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Regulatory and Legislative Update – November 2023

Regulatory and Legislative Analysis – GLOBAL

FATF to provide countries with enhanced tools to more effectively freeze, seize and confiscate criminal property

During its fourth Plenary in Paris (Oct 25-27) the Plenary agreed on major amendments to the FATF Recommendations that will provide countries with enhanced tools to more effectively freeze, seize, and confiscate criminal property, both domestically and through international cooperation. The revised Recommendations require countries to have policies and operational frameworks that prioritize asset recovery and establish non-conviction-based confiscation regimes in their legal systems. They also provide new features, such as the power to suspend transactions related to money laundering, terrorist financing and serious crime. The FATF will now work to revise relevant parts of its Assessment Methodology for the next round of mutual evaluations to take into account the changes to the Recommendations.

Basel Institute Publishes AML Index 2023

On Nov 13, The Basel Institute on Governance published the 12th edition of the Basel AML Index: “Ranking money laundering and terrorist financing risks around the world”.  The Basel AML Index is an independent ranking that assesses ML/TF risks of countries and their capacity to counter them.

IOSCO finalizes its policy recommendations for crypto and digital assets

On Nov 16, the International Organization of Securities Commissions (IOSCO) finalized its policy recommendations for crypto and digital asset markets.  These are central to the delivery of a coordinated global regulatory response to the global regulatory response, to the significant investor protection and market integrity risks posed by centralized crypto-asset intermediaries called crypto asset service providers (CASPs). The Recommendations cover six key areas: Conflicts of interest arising from vertical integration of activities and functions; Market manipulation, insider trading and fraud; Custody and client asset protection; Cross-border risks and regulatory cooperation; Operational and technological risk; and Retail distribution.

BIS examines anonymity and privacy considerations of CBDCs

On Nov 17, the Bank for International Settlements issued working paper nr. 1147 titled: Central Bank Digital Currency and Privacy: A Randomized Survey Experiment. The abstract from the working paper reads as follows:  “Privacy protection is among the key features to consider in the design of central bank digital currency (CBDC). Using a nationally representative sample of over 3,500 participants, we conduct a randomized online survey experiment to examine how the willingness to use CBDC as a means of payment varies with the degree of privacy protection and information provision on the privacy benefits of using CBDC. We find that both factors significantly increase participants’ willingness to use CBDC by up to 60% when purchasing privacy-sensitive products. Our findings provide useful insights regarding the design and the public’s adoption of CBDC”.

FSB assesses risks of multi-function crypto-asset intermediaries

On Nov 28, the Financial Stability Board (FSB) published a report on the financial stability implications of multifunction crypto-asset intermediaries (MCIs). MCIs are individual firms, or groups of affiliated firms, that combine a broad range of crypto-asset services, products, and functions typically centered around the operation of a trading platform. Most of these activities have analogues in traditional finance but are often not provided by the same entity or are restricted or controlled to prevent conflicts of interest and promote market integrity, investor protection, and financial stability.  The report warns that combining different activities within multifunction crypto-asset intermediaries (MCIs), could exacerbate MCI vulnerabilities and that there exist financial stability implications from the failure of an MCI will depend on the effective implementation and enforcement of comprehensive and consistent regulations to crypto-asset markets globally. They also noted that further work may be needed to enhance cross-border cooperation and information sharing and to address information gaps identified in the report.

Regulatory and Legislative Analysis – NAM (United States & Canada)

PayPal receives SEC subpoena related to its work on PYUSD stablecoin

On Nov 2, PayPal Holdings Inc. said in a quarterly regulatory filing that it received a subpoena from the US Securities and Exchange Commission’s division of enforcement related to its work on a dollar-linked stablecoin. In Aug 2023, PayPal unveiled the PayPal USD (PYUSD), a 1-1 fiat-pegged stablecoin, having a market capitalization of $159 million (as of 05 Nov 2023).  The subpoena requests the production of documents, while PayPal states it is cooperating with the SEC in connection with this request.

FTX’s Sam Bankman-Fried found guilty of all seven charges

On Nov 3, FTX’s Sam Bankman-Fried was reportedly found guilty on all seven fraud charges.  Sentencing to take place on March 28, 2024. Bankman-Fried may also have to face another set of criminal charges that allege he committed bank fraud and bribed Chinese officials.

JP Morgan’s customers can use JPM Coin to program their accounts and make payments automatically. 

On Nov 10, JP Morgan Chase reportedly allow their clients to program their accounts by setting conditions, enabling them to move funds to cover payments and margin calls via JPM Coin – a permissioned blockchain, allowing clients to transfer funds and make payments instantly.  Recently in October, JPM reached a milestone of handling $1 billion of transactions daily via JPM Coin.

Swan Bitcoin to terminate accounts using mixing services

On Nov 12, U.S.-domiciled services platform Swan Bitcoin sent an email to its users stating that accounts depositing or withdrawing Bitcoin directly from mixing services, may be terminated.  Yan Pritzker, Swan Bitcoin’s co-founder explained via X (formerly Twitter), that although the company is not against mixing, has no any anti-mixing policies, and there is no anti-mixing law or regulation yet, it works with qualified custodians which interface with multiple banking institutions to provide fiat services, which are subject to rules and guidelines from FinCEN, FATF and other international bodies.

Hill Delivers Remarks at Hearing on Breaking Down the Illicit Activity in Digital Assets

On Nov 15, the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion, led by Chairman French Hill (AR-02), hold a hearing entitled “Crypto Crime in Context: Breaking Down the Illicit Activity in Digital Assets.”  Invited witnesses shared their expertise and discussed the issues at hand.

NYDFS issues new guidance regarding listing of virtual currencies

On Nov 15, the New York State Department of Financial Services (NYDFS) issued guidance, setting new heightened standards for virtual currency coin-listing and delisting, for all Virtual Currency (VC) business entities under “BitLicense”. The BitLicense is New York’s own regulatory regime specific to virtual currency-related activities. VC Entities that had a previously approved coin-listing policy under the prior Guidance are not permitted to self-certify any coins until they submit to and receive approval from the Department a coin-listing policy that meets the standards of Section (A) of this Guidance, and have an approved coin-delisting policy that meets the standards of Section (B) of this Guidance. Following DFS approval of a coin-listing policy, a VC Entity may proceed with self-certification of coins, thereby making them available for approved virtual currency business activity in New York or to New Yorkers. The Department will not approve a coin-listing policy absent an accompanying coin-delisting policy.  For any new coins, the VC entity must perform a comprehensive risk assessment which should include factors such as: Technical design and technology risk; Operational risk; Cybersecurity risk; Market and Liquidity risk; Illicit finance risk; Legal risk; Reputational risk; Regulatory risk.  Additionally, VC entities should consider: Conflicts of Interest and Customer protection issues.  Under the new guidelines, a VC entity cannot self-certify anonymity enhanced coins, designed to obfuscate the identity of individuals or entities, or any virtual currency that is not included on the Greenlist, which now only includes: Bitcoin (BTC) Ethereum (ETH), and six stablecoins: Gemini Dollar (GUSD), GMO JPY (GYEN), GMO USD (ZUSD), Pax Gold (PAXG), Pax Dollar (USDP) and PayPal Dollar (PYUSD).

BlackRock files for an Ethereum Exchange-Traded Fund

On Nov 16, BlackRock, the world’s largest asset manager, filed with the Securities and Exchange Commission for a spot Ethereum Exchange-Traded Fund (ETF). The iShares Ethereum Trust, was registered as a Delaware Trust and will be listed on Nasdaq if approved. Crypto ETFs track the price performance of one or more cryptocurrencies, giving investors access to the underlying asset (Ether in this instance), without directly owning it.

Canada’s FINTRAC says that Canadian financial institutions must begin reporting high-priority illicit payments close to real time

On Nov 16, FINTRAC Director Sarah Paquet speaking at the Assembly Canada conference in Toronto, hosted by ACAMS, said that financial institutions must begin flagging and reporting terrorist financing-linked payments and other high-priority suspicious transactions closer to “real time”.  She also highlighting the need for financial institutions to update their systems accordingly.

US SEC charges Kraken for operating an unregistered securities exchange

On Nov 20, the Securities and Exchange Commission (SEC) charged Payward Inc. and Payward Ventures Inc. together known as Kraken, for operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer and clearing agency, without registering with the regulator.  The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers.

U.S. Treasury announced largest settlement in history with Binance for violations of U.S. AML and sanctions laws

On Nov 21, the U.S. Department of the Treasury (DoJ), through the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and IRS Criminal Investigation (CI), took unprecedented collective action to hold Binance Holdings Ltd. and its affiliates (collectively, Binance) accountable for violations of the Bank Secrecy Act (BSA), U.S. anti-money laundering (AML) and multiple sanctions programs. FinCEN’s settlement agreement assesses a civil money penalty of $3.4 billion, imposes a five-year monitorship, and requires significant compliance undertakings, including to ensure Binance’s complete exit from the United States. OFAC’s settlement agreement assesses a penalty of $968 million and requires Binance to abide by a series of robust sanctions compliance obligations, including full cooperation with the monitorship overseen by FinCEN.  Effective immediately, Changpeng Zhao (CZ), steps down as Binance’s CEO, to be succeeded by Richard Teng, until now Binance’s Global Head of Regional Markets, succeeds.   Treasury Secretary Janet Yellen said  “Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform.” Binance announced the resolution with the DoJ via a Binance blog while CZ, Binance’s former CEO shared his decision to step down as Binance’s CEO via an X (former Twitter) post. FinCEN’s consent order can be found here.

U.S. Treasury asks for more power to combat illicit financial activity involving crypto

On Nov 29, Deputy Secretary of the Treasury Wally Adeyemo, asked Congress to significantly expand its surveillance and enforcement powers under the Bank Secrecy Act, speaking at the 2023 Blockchain Association’s Policy Summit, in Washington D.C.   The Treasury provided Congress a set of common-sense recommendations to expand our authorities and broaden our tools and resources to go after illicit actors in the digital asset space”, the U.S. deputy secretary of the Treasury said.   He also highlighted that, “We need to update our illicit finance authorities to match the challenges we face today, including those presented by the evolving digital asset ecosystem” and that In addition to working with Congress, we are committed to working with the Financial Action Task Force (FATF) to make sure our allies and partners around the world join us in updating their regulatory approach.

Regulatory and Legislative Analysis – EMEA

UK’s HM Treasury publishes update on plans for the regulation of fiat-backed stablecoins

On Oct 30, UK’s HM Treasury published  an update to its plans to regulate fiat-backed stablecoins and facilitate their use in U.K. payment chains.  According to this update, specific legislation will be introduced to parliament in 2024, bringing the regulation of fiat-backed stablecoins (phase 1) under the Financial Conduct Authority’s (FCA) mandate.  Activities relating to other types of stablecoins (i.e. algorithmic stablecoins) will be in scope of phase 2 and will still be allowed to be used in payment chains, but these transactions will remain unregulated, deemed unsuitable for use in regulated payments.

PayPal UK registers with the FCA as a cryptocurrency service provider

Effective Oct 31, PayPal UK Limited has secured a crypto license: ref. nr. 100074 from UK’s Financial Conduct Authority, to engage in certain crypto asset activities within the UK.

Germany’s BaFin grants crypto custody license to BitGo

On Nov 1, U.S. crypto custody firm BitGo was granted a crypto custody license by Germany’s BaFin.  BitGo’s German entity is BitGo Europe Gmbh, with a BaFin Id: 50085544.   BitGo, which received approval from the New York Department of Financial Services (NYDFS) for a New York trust charter in 2021, has been storing crypto assets for its customers since 2019. Such activity is also under BaFin supervision, as part of a transitional regime.

Germany’s DZ Bank launches custody platform for crypto assets

On Nov 2, Germany’s DZ Bank announced it launched a new platform for the settlement and storage of digital financial instruments for institutional clients based on blockchain technology.  After BNP Paribas and State Street, DZ bank is the third largest custodian in Germany, with a volume of over € 300 billion.  DZ bank will now be the custodian of a crypto bond from Siemens, as custody is already possible with the existing licenses, under the scope of the Electronic Securities Act (eWpG).  In order to enable institutional clients to invest in cryptocurrencies such as Bitcoin in the future, DZ BANK has already applied for a crypto-deposit license to the Federal Financial Supervisory Authority (BaFin) in June.  They are also developing an offering for private clients to invest directly in cryptocurrencies.

Switzerland’s SEBA Bank partners with St.Galler Kantonalbank to enable digital asset custody for its clients 

On Nov 2, Switzerland’s SEBA Bank, a full-service, global crypto bank providing financial solutions for the digital age, announced it has launched a partnership with St.Galler Kantonalbank (SGKB), Switzerland’s fifth largest cantonal bank, to enable digital asset custody and brokerage services for SGKB’s clients. After a short implementation time, the SGKB’s service is now live, with SGKB launching custody and trading services for Bitcoin (BTC) and Ethereum (ETH) to a select group of clients, with plans to expand its offerings to additional cryptocurrencies moving forward. This collaboration marks a significant milestone in the adoption of digital assets and crypto-related services for the Swiss market.

UAE’s Central Bank issues guidance on combating the use of unlicensed VASPs

On Nov 6, the UAE’s National Anti-Money Laundering and Combating Financing of Terrorism and Financing of Illegal Organizations Committee (NAMLCFTC), in collaboration with UAE supervisors,  issued guidance on combating the use of unlicensed virtual asset service providers, which is prepared by the supervisory subcommittee.  The guidance aims to educate licensed financial institutions (LFIs) and the wider public sector. The supervisors remind the sector that VASPs operating in the UAE without a valid license will be subject to civil and criminal penalties including, but not limited to, financial sanctions against the entity, owners, and senior managers. Furthermore, reporting entities that demonstrate willful blindness in their dealings with unlicensed VASPs and have weak AML/CFT and Counter Proliferation Financing controls may be subject to enforcement action.

UK’s FCA issues discussion paper planning to regulate fiat-backed stablecoins

On Nov 6, UK’s Financial Conduct Authority (FCA), issued a discussion paper, to help develop UK’s regime for fiat-backed stablecoins, including when used as a means of payment.  The Government has announced plans to legislate for a future financial services regime for cryptoassets. It is taking a phased approach, focusing initially on fiat-backed stablecoins that may be used as a form of payment, followed by the wider cryptoasset regime.  The FCA has mandated that fiat-backed stablecoins used in the country must adhere to uniform standards, regardless of the issuer’s location. The discussion period ends Feb 06, 2024.

Kazakhstan’s regulators block access to Coinbase website within the country for violating new digital assets law

On Nov 8, Coinbase has been reportedly blocked in Kazakhstan for violating the country’s new digital assets law. The law, which came into effect earlier in 2023, prohibits the issuance, circulation, and trading of “unsecured digital assets” outside of the Astana International Financial Center (AIFC), a designated economic zone in Kazakhstan. Permits to operate crypto trading platforms within the AIFC are issued by the Astana Financial Services Authority (AFSA).

Commerzbank AG obtains a crypto custody license in Germany

On Nov 15, Commerzbank AG announced it has obtained a crypto custody license in Germany.  Commerzbank is the first German full-service bank to be granted the Crypto Custody License pursuant to Article 1, Section 1a, Sentence 1, No 6 of the German Banking Act (KWG). The license will enable the Bank to build up a broad range of digital asset services, with particular emphasis on crypto assets.

EBA issues guidance to AML/CFT supervisors of CASPs

On Nov 27, the European Banking Authority (EBA) issued new guidance to AML/CFT supervisors of CASPs, extending its risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision guidelines to AML/CFT supervisors of crypto-asset service providers (CASPs). The new guidelines set clear expectations of the steps supervisors should take to identify and manage money laundering and terrorism financing (ML/TF) risks in this sector and are an important step forward in the EU’s fight against financial crime.  As the EBA noted: “CASPs can present high ML/TF risks. They also operate across borders. This is why a common supervisory approach to tackling ML/TF risks in that sector is important. By extending the scope of its AML/CFT Supervision Guidelines to supervisors of CASPs, the EBA fosters a common understanding, across all Member States, of the risk-based approach to the AML/CFT supervision of CASPs and how it should be applied.”

Regulatory and Legislative Analysis – APAC

Hong Kong regulators to issue new regulation on tokenization soon

On Nov 2, Christopher Hui, Hong Kong’s Secretary for Financial Services and the Treasury, reportedly revealed that regulators may soon issue new regulation on tokenization, to ensure customer protection. He was talking during the Hong Kong Fintech Week.

Bitget Hong Kong halts operations, decides not to apply for a local crypto license

On Nov 13, Bitget Hong Kong reportedly announced that it will halt operations on Dec 13, after deciding not to apply for a local crypto license.  Bitget HK will be allowing its customers to withdraw their assets until the platform shuts down in December.

Crypto.com granted VASP license by Dubai’s VARA

On Nov 14, Crypto.com announced it has been granted a Virtual Asset Service Provider (VASP) License by Dubai’s Virtual Assets Regulatory Authority (VARA). The license is subject to the company fully satisfying select conditions and localization requirements defined by VARA, and will be able to commence operations thereafter subject to operational approval notice from the regulator.

Paxos receives in principal approval from Singapore and Abu Dhabi to issue USD and other stablecoins

On Nov 16, stablecoin issuer Paxos announced it received in principle approval from the Monetary Authority of Singapore (MAS), for a new entity: Paxos Digital Singapore Pte., that will issue USD-Backed Stablecoin in Singapore.  MAS has acknowledged that the new US dollar stablecoin will be substantively in compliance with MAS’ proposed stablecoin regulatory framework, in advance of coming into force.  Two weeks later, on Nov 28, Paxos announced that it has secured an in-principal license to issue USD and other currency-backed stablecoins, offer crypto brokerage and custody services out of the Abu Dhabi Global Market.

Philippines issue DLT based tokenized bonds

On Nov 16, the Philippines Bureau of the Treasury (BTr) announced the country’s maiden offering of Philippine Peso-denominated Tokenized Treasury Bonds (TTBs), in a bid to raise at least P10 billion from the domestic bond market.  The BTr saw a strong demand; the size of the book reached P31.426 billion ($560 million), more than three times the target issue size of P10 billion ($180 million) and eventually raised $270 million. The TTBs are one-year fixed-rate government securities that pay semi-annual coupons at 6.5%, issued in the form of digital tokens, which will be maintained in the BTr’s Distributed Ledger Technology (DLT) Registry. The BTr will implement a dual registry structure, with the DLT Registry running in parallel with the National Registry of Scripless Securities (NRoSS), with the NRoSS serving as the primary registry.  The TTBs were offered to qualified institutional buyers this time, but over time may be expanded to the wider public.

South Korea’s National Pension Fund invests $20M in Coinbase shares

On Nov 16, National Pension Service (NPS), an entity that manages South Korea’s National Pension Fund (NPF) has reportedly bought nearly $20 million worth of Coinbase (COIN) shares in the third quarter, as cited by local outlet News1.  The NPF proclaims itself as the world’s third-largest pension, with Assets Under Management as of 2023 at 775 billion U.S. dollars.

New Zealand Dollar-pegged stablecoin goes live

On Nov 22, New Zealand-based Easy Crypto, introduced NZDD a stablecoin, issued by ECDD Company Ltd., backed one-to-one to the New Zealand Dollar (NZD).  Underlying assets being held in a local bank account, regulated by the New Zealand Financial Markets Authority. Initially NZDD is available on the Ethereum blockchain, with plans to expand to other blockchains as well.

Regulatory and Legislative Analysis – LATAM

Brazil proposes legislation stipulating 15% tax on offshore crypto gains

On Nov 30, the Brazilian Senate reportedly passed legislation introducing an income tax of 15% on crypto gains from offshore exchanges exceeding $1,200.  If signed by the country’s president, crypto gains exceeding this amount starting Jan 1, 2024, will be subject to this tax.

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