were summarised for members.

26. BaFin: Announcement on FinTech Innovation Hub

As of 14 October 2022, BaFin's FinTech Innovation Hub is available in English. BaFin launched its FinTech Innovation Hub in German already on 1 September 2022. The hub offers a structured overview and regulatory assessment of various fintech business models and provides further information on necessary licences and applicable regulatory provisions.

27. MAS: Consultation paper to address the treatment of stablecoins

On 26 October 2022, the MAS released a consultation paper setting out a specific regulatory regime to address the regulation of stablecoin issuers and intermediaries, with a specific focus on single-currency pegged stablecoins (SCS) and SCS issued in Singapore.

Amongst other things, the MAS has announced its intention to introduce a new regulated activity of "Stablecoin Issuance Service" under the Payment Services Act 2019 (PS Act) to regulate stablecoin issuance by Singapore-based entities. SCS issuers exceeding or expecting to exceed a SCS circulation of S$ 5million in value will be required to obtain a major payment institution (MPI) licence to be recognised as an issuer of MAS-regulated SCS. Conversely, SCS issuers that do not exceed the size threshold for MPI will only need to obtain a standard payment institution (SPI) licence should they provide regulated DPT services. Banks in Singapore will continue to be exempted from the requirement to obtain a licence under the PS Act to carry on a business of providing any payment service, including the proposed Stablecoin Issuance Service.

In addition, the MAS has also proposed that new and further requirements be imposed on regulated SCS issuers (i.e. bank issuers, as well as non-bank issuers regulated for SCS issuance under the PS Act). These include requirements to maintain a high degree of value stability of SCS through reserve asset backing of SCS – in particular, SCS issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100 per cent of the par value of the outstanding SCS in circulation, with assets being denominated in the same currency as the pegged currency. All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten (G10) currencies. Further, issuers must segregate customers' MAS-regulated SCS from other customers' assets (e.g. DPTs) as well as its own assets in different custody accounts, to prevent commingling and misuse.

Apart from the proposed measures above, the MAS has also proposed to designate a systemic stablecoin arrangement as a designated payment system (DPS).

28. MAS: Consultation paper on regulatory measures concerning retail investors investing in DPTs

On 26 October 2022, the MAS released a consultation paper setting out the MAS' proposed regulatory measures for licensees and exempt payment service providers that carry on a business of providing a DPT service under the PS Act (collectively known as DPT service providers, or DPTSPs) – in particular, that DPTSPs ensure proper business conduct and adequate risk disclosure.

The proposed measures will cover three broad areas:

• Consumer Access – DPTSPs will be required to provide relevant risk disclosures to enable retail investors to make informed decisions about trading in cryptocurrency. Credit facilities, such as borrowing to fund cryptocurrency purchases, and leverage by retail consumers for cryptocurrency trading must be disabled.
• Business Conduct – DPTSPs will be required to implement proper segregation of customers' assets, mitigate any potential conflicts of interest which arise from the various roles they perform, and establish proper channels and processes for handling complaints from users.
• Technology Risks – Similar to other financial institutions e.g. banks, DPTSPs will be required to maintain high availability and recoverability of their critical systems.

29. Singapore High Court: Ruling on characterisation of NFTs

On 21 October 2022, the Singapore High Court ruled in Janesh s/o Rajkumar v Unknown Person (CHEFPIERRE) [2022] SGHC 264 that non-fungible tokens (NFTs) – in this case, an NFT known as Bored Ape yacht Club (BAYC) No. 2162 – could be considered property, as they fulfil certain legal requirements, such as being easily distinguishable from one another and having owners capable of being recognised as such by third parties. As the application for an injunction was however interlocutory in nature, and made on the basis of urgency, the Singapore High Court also cautioned that "a different conclusion may well be reached with the benefit of fuller submissions".

30. Singapore Supreme Court: Details released in relation to $57 million class-action hearing concerning Terraform Labs CEO, Do Kwon

Following the collapse of Terra Luna, the Supreme Court of Singapore announced that it would conduct a hearing for a $57 million class-action lawsuit filed on behalf of over 350 international investors against Terraform Labs CEO, Do Kwon. Notably, the individuals filing the lawsuit have alleged that Do Kwon, along with the Luna Foundation Guard (LFG) and Terra, had made fraudulent and/or reckless claims that its native algorithmic stablecoin, TerraUSD (UST) would have been able to maintain its USD peg, despite being aware of the UST's inherent structural weaknesses. The hearing was scheduled to take place on 2 November 2022.

31. MAS: Responses to Parliamentary Questions on cryptocurrency investment companies and the regulation of cryptocurrency transactions involving privacy coins

On 4 October 2022, in response to a Parliamentary Question on cryptocurrency investment companies setting up operations and measures in place to prevent money laundering and fraud, the Monetary Authority of Singapore (MAS) clarified that it has in place a "rigorous licensing process" to ensure that licenses are only granted to DPT service providers with strong governance structures and robust controls. In addition, the MAS has stated that it will conduct surveillance to identify entities that are involved in illicit activities, and refer such entities to the Police and/or place them on its Investor Alert List to warn the public.

The MAS also responded to a Parliamentary Question on prevalence and regulation of cryptocurrency transactions involving privacy coins and privacy wallets. Specifically, the MAS has clarified that digital payment token (DPT) service providers engaged in customer transactions involving anonymity features are required to implement stronger controls to address the higher risks they pose. In particular, money laundering and terrorism financing risks posed by such tokens must be assessed before dealing in them. DPT service providers are also required to evaluate the purpose of their customers’ use of privacy coins, privacy wallets or mixers and undertake enhanced monitoring of their transactions.

32. Australian Law Reform Commission Background Paper on regulatory reform and the emergence of new business models

In October 2022, the Australian Law Reform Commission released a Background Paper entitled " New Business Models, Technologies and Practices" as part of its Review of the Legislative Framework for Corporations and Financial Services Regulation (the Inquiry). The Inquiry examines the potential simplification of laws which regulate financial services in Australia as part of the Government's response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The purpose of Background Paper is to provide a high-level overview of the extent to which regulatory reform may support the emergence of new business models, technologies and practices, with a particular focus on crypto assets and DAOs.

The Paper explores the regulatory environment, policies, framework and approaches which apply to crypto assets and DAOs in Australia, and concludes by identifying areas for reform in regulating crypto assets and DAOs.

A key area for reform relates to defining crypto-assets. Drawing upon findings of Treasury's Consultation Paper "Crypto Asset Secondary Service Providers: Licensing and Custody Requirements" the ALRC considers whether in defining crypto-assets, reference may be had to the definition of a "financial product". This is because the law remains ambiguous as to whether the regulatory treatment in respect of traditional financial products can similarly be applied to novel crypto assets. The ALRC also notes the need for reform in relation to licensing and custody requirements for crypto asset secondary service providers (CASSPs) and identifies three regulatory approaches which could be taken. The Background Paper also explores whether technology-neutral regulation should be adopted in relation to crypto-assets in circumstances where doing so may impede innovation.

33. CFTC: Speech by Commissioner Christy Goldsmith Romero before the International Swaps and Derivatives Association’s Crypto Forum 2022, New York

On 26 October 2022, the CTFC issued a speech by CFTC Commissioner Christy Goldsmith Romero before ISDA's Crypto Forum 2022 in New York. In the speech, Ms Romero explains how crypto presents many similar financial stability risks as the traditional financial system, adding that she advocated a “same risk, same regulatory outcome” approach, starting first with an assessment of risk, and in particular, financial stability risk.

Key messages

• Unregulated crypto markets showed vulnerabilities to similar financial stability risks as traditional finance, with parallel themes from the 2008 financial crisis: opaque, complex, leveraged, and unregulated products; underappreciated risk; a lack of confidence that underlying assets were stable or of high quality; and connections between market participants. However, at present, the digital asset market remains relatively small, and contained from the level of systemic risk.
• Digital assets operate differently from the products in 2008, and with far more hype, celebrity endorsements, and novel technologies.
• Intra-market risk should be monitored and regulators should understand possible spillover effects on the financial system or economy during times of stress.
• The credibility of stablecoins could be significantly improved by regular independent audits of the stabilization mechanism or quality of underlying assets.
• The challenge faced by regulators is that cryptocurrency was designed to sit side-by-side with the traditional financial system – an alternative to, rather than a part of, Trad-Fi.

34. FDIC: Speech by Acting Chairman Martin J. Gruenberg at the Brookings Institution on the prudential regulation of cryptoassets

On 20 October 2022, the FDIC published a speech from acting Chairman Martin J. Gruenberg at the Brookings Institution concerning the prudential regulation of cryptoassets.

Key points

• Some of the challenges arising from the regulation of cryptoassets stem from the dynamic nature of cryptoassets, the crypto marketplace, and the rapid pace of innovation. When the risks of some cryptoassets begin to come into focus, either the underlying technology shifts or the use case or business model of the crypto–asset change.
• Agencies are deliberately adopting a cautious approach to bank participation in cryptoasset related activity. Once the FDIC and the other Federal banking agencies develop a better collective understanding of the risks associated with these activities, it will provide broader industry guidance on an interagency basis.
• Payment stablecoins would be safer if they were subject to prudential regulation. One method for ensuring prudential regulation and separation from deposit taking would be issuing a payment stablecoin through a bank subsidiary.
• Payment stablecoins would be safer if they were required to be backed dollar–for–dollar by high–quality, short–dated U.S. Treasury assets.
• The development of a payment stablecoin could fundamentally alter the landscape of banking.

35. Federal Reserve: Speech on managing the promise and risk of financial innovation

On 17 October 2022 a speech by Michael S Barr Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, given at the DC Fintech Week, Washington DC was published.

Points to note

• Supporting innovation with appropriate regulation: The right kind of financial innovation supported by new technologies can boost competition and help to create products that better meet customer needs and can also boost financial inclusion.
• Striking the right balance for cryptoasset activity: The Board is working with other US agencies/bodies to ensure that appropriate regulation of the cryptoasset-related activities banks. Recent volatility in cryptoassets market have shown potential risks if bank deposits are concentrated in deposits from cryptoassets, as well as risks concerning interconnection between cryptoasset companies sharing the same risk profile.
• Regulating stablecoins: Stablecoins could pose a risk to financial stability and the Fed is working with other regulatory agencies in this regard.
• Recognizing the risks of tokenizing bank liabilities: A number of banks are looking at different ways to issue dollar-denominated tokens on distributed ledger networks and should engage with regulators early on in the process.
• CBDC: No decision has yet been made by the Federal Reserve on whether to issue a CBDC, but any move in this area would need the support of Congress and the Administration.

36. Federal Reserve: Speech on the U.S. Dollar and Central Bank Digital Currencies

On 14 October 2022, the Federal Reserve issued a speech by Governor Christopher J. Waller given at the "Digital Currencies and National Security Tradeoffs" symposium. In the speech, Mr Waller refers to the January 2022 discussion paper issued by the Federal Reserve Board of governors in respect of CBDCs.

The speech notes the impact cryptoassets have had in respect of changes to the payments system (from instant interbank payments to mobile payment services to a shift toward nonbank payment providers). The speech concludes that focus should be on CBDC's effects on financial stability, payment system improvements, and financial inclusion.

37. Financial Stability Oversight Council: Report on Digital Asset Financial Stability Risks and Regulation"

On 3 October 2022, the Financial Stability Oversight Council published its report on Digital Asset Financial Stability Risks and Regulation. The Council voted to approve the report in response to President Biden’s Executive Order 14067, “Ensuring Responsible Development of Digital Assets.” (see Ashurst briefing).

The report reviews the specific financial stability risks and regulatory gaps posed by various types of digital assets and provides recommendations to address such risks. The report identifies three gaps in the regulation of cryptoasset activities in the United States: the spot markets for cryptoassets that are not securities are subject to limited direct federal regulation; cryptoasset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage (some crypto-asset businesses may have affiliates or subsidiaries operating under different regulatory frameworks); and some cryptoasset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries such as broker-dealers or futures commission merchants. Recommendations proposed in the report include introducing legislation providing for rulemaking authority for federal financial regulators over the spot market for cryptoassets that are not securities.

38. SEC: Action against Kim Kardashian in respect of promotion of cryptoassets on social media

The Securities Exchange Commission announced charges against Kim Kardashian for touting on social media a cryptoasset security offered without disclosing the payment she received for the promotion. Ms Kardashian published a post on her Instagram account, with the post containing a link to a website, which provided instructions for potential investors to purchase the tokens in question.

39. Dubai: DFSA publishes policy statement on regulatory regime for cryptoassets

The Dubai Financial Services Authority (DFSA) published its plans for implementing a regulatory regime for crypto tokens that came into force in November 2022. This is contained in a feedback statement published in October 2022. The regime has been informed by the approach adopted by international standard-setters, including the Financial Action Task Force, the FSB and the International Organisation of Securities Commissions. The statement provides an overview of the DFSA's approach to AML; the prudential treatment of crypto tokens; and decentralised finance activities.

40. Reuters: Cryptoverse: British pound fiasco boosts bitcoin's hedge appeal

This article reports on the fallout from the UK mini budget and cites figures indicating that a number of investors moved away from the pound and towards the cryptocurrency (despite it falling in value earlier this year). According to figures cited, when the pound fell to its lowest-ever level against the dollar, trading volumes between sterling and bitcoin increased to a daily record high of 846 million pounds.

41. Reuters: UAE's central bank pilots cbank digital currencies transactions

This article reports that the central bank of UAE has announced that it has completed a pliot in relation to CBDCs in conjunction with other jurisdictions, including the People's Republic of China's Digital Currency Institute. The article notes that the pilot is part of the Project mBridge, which looks at cross-border payments using a common platform based on DLT.

42. FT: ‘We never lost interest’: Asian family offices buy into crypto

This article reports that family offices in Asia are showing more interest in cryptocurrencies in light of weak returns in equity. It cites a survey of interest in cryptocurrencies which noted the biggest interest came from family offices. The article notes a generational divide in the appeal of cryptoassets, arguing that crypto companies are seeking to access old money.