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Regulatory and Legislative Analysis #6

Regulatory and Legislative Analysis – Global

The Bank for International Settlement (BIS) publishes a report on project mBridge, which experiments with cross-border payments using a common platform based on distributed ledger technology (DLT) upon which multiple central banks can issue and exchange their respective central bank digital currencies (multi-CBDCs).  The report was developed by BIS, Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.  Project Icebreaker is another exciting collaboration between BIS and the central banks of Israel, Norway, and Sweden, to explore CBDCs can be used for international retail and remittance payments.

Financial Action Task Force (FATF): Jurisdictions under increased monitoring: In its 21 Oct 2022 release, FATF adds the Democratic Republic of the Congo, Mozambique, and Tanzania, identified as having strategic AML/CTF deficiencies, but have developed action plans to address their vulnerabilities. On the flipside, Nicaragua and Pakistan were removed from FATF’s list of jurisdictions under increased monitoring.

OECD publishes Crypto-Asset Reporting Framework (CARF):  The Organization for Economic Co-operation and Development (OECD) published its Crypto-Asset Reporting Framework (CARF), following a request by the Group of Twenty (G20) for a proposed automatic exchange system. This publication contains the rules and commentary of the CARF, and a set of amendments to the Common (tax) Reporting Standard (“CRS”), as approved by the OECD Committee on Fiscal Affairs in August 2022.

Regulatory and Legislative Analysis – United States

On October 20th, the Commodity and Futures Trading Commission (CFTC) released enforcement results for its fiscal year 2022, of which 18 of the 82 actions were digital asset related cases.  Highlighting these cases was a $1.7 billion fraud scheme from June; this is the largest enforcement case to date for the CFTC that involves digital assets.

The Internal Revenue Service (IRS) released draft instructions for 1040 filers.  Page 17 of the draft release includes definitions for how to treat digital assets more broadly than prior years, and now includes a specific mention of non-fungible tokens (NFTs).

On October 3rd, the Security and Exchange Commission (SEC) announced charges against celebrity, Kim Kardashian for not disclosing that she was compensated for promoting EthereumMax.  The settlement included her agreeing to pay $1.26 million.  SEC Chairman Gensler noted that this is a reminder to celebrities to follow disclosure laws, and for individuals to be mindful of investment risks.  Also on October 3rd, the SEC announced the halting of crypto asset related fraud involving Latino investors. “On September 19, 2022, the Securities and Exchange Commission filed an emergency action to stop an on-going fraudulent and unregistered crypto asset offering targeting Latino investors, run by defendants Mauricio Chavez and Giorgio Benvenuto through a company Chavez founded and controlled, CryptoFX, LLC.”  The SEC noted that this fraudulent scheme involved over 5,000 victims and $12 million in funds.

Regulatory and Legislative Analysis – EMEA

VASPs in Europe displayed an unprecedented rate of suspicious transactions reports (STR) last year.  Data collected by ACAMS moneylaundering.com shows that total STRs received by the financial intelligence units of 42 European nations nearly tripled from 2.4 million in 2020 to 6.9 million last year.  STRs rose roughly 20% in the U.K. and Italy, 44% in France, 70% in the Netherlands, 100% in Germany and Estonia. However, the most impressive growth occurred in Lithuania, which logged 13 times as many STRs in 2021; and in Finland, where STRs rose by a factor of nearly 60, from only 62,000 in 2020 to 3.7 million last year.

US based Gemini expands its EU services in six European countries: Denmark, Sweden, Portugal, Czechia, Latvia, and Liechtenstein. Residents and institutions from these countries can now buy, deposit, trade, and custody over 100 cryptocurrencies via Euros, Pound Sterling, debit card, bank transfer, Apple, or Google Pay.  Earlier in March 2022, Gemini got “Gemini Payments Limited” registered as a Virtual Asset Service Provider (VASP) by the Central Bank of Ireland (ref numb C432664)Under EU’s landmark Markets in Crypto-Asset Regulation (MiCA), crypto-asset service providers will need an authorization to operate within the EU.

Bankhaus von der Heydt, one of Germany’s oldest privately owned banks, founded in 1754, is being considered for acquisition by Germany-based cryptocurrency and blockchain investor Bitcoin Group SE, owner of futurum bank AG, a trading platform for digital currencies. Earlier in May, Coinpanion, a crypto startup for easy entry into the world of crypto investments, announced a collaboration with Bankhaus von der Heydt, to create an operational partnership in crypto custody, and trading. On another note, various media announced that Binance is considering buying bank(s) to bridge the gap between crypto and traditional finance.

Deutsche Bank AG was ordered by BaFin to take specific measures aimed at preventing money laundering and terrorist financing.  As per a 28 Sept 2022 announcement,  Germany’s Federal Financial Supervisory Authority has threatened to impose financial penalties in the event that the bank does not comply with these specific measures.

FINMA partially revises Anti-Money Laundering Ordinance:  The Swiss Financial Market Supervisory Authority FINMA has partially revised the FINMA Anti-Money Laundering Ordinance. Starting Jan 2023, Swiss citizens will have to verify their identities when transacting with more than 1,000 Swiss francs in crypto.

The Tel Aviv Stock Exchange will reshape its ownership structure and also create a blockchain platform to allow more trading of crypto currencies in an effort to match international standards, as detailed within its 2023 to 2027 strategy document published on 24 Oct.

Regulatory and Legislative Analysis – APAC

The Monetary Authority of Singapore (MAS) released two consultation papers on October 26th Consultation Paper P008-2022 provides proposed regulatory measures for digital payment tokens; this “sets out proposed regulatory measures for licensees and exempt payment service providers that carry on a business of providing a digital payment token service under the Payment Services Act 2019”.  Consultation paper P009-2022 provides proposed regulatory approach for stablecoin-related activities; this “sets out MAS’ policy thinking regarding the overall regulatory approach on stablecoin-related issuance and intermediation activities, and highlights the key requirements that will be imposed on such activities”. The comment period extends until December 21, 2022.

Hong Kong plans to legalize retail crypto trading, and reportedly will introduce mandatory licensing for crypto platforms from March 2023. Hong Kong wants to reestablish its reputation as a global financial hub, however, contrasts with mainland China, where crypto is banned.

The Reserve Bank of India (RBI) issues a Concept Paper on Digital Rupee, its central bank digital currency (CBDC). The purpose is to create awareness about CBDCs, explain RBI’s approach and considerations towards the introduction of a digital Rupee.

The Reserve Bank of Australia remains cautious about the case for a central bank digital currency (CBDC), particular in the retail space, but is moving forward with a CBDC research project with Australia’s Digital Finance Cooperative Research Centre.

Regulatory and Legislative Analysis – LATAM

Brazil’s Securities and Exchange Commission (CVM) releases guidance opinion on cryptoassets and the securities market

On October 11, 2022, the Brazilian CVM published Guidance Opinion 40, “which consolidates the Municipality’s understanding of the rules applicable to cryptoassets that are considered securities”.  This is important as it clarifies how the CVM would exercise its regulatory powers, including supervision and enforcement, over cryptoassets.

The primary focus of the guidance occurs in the middle of the document, whereby, the CVM outlines criteria for token taxonomies and characterization of cryptoassets as securities.   The taxonomy of tokens is an important distinction as it indicates legal treatment. Initial taxonomies include the following, and the CVM notes that a token may fit into multiple categories depending on its design and economic use:

1)     Payment Token“Seeks to replicate currency functions, notified account unit, means of exchange and value reserve”
2)     Utility TokenUsed to purchase or access certain products or services”
3)     Token Referenced“Represents one or more assets, tangible or intangible. Examples are ‘security tokens’, stablecoins, non-fungible tokens (NFTs) and other assets object of ‘tokenization’ operations.”

When a cryptoasset falls into the category of a security, issues and applicable parties must comply with securities laws. Market participants are required to analyze the cryptoasset’s characteristics to determine if it is a security.  This occurs when it: 1) “is the digital representation of any of the securities provided for in items I to VIII of Article 2 of Law No. 6,385/76 and/or provided for in Law No. 14,430/2022” and 2) “falls within the scope item IX of Article 2 of Law No. 6,385/76 [CVM leverages the US’ Howie Test in this law], to the extent that it is a collective investment agreement”.  Other considerations of security treatment are outline in the guidance to include: Investment, Formalization, Collective nature of investment, Expectation of economic benefit, Third-party effort, and Public offering.  Lastly, the CVM is open to technology advances and find benefit in their ability to improve capital markets; it will continue to perform analysis in this area and may update/enhance guidance and legal measures in the future.

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