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Regulatory and Legislative Analysis #3

Regulatory and Legislative Analysis – Global

Financial Action Task Force (FATF): Targeted Update on Implementation of FATF’s Standards on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs)

On June 30, 2022, the FATF released a targeted update for VA and VASP standards. This release focused heavily on the Travel Rule (for more background on Travel Rule click here), which is covered within FATF Recommendation 15. It also discussed emerging/evolving risks in decentralized finance, non-fungible tokens (NFTs), and ransomware.   Key takeaways include:

  • Of 98 responding countries, 29 have passed VA-specific Travel Rule legislation and 11 have started supervision/enforcement.
  • The private sector has introduced viable solutions to facilitate compliance with the Travel Rule (an example is CipherTrace’s Traveler), but that ongoing work is required to continually improve interoperability between VASPs and jurisdictions.
  • The term, decentralized, should be scrutinized as many decentralized arrangements have much more centralized authority subject to Anti-Money Laundering (AML) obligations.
  • Ransomware threats and challenges continue to occur through VAs, particularly moving funds via privacy coins and non-compliant VASPs.
  • NFT markets have continued to grow rapidly; FATF will continue to assess risk and focus on NFT differentiation by use (i.e., collectibles vs payments-use).

Basel Committee on Banking Supervision (BCBS) publishes ‘Second Consultation on the prudential treatment of cryptoassets exposures’

This is important, as it will ultimately inform the Bank of International Settlement (BIS) drafting of standards for capital treatment of cryptoassets. The BCBS published this consultation as a follow-up to the initial consultation in June 2021. The primary focus of this consultation is creating two groups of cryptoassets (i.e., Group 1 and Group 2). Group 1 cryptoassets include, “include tokenized traditional assets (Group 1a) and cryptoassets with effective stabilization mechanisms (Group 1b), which would be subject to at least equivalent risk-based capital requirements based on the risk weights of underlying exposures as set out in the existing Basel capital framework”. The consultation specifically excludes algorithm-based stablecoins from Group 1 and outlines subgroups for specific pegging functionality that would pass a Basis test. Group 2 cryptoassets include those assets that, “pose additional and higher risks compared with Group 1 cryptoassets and consequently would be subject to a newly prescribed conservative capital treatment”. Group 2 includes assets where there is no counterparty, thus, bitcoin would be an example of an asset in this grouping. Further, the consultation sets a provisional limit of Group 2 assets at one percent of tier 1 capital, which will be reviewed in an ongoing manner. A key update from the first consultation splits group 2 into two buckets, which have different capital charges. The consultation also offers clarification on accounting links (delinking prudential treatment of intangible assets to goodwill lessening impacts to Tier1 capital calculations), operational risk classifications (delineating operational risk vs those covered in market and credit risk).

  • The BCBS is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability (BCBS Charter).

Regulatory and Legislative Analysis – United States

US Office of Government Ethics (OGE) releases advisory focused on government employees involved in policy work not being able to hold coins/tokens

An advisory from the OGE was released on July 5, 2022. It provided expanded details around certain government employees’ ability to invest in cryptocurrencies and other virtual assets/tokens. Several examples are provided, but this document essentially outlines that government employees working on virtual asset policy may not invest in VAs that could be related to their work. The author of this newsletter understands this first-hand as the author was required to sell virtual asset holding in 2021 while working on VA-related supervisory and policy initiatives for a government agency. Lastly, it is not clear if this applies to government officials (i.e., members of US Congress or Senate) that may impact US’ VA legislative efforts.

 

Commodity Futures Trading Commission (CFTC) charges South African pool operator and CEO with $1.7 billion fraud involving bitcoin

On June 30, 2022, the CFTC filed a civil suit in the Western District of Texas. The suit charged Mirror Trading International Proprietary Limited and its CEO, Cornelius Johannes Steynberg, with fraud and registration violations. The CFTC press release cited the following:

  • The complaint charges that from approximately May 18, 2018, through approximately March 30, 2021, Steynberg, individually and as the controlling person of MTI, engaged in an international fraudulent multilevel marketing scheme…to solicit Bitcoin from members of the public for participation in a commodity pool operated by MTI.”
  • The defendants “accepted at least 29,421 Bitcoin—with a value of over $1,733,838,372 at the end of the period—from approximately 23,000 non-ECPs from the United States, and even more throughout the world, to participate in the commodity pool without being registered as a commodity pool operator as required” and “misappropriated, either directly or indirectly, all of the Bitcoin they accepted from the pool participants.”
  • Steynberg was recently detained in Brazil based on an INTERPOL arrest warrant.

Regulatory and Legislative Analysis – EMEA

European Parliament and Council presidency reached a provisional agreement on the Markets in Crypto Assets (MiCA) proposal

On June 30, 2022, the European Union (EU) Council Presidency and the European Parliament “reached a provisional agreement on the markets in crypto-assets (MiCA) proposal which covers issuers of unbacked crypto-assets, and so-called “stablecoins”, as well as the trading venues and the wallets where crypto-assets are held”. MiCA brings crypto-assets, crypto-assets issuers, and crypto-asset service providers (CASPs) under a regulatory framework for the first time in the EU. While fostering innovation, this EU level framework will bring more clarity in the region and its member states regarding crypto-assets. Once adopted (subject to formal approval by Council and Parliament), MiCA would be intended to become applicable 18 months following its entry into force. MiCA includes, but is not limited, to the following elements:

  • Protecting consumers from schemes/fraud and risks associated with crypto-assets as an investment.
  • Tasking the European Banking Authority with creating and maintain a public register for non-compliance CASPs to support AML standards and obligations.
  • Requiring CASPs to be registered with national authorities providing relevant information directly to the European Securities and Markets Authority.
  • Creating capital requirements for issuers of virtual assets.
  • Covering other considerations including: Travel rule compliance, unhosted wallets, stablecoins, NFTs, climate consideration/risk, and personal data protections.
Qatar Central Bank (QCB) is in early stage of Central Bank Digital Currency (CBDC) development (Yahoo Finance and Cointelegraph Links)

While not published on the QCB website, numerous sources cited QCB Governor H E Sheikh Bandar bin Mohammad bin Saoud Al Thani noting that the country was in the process of evaluating whether a CBDC is possible and valuable for Qatar. He discussed crypto and CBDC, making the following statement, “Currently, crypto are a technology innovation. It might take us to new era of fast, cheap, and more accessible financial services. However, those crypto assets which are not underlined by monetary authority might be less credible”. CBDCtracker.org notes that Qatar is in the research stage and had commenced their efforts in 2022. Qatar continues to be an intriguing country to watch on the VA front as Crypto.com is a notable sponsor of the 2022 World Cup.

Regulatory and Legislative Analysis – LATAM

Argentina’s Administración Federal de Ingresos Públicos (AFIP) seizes digital wallets for tax recovery (Cointelegraph and Bitcoin.com)

While not available directly on the AFIP’s website, it was reported that the agency has seized over 1,200 digital wallets from individuals/entities that were delinquent on their taxes. This occurred as the AFIP was able to attain information from the Argentinian VASPs. This followed a nearly two-year period where the AFIP did not seize citizens’ assets as part of a COVID-relief measure.

Regulatory and Legislative Analysis – APAC

Hong Kong publishes amendment to AML and Counter Terrorism Financing (CTF) Bill, including VASP clarifications (Gazette Announcement and Bill)

On June 24, 2022, Hong Kong’s government produced an amended AML/CTF bill to improve Hong Kong’s ability to fight money laundering and terrorist financing risks. Within this bill, there was a specific focus on VAs/VASPs (Part 5b) and updating the regime to meet FATF expectations. Key aspects of the amendment are as follows:

  • The bill proposes to apply customer due diligence and record-keeping requirements to VASPs and clarifies the types of activities that would constitution a VASP or other VA services.
  • “Any person who seeks to carry on a business of operating a virtual asset exchange is required to apply for a license from the Securities and Futures Commission (SFC). The relevant person is subject to the meeting of a fit and proper test as well as the AML/CTF and other regulatory requirements”. The fitness tests are like firms outside the VA space, so not too dissimilar from SFC’s normal course of business.
  • The SFC may impose a license condition(s) (i.e., capital requirements, AML/CFT procedures, etc.) and has authority to revoke a license.
  • Licensed firms must appoint two responsible officers, which require approval by the SFC; these officers are legally accountable for their firm’s AML/CTF compliance.
  • VASPs registering in Hong Kong are also required to maintain a physical and permeant presence in country to be eligible.
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