Global Blockchain Business Council

EU

Council organises first working group on DORA proposal in 2021

On Thursday, 21 January, the Portuguese presidency of the Council held its first working group on the review of the European Commission’s proposal for a Regulation on digital operational resilience for the financial sector (DORA). The Council is still in its initial phase of examining the proposal. The Council Presidency is taking an issue-by-issue approach, discussing a number of specific features of the DORA proposal during each meeting. In this context, it has not yet reached the stage of drafting compromise amendments. It is unlikely that the Council will adopt a general approach on the DORA proposal in the short term.

We understand that the Council Working Group meeting on 21 January would have discussed the following aspects of the DORA proposal:

Oversight Framework

• Concerning the structure of the Oversight Framework, the Working Group would discuss the function of the Lead Overseer, which will supervise the operational resilience framework at the European level. The discussion would cover the possible designation of an existing European Supervisory Authority (ESA) as the lead overseer. In addition, the working group would discuss the composition of the Oversight Forum, which would consist of the Chairpersons of the ESAs and one high-level representative of the relevant national competent authority (NCA) of each Member State, which will have voting rights. In addition, the executive directors of the ESAs, the European Commission, the ESRB, ECB and ENISA would have a seat as observer. The discussion would cover arrangements for when multiple NCAs cover tasks under DORA and possible information sharing arrangements in this scenario. Lastly, the working group would discuss the arrangements for the follow-up by ICT third party service providers when having received a recommendation by the Lead Observer.

Interaction with the NIS Directive

• The DORA Regulation should be considered a lex specialis vis-à-vis the Network and Information Security (NIS) Directive ((EU) 2016/1148). This means that DORA replaces existing obligations for the financial sector to report incidents under the NIS Directive and under substantive obligations under that Directive. The status of DORA in relation to the NIS Directive is not explicitly explained in the DORA proposal, and Member States are asked whether there is a need for a written clarification in the proposal. If so, Member States are asked whether this clarification should be within the Articles of DORA, or rather the recitals.
• In the meantime, the NIS Directive itself is under review after the European Commission adopted an amending proposal in December 2020.

The next working group is scheduled to take place on 11 February 2021.

Published: 20 January 2021

ECB digital euro consultation ends with record level of public feedback

Press release extract as follows:

“The European Central Bank (ECB) concluded its public consultation on the digital euro yesterday and will now analyse in detail the large number of responses. 8,221 citizens, firms and industry associations submitted responses to an online questionnaire, a record for ECB public consultations.

The public consultation was launched on 12 October 2020, following the publication of the Eurosystem report on a digital euro. The ECB will publish a comprehensive analysis of the public consultation in the spring, which will serve as an important input for the ECB’s Governing Council when deciding whether to launch a digital euro project.

An initial analysis of raw data shows that privacy of payments ranked highest among the requested features of a potential digital euro (41% of replies), followed by security (17%) and pan-European reach (10%).

The Eurosystem task force, bringing together experts from the ECB and 19 national central banks of the euro area, identified possible scenarios that would require the issuance of a digital euro. These scenarios include an increased demand for electronic payments in the euro area that would require a European risk-free digital means of payment, a significant decline in the use of cash as a means of payment in the euro area, the launch of global private means of payment that might raise regulatory concerns and pose risks for financial stability and consumer protection, and a broad take-up of central bank digital currencies issued by other central banks.

A digital euro would be an electronic form of central bank money accessible to all citizens and firms – like banknotes, but in a digital form – to make their daily payments in a fast, easy and secure way. It would complement cash, not replace it. The Eurosystem will continue to issue cash in any case.

A digital euro would combine the efficiency of a digital payment instrument with the safety of central bank money. The protection of privacy would be a key priority, so that the digital euro can help maintain trust in payments in the digital age.”

Published: 13 January 2021

France

Banque de France conducted successful experiment with IZNES on use of central bank digital money for interbank settlement

Press release as follows:

“On 17 December 2020, the Banque de France successfully carried out an experiment on central bank digital currency (CBDC) with IZNES as part of the experimental programme launched in March.

The experiment consisted in the subscription and redemption by investors of money market fund units on a private Blockchain, provided by SETL, for a global amount exceeded 2 million euros. Cash settlements were simulated by central bank digital money issued on the blockchain. From a technological point of view, the experiment required the development and deployment of smart contracts so that the Banque de France could issue and control the circulation of CBDC tokens and ensure that their transfer takes place simultaneously with the delivery of the fund unit tokens into the investors' portfolio.

The experiment was carried out in collaboration with IZNES, SETL, CACEIS, CITIGROUP, GROUPAMA AM, OFI AM and DXC.

This experiment represents a significant step forward in assessing the levers that a central bank digital currency provides for enhancing the efficiency and resilience of the settlement of financial asset in a blockchain environment, thereby contributing to the smooth functioning of the real economy. The programme's other experiments are ongoing until mid-2021 and all the lessons learned will be an important part of the Banque de France's contribution to the Eurosystem's more global reflection on the benefits of CBDC.”

Published: 19 January 2021

UK

FCA warns consumers of the risks of investments advertising high returns based on cryptoassets

On 11 January 2021, the FCA published a warning on its website which sets out the regulator’s following concerns regarding firms offering investments in cryptoassets, or lending or investments linked to cryptoassets:

• Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
• Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
• Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
• Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
• Marketing materials: Firms may overstate the returns of products or understate the risks involved.

Published: 11 January 2021

UK Government consults on plan to regulate stablecoins

On 7 January 2021 HM Treasury issued a consultation document on the Government’s approach to cryptoasset regulation with a focus on stablecoins. The document includes a call for evidence in particular on investment and wholesale use cases for cryptoassets (the CfE). The CfE is a further step in HM Treasury’s broader policy approach to cryptoassets, following the close of its consultation on 26 October 2020 detailing measures to expand the UK’s financial promotions regime to a wide constituent of cryptoassets.

The CfE confirms that the FCA’s broad approach to the categorisation of cryptoassets as detailed in its existing Cryptoassets Guidance (PS 19/22) will be maintained as far as possible. That guidance segments cryptoassets into three main categories: security tokens, which fall within the UK’s regulatory perimeter as a form of specified investment under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; e-money tokens which satisfy the definition of electronic money under the Electronic Money Regulations 2011; and unregulated tokens, which are not currently within the scope of the perimeter. Unregulated tokens primarily comprise of utility tokens and exchange tokens. Stablecoins can take any form, but to date they have largely comprised of either e-money tokens or unregulated tokens.

However, in order to expand the regulatory perimeter to address stablecoins, HM Treasury is considering whether to create a new category of regulated tokens called stable tokens. A “stable token” would be a form of cryptoasset which stabilises its value by referencing one or more assets, such as fiat currency (i.e. by pegging itself to a particular currency) or a commodity (such as gold).

What then, is the starting point for the new regime? The Government is cognisant that any expansion of the regulatory perimeter with respect to cryptoassets needs to be taken on a phased basis. On that basis, HM Treasury confirms that unregulated tokens and associated activities relating to speculative investment purposes could initially remain outside the scope of the perimeter, with utility tokens also remaining unregulated. HM Treasury considers that the first step is to bring stable tokens used as a means of payment within the scope of regulation, which would cover those assets themselves and their issuers and other firms providing services in relation to them. The Government will keep this approach under review and may bring other forms of cryptoasset within the scope of this regime in the future.

A summary of the proposals for the new regime is set out below:

• It is currently proposed that “algorithmic stablecoins” (i.e. those cryptoassets which maintain a stable value through control of supply via algorithms and not reference assets) should not be included within the scope of this regime at this time.
• Security tokens are not included either, primarily as they’re already in scope of the perimeter.
• For e-money tokens already subject to regulation under the Electronic Money Regulations 2011, the proposed position is that those existing requirements should continue to apply. However, e-money tokens which are also stable tokens may be subject to enhanced requirements under this new regime if they have “significant potential” to become systemic.
• The FCA would be responsible for authorising firms under the regime and supervising them.
• A firm issuing, creating or destroying stable tokens would fall to be regulated under the new regime.
• In addition, key services such as value stabilisation and reserve management, transaction validation, facilitating access, transmitting fund, providing custody services, executing transactions in stable tokens and exchanging stable tokens for fiat currency or fiat currency for stable tokens are all activities which the Government considers could fall to be regulated under the new regime.
• In terms of baseline obligations for those firms falling within the regime, the CfE highlights the following necessary requirements: authorisation requirements and threshold conditions, prudential requirements, requirements on the maintenance and management of any reserve of assets, orderly failure and insolvency requirements, safeguarding requirements, systems, controls risk management and governance requirements, notification and reporting obligations, record-keeping requirements, a conduct regime, financial crime requirements, outsourcing requirements, operational resilience and security requirements.
• In addition to these requirements, UK authorities continue to consider how to specifically tailor requirements for reserves of assets, particularly where such reserves are deemed systemic. Providing access to central bank accounts is one method under consideration to ensure that firms establishing a reserve can do so by utilising “traditional” financial market infrastructure.
• Where arrangements linked to stable tokens play a similar function to existing payment systems, the Government considers that it may be appropriate for such arrangements to be designated for regulation by the Payment Systems Regulator. Similarly, for stable token arrangements that are systemic in their scale, then it may be appropriate for the Bank of England to regulate those arrangements via the exercise of its powers under the Banking Act 2009. In addition to the operator of a systemic payment system, the Government is of the view that service providers that form part of the chain of actors involved in a systemic stable token arrangement could themselves be subject to Bank of England regulation. The example given in the CfE is that of wallet providers, who may hold the reserve of assets underpinning the systemic stable token.

The takeaway from the CfE is that the regulatory environment for cryptoassets continues to evolve. These proposals, if implemented, would expand the scope of the UK’s regulatory framework when it comes to cryptoassets, but would be unlikely to significantly expand it in this first phase given the currently low level of prevalence for stablecoins versus other forms of cryptoassets. What is clear, however, is that the CfE represents the commencement, and not the culmination, of a trend in UK financial services policy that is likely to see increasing focus placed on cryptoassets and their relationship with regulation, which will no doubt bring changes that the industry will need to adapt to. The CfE closes on 21 March 2021.

Published: 11 January 2021

FCA CP21/3: Changes to the SCA-RTS and to the guidance in ‘Payment Services and Electronic Money – Our Approach’ and the Perimeter Guidance Manual

On 28 January 2021, the FCA published Consultation Paper 21/3: Changes to the SCA-RTS and to the guidance in ‘Payment Services and Electronic Money – Our Approach’ and the Perimeter Guidance Manual (CP21/3).

In the 2020/2021 Business Plan the FCA identified the payments sector as a priority for the next three years. The regulator has identified barriers to the future success and adoption of open banking as it grows in the UK and to address these it sets out in CP21/3 proposed amendments to the onshored technical standards on strong customer authentication and secure methods of communication (SCA-RTS).

Proposed changes to the SCA-RTS include:

• Adding a new exemption from strong customer authentication (SCA) for when customers access their account information though an account information service provider (AISPs) (see paragraphs 3.6 to 3.15 of CP21/3).
• Mandating the use of dedicated interfaces (such as application programming interfaces (APIs) by account servicing payment service providers (ASPSPs) to facilitate third party provider (TPP) access to retail and SME customers’ payment accounts (see paragraphs 3.16 to 3.23 of CP21/3).
• Changing requirements for publishing interface technical specifications, availability of testing facilities, and fallback mechanisms by account providers (see paragraphs 3.24 to 3.30 of CP21/3).
• Treating ASPSPs with deemed authorisation under the temporary permissions regime as exempt from the requirement to set up a fallback interface, where the ASPSP has an exemption from its home state competent authority (see paragraphs 3.31 to 3.39 of CP21/3).
• Increasing the single and cumulative transaction thresholds for contactless payments from £45 up to £100 (or potentially a maximum of £120) and from £130 to £200 respectively (paragraphs 3.41 to 3.46 of CP21/3).

The proposals to amend the guidance in the document ‘Payment Services and Electronic Money – Our Approach’ (AD) relate to four areas:

• In particular the FCA is updating the AD to take into account updated Commission Q&As and the European Banking Authority opinion published in June 2019 on SCA, clarifying what constitutes a valid element for the purposes of SCA.
• Prudential risk management and safeguarding customer funds. In May last year the FCA published a consultation on coronavirus and safeguarding customers’ funds. In the consultation the FCA proposed additional temporary guidance to strengthen payment and e-money firms’ prudential risk management and arrangements for safeguarding customers’ funds in the exceptional circumstances of the COVID-19 pandemic. On 9 July 2020, the FCA published its temporary guidance taking into account the feedback it received to the consultation. The FCA is now proposing, among other things, to make this temporary guidance permanent and incorporate in the AD.
• Onshoring changes to reflect changes to the regulations and rules following the UK’s withdrawal from the EU and the end of the transition period, and the application of FCA rules and guidance to firms in one of the temporary permission schemes designed to enable EEA payment institutions, electronic money institutions and registered account information services providers to continue operating in the UK for a limited time after the end of the transition period.
• General updates relating to areas such as reporting requirements.

The FCA is also proposing to made changes to chapter 15 of the Perimeter Guidance manual regarding certain exclusions from the Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs). The changes are intended to help industry identify whether their business activities fall within scope of the PSRs or EMRs.

The deadline for comments on the proposals for contactless payments is 24 February 2021. The deadline for the remainder of the proposals in CP21/3 is 30 April 2021.

Published: 28 January 2021

China

PBC holds 2021 work conference and publishes release on FinTech in China

Press release extract as follows:

“The 2021 Work Conference of the People’s Bank of China (PBC) was held virtually on the morning of January 4, 2021, [which] put forward [the following] requirements:

Tenth, the PBC will improve financial services and management. Coordinated efforts will be made to promote rule of law in the financial sector. The influence of the central bank’s research work will be further enhanced. The PBC will study and formulate key contents related to the financial sector in the national outline for the 14th Five-Year Plan as well as the 14th Five-Year Plan of the financial sector. Solid work will be done to improve integrated financial statistics. The modern central bank finance system will be optimized. The PBC will further modernize the governance of the payment industry, and improve the application and management of FinTech. The pilot program of DC/EP will be conducted and tested properly. Steps will be taken to promote the high-quality development of Treasury. Credit information will be utilized more thoroughly in digital finance and economic governance. Anti-money laundering investigation and monitoring will be conducted more efficiently. The internal management will be more standardized and effective.”

This was followed by a press article later in the month which outlines China’s approach in handling FinTech risk and regulation. Extract as follows:

“China’s financial authorities take the challenges posed by fintech seriously. We have enhanced communication and experience-sharing with our international counterparts. In fintech’s early days, China put in place a prudent yet inclusive regulatory environment for fintech development that emphasised fairness and tolerance. The non-bank mobile payment business, led by Alipay and WeChat Pay, experienced 75 per cent annual growth between 2015 and 2019, with a mobile payment penetration rate of 86 per cent.

Meanwhile, China’s regulators have kept addressing regulatory gaps. We conduct prudential supervision over the financial activities of fintech companies and internet platforms and have recently issued provisional regulations for financial holding companies. China is taking steps to guard against misappropriation of clients’ funds by nonbank payment institutions via centralised deposits of these funds at the central bank. We are refocusing non-bank payment institutions on payments by separating out the clearing function into a newly established financial infrastructure. China is working to mitigate financial risks posed by internet businesses, and the central bank has recently asked for comment on draft regulations to strengthen anti-monopoly supervision of nonbank payment services.

China is trying to strike a balance between encouraging fintech development and preventing financial risks via prudent regulation. The results so far have been satisfactory: three Chinese companies ranked among KPMG’s 2019 ranking of the top 10 global fintech companies. We are striving to provide a level playing field for all companies, foreign-owned and private alike, by opening up the sector. These efforts are paying off. By the end of June 2020, there were 116 foreign banks, 65 foreign insurance firms and 15 foreign brokerage firms in China. American Express has received a licence to provide bank card clearing services and PayPal has a wholly owned subsidiary.

But fintech is still finance in essence, so the principle of “same business, same rules” should apply. We need regulation that emphasises the substance not the form of a company. The aim is to align business rules and standards with regulation to fend off arbitrage.

Looking ahead, China’s financial authorities want to step up exchanges with our international counterparts and strengthen co-operation on antitrust issues, data treatment and consumer protection. We will ensure that fintech regulation is effective, measured and guards against cross-border regulatory arbitrage and contagion. When we insist on good supervision, equal access and fair competition, fintech will develop in a way that balances capital expansion, innovation and public interests, and develops technology for good. It’s not an easy task. We need to try hard and work together.”

Published: 27 January 2021

Singapore

MAS Enhances Guidelines to Combat Heightened Cyber Risks

Press release extract as follows:

“The Monetary Authority of Singapore (MAS) today issued revised Technology Risk Management Guidelines (Guidelines) to keep pace with emerging technologies and shifts in the cyber threat landscape.

The revised Guidelines focus on addressing technology and cyber risks in an environment of growing use by financial institutions (FIs) of cloud technologies, application programming interfaces, and rapid software development. The Guidelines reinforce the importance of incorporating security controls as part of FIs’ technology development and delivery lifecycle, as well as in the deployment of emerging technologies.

The recent spate of cyber attacks on supply chains, which targeted multiple IT service providers through the exploitation of widely-used network management software, is a clear indication of a worsening cyber threat environment. The revised Guidelines set out the following enhanced risk mitigation strategies for FIs –

• to establish a robust process for the timely analysis and sharing of cyber threat intelligence within the financial ecosystem; and
• to conduct cyber exercises to allow FIs to stress test their cyber defences by simulating the attack tactics, techniques, and procedures used by real-world attackers.

In light of FIs’ growing reliance on third party service providers, the revised Guidelines set out the expectation for FIs to exercise strong oversight of arrangements with third party service providers, to ensure system resilience as well as maintain data confidentiality and integrity.

The revised Guidelines provide additional guidance on the roles and responsibilities of the board of directors and senior management –

• the board and senior management should ensure that a Chief Information Officer and a Chief Information Security Officer, with the requisite experience and expertise, are appointed and accountable for managing technology and cyber risks; and
• the board should include members with the relevant knowledge to provide effective oversight of technology and cyber risks.

The revised Guidelines have incorporated feedback received from the public consultation conducted in 2019, MAS’ engagement with the industry, and MAS’ Cyber Security Advisory Panel (CSAP). MAS thanks all respondents for the invaluable suggestions in shaping the Guidelines.”

Published: 18 January 2021

Veritas Initiative Addresses Implementation Challenges in the Responsible Use of Artificial Intelligence and Data Analytics

Press release extract as follows:

“The Monetary Authority of Singapore (MAS) today announced the successful conclusion of the first phase of the Veritas initiative which saw the development of the fairness assessment methodology in credit risk scoring and customer marketing. These are the first two use cases to help financial institutions validate the fairness of their Artificial Intelligence and Data Analytics (AIDA) solutions according to the Fairness, Ethics, Accountability and Transparency (FEAT) principles. The Veritas Consortium, comprising MAS and industry partners, also published whitepapers on the fairness assessment methodology and the open source code of these two use cases.

The two whitepapers detailed a five-part methodology to assess the application of the FEAT fairness principles in the two use cases. The methodology addresses the implementation challenges in the responsible use of AIDA, and provides an actionable approach for financial institutions to validate their AIDA solutions. The open source code of the two use cases has been made publicly available to help the wider AIDA community in adopting the fairness assessment methodology and spur industry development. These will benefit customers by improving the fairness of financial services delivered by AIDA systems.

This development marks a milestone for the Veritas initiative and paves the way for the next phase of work. Phase Two will look into developing the Ethics, Accountability and Transparency assessment methodology for the two use cases in Phase One. Phase Two will also include use cases for the insurance industry.

For the insurance use cases, the Veritas consortium will focus on the fairness assessment methodology for predictive underwriting, and develop the ethics and accountability assessment methodology for fraud detection:

Fairness is a key consideration in the course of underwriting for insurance companies. The Veritas consortium will focus on enhancing the fairness assessment methodology applicable to the predictive underwriting for life and health insurance products.

Fraud detection and identification of suspicious customer claims are key activities in claims processing by insurance companies. Traditional fraud detection is resource intensive and insurance companies can employ AIDA to enhance their fraud detection capabilities and efficiency.”

Published: 6 January 2021

“Animal, Vegetable, Token” blog series by Norton Rose Fulbright

Our blog series which focusses on tokens, has been named after the classic children’s categorisation game where one player names an object and the other player has to categorise it as an animal, vegetable or mineral. Whilst simple in concept, the difficulty of the game varies – some things are extremely easy to categorise (such as ‘cat’), whereas others are difficult to categorise, or might have features meaning that different people could categorise them in different ways (is ‘coal’ better categorised as fossilised vegetable matter or a mineral?).

As with that game, the difficulty of categorisation of tokens can vary greatly depending on their features and in this series we’ll look at some of the ways in which Singapore law seeks to do so.

Animal, Vegetable, Securities (Part 2)

Tokens can be categorised as securities for purposes of the Securities and Futures Act (SFA). The SFA regulates institutions and activities in the securities and derivatives industry, including the conduct of regulated activities (such as dealing in capital markets products and fund management) and the operation of organized markets.

Initial Token Offerings (or Initial Coin Offerings) started growing in popularity around 2017 in Singapore. At that time tokens were generally categorised as ‘security tokens’ or as ‘utility tokens’. Security tokens were commonly understood to be tokens which fell within the existing and established regulations governing securities and other capital markets products under the SFA whereas utility tokens on the other hand were tokens which only granted its holders the right to access certain services provided by the token-issuer (and as such did not fall within the ambit of the SFA and on its platforms.

Tokens (however labelled) may be characterised (and therefore regulated) as securities such as shares, units of a business trust or debentures, if the tokens confer a right of ownership interest in a corporation or business trust, or evidence the indebtedness of the issuer in respect of monies lent to the issuer by the token holder.

Offers of tokens which constitute securities are subject to various requirements including the preparation of a prospectus in accordance with the SFA unless an applicable exemption is available. Dealing in tokens which constitute securities is a regulated activity under the SFA for which a licence is needed. Persons intending to deal in securities, or intermediaries facilitating offers or issues of securities, would be subject to applicable licensing and business conduct requirements under the SFA.

Previous blogs in the series:

Animal, Vegetable, Asset-based token (Part 1)

Published: 10 January 2021

Korea

Financial Services Commission Announces Specific Plans for Financial Innovation and Digital Finance

Press release extract as follows:

“The FSC announced a detailed work plan for financial innovation and digital finance on January 28, which aims to spur the growth of fintechs, promote the spread of online-based financial services and build financial infrastructures necessary for digital innovation.[…]

In an effort to promote a digital transformation in the financial industry, the fintech investment guidelines were introduced in October 2019 and more innovative types of businesses such as MyPayment came into being. In December 2019, open banking service was introduced, and in January 2020, the revisions to the Credit Information Use and Protection Act were finalized which will promote the use of data and the growth of MyData industry. In order to strengthen data security and ensure safety in payment systems, enhanced security measures were introduced in the wake of the COVID-19 pandemic. Against this backdrop, the FSC will work on the following to further promote innovation and digital transformation in the financial industry.

Key Policy Tasks

A. Advancement of Fintech Industry

• Introduce a digital sandbox through which fintech startups can have opportunities to virtually test their new business ideas (from Jun-Aug 2021)
• Establish a comprehensive fintech support system by working on a legislation focused on nurturing fintechs (within 2021), further improving the management of the regulatory sandbox program (Jan 2021) and expanding financial support through state-backed financial institutions and private sector investments (Q1 2021)
• Work to boost the organizational capabilities of the relevant divisions and agencies (Q1 2021)

B. Promotion of Online-based Financial Services

• Promote platform finance to further advance innovation in financial services by encouraging the use of big data analytics (H1 2021)
• Improve the convenience and safety of online and mobile authentication and identity verification systems in financial services (H1 2021)
• Establish a regulatory environment to facilitate telecommuting of fintechs and financial institutions by improving the relevant rules on network separation, etc. (H1 2021)
• Ensure a stable operation of open banking services for the users of credit card and financial investment services (H1 & Jul 2021)

C. Establishment of Digital Finance Infrastructures

• Improve rules on data privacy to enhance consumer rights to data ownership and ensure that consumers are thoroughly informed about the risks of data transfer (throughout 2021)
• Set up necessary infrastructures to allow easy access to data convergence using abundance of data stored at financial institutions and across different industries (within 2021)
• Draw up measures to promote the development of AI-based financial services by setting up infrastructures for providing support through testbeds (Q3 2021) and introducing guidelines to ensure user safety (Q2 2021).”

Published: 28 January 2021

US

FinCEN Extends Reopened Comment Period for Proposed Rulemaking on Certain Convertible Virtual Currency and Digital Asset Transactions

Press release as follows:

“The Financial Crimes Enforcement Network (FinCEN) announced today that it has submitted for publication in the Federal Register an Extension Notice, which will lengthen the reopened comment period and set one deadline for all comments addressing its Notice of Proposed Rulemaking (NPRM) regarding certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA). Under the NPRM, banks and money services businesses (MSBs) would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution (“unhosted wallets”) or CVC/LTDA wallets hosted by a financial institution in certain jurisdictions identified by FinCEN.

Earlier this month, FinCEN issued a notice reopening the comment period for the NPRM. In that notice, FinCEN provided an additional 15 days for comments on the NPRM’s proposed reporting requirements regarding CVC or LTDA transactions greater than $10,000, or aggregating to greater than $10,000, that involve unhosted wallets or wallets hosted in a jurisdiction identified by FinCEN. FinCEN further provided for an additional 45 days for comments on the NPRM’s proposed requirements that banks and MSBs report certain information regarding counterparties to transactions by their hosted wallet customers, and on the NPRM’s proposed recordkeeping requirements.

Today's Extension Notice allows additional time to respond to all aspects of the proposed rule, and sets one closing date for the comment period. All comments to the NPRM will now be due 60 days from the date of publication of this Extension Notice in the Federal Register. FinCEN looks forward to reviewing any additional information submitted during this time.”

Published: 26 January 2021

Federally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities

Press release extract as follows:

“The Office of the Comptroller of the Currency (OCC) today published a letter clarifying national banks’ and federal savings associations’ authority to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions.

The agency letter concludes a national bank or federal savings association may validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound, and fair banking practices.

Engaging in INVN within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities and achieve the benefits of real-time payments already enjoyed in other countries. For example, such activities may be more resilient than other payment networks because of the decentralized nature of INVNs, which allows a comparatively large number of nodes to verify transactions in a trusted manner. An INVN also limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information.

Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud. New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner. Banks have experience with managing such risks, which are similar to those of other electronic activities expressly permitted for banks, including providing electronic custody services, acting as a digital certification authority, and providing data processing services. Among the compliance risks, banks should guard against potential money laundering activities and terrorist financing by adapting and expanding their compliance programs to ensure compliance with the reporting and recordkeeping requirements of the Bank Secrecy Act and to address the particular risks of cryptocurrency transactions.

Banks should develop and implement new activities consistently with sound risk management practices and should align with banks’ overall business plans and strategies.”

Published: 4 January 2021

International developments

Financial Stability Board (FSB)

FSB sets out 2021 work programme

Press release as follows:

“The Financial Stability Board (FSB) today published its work programme for 2021. The work programme reflects a strategic shift in priorities in the COVID-19 environment. The work programme aims to maximise the value of FSB work to foster global financial stability while preserving the FSB’s capacity to respond to new issues that may emerge. Important FSB work programme items, which include key deliverables to the G20 Italian Presidency, are:

• International cooperation and coordination related to COVID-19. The FSB, through its cross-sectoral membership, continues to promote financial stability during market stress related to COVID-19.
• Non-bank financial intermediation (NBFI). The FSB will take forward the ambitious work programme for strengthening the resilience of NBFI laid out in its holistic review of the March market turmoil.
• Central counterparty (CCP) resilience, recovery and resolvability. The FSB will, in cooperation with the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO), consider the need for, and develop as appropriate, international policy on financial resources in recovery and resolution to further strengthen the resilience and resolvability of CCPs.
• Cross-border payments. The FSB will complete a number of actions under the FSB roadmap to enhance cross-border payments. It will also continue discussions of regulatory and supervisory approaches with respect to global ‘stablecoins’.
• Climate change and sustainable finance. The FSB will explore ways to promote globally comparable, high-quality and auditable standards of disclosure based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The FSB will also work on regulatory and supervisory approaches to addressing climate risks at financial institutions.
• Interest rate benchmarks. The FSB will continue to support transition away from LIBOR to more robust benchmarks by end-2021, and report on progress to the G20.
• Cyber and operational resilience. The FSB will explore the scope for convergence in the regulatory reporting of cyber incidents and the need for revisions to the FSB Cyber Lexicon.

Published: 20 January 2021

Bank for International Settlements (BIS)

BIS Innovation Hub sets out annual work programme and launches Innovation Network

Press release extract as follows:

“The Bank for International Settlements' Innovation Hub (BISIH) today set out its work programme, demonstrating its focus on six key areas as it fosters international collaboration among central banks on innovative financial technology.

The thematic priorities are:

• Suptech and regtech
• Next-generation financial market infrastructures (FMIs)
• Central bank digital currencies (CBDCs)
• Open finance
• Cyber security
• Green finance

Among the newly launched projects will be:

• a proof of concept solution for a regulatory reporting platform employing data analytics and data visualisation to provide supervisors with deeper and more timely insights to address risks;
• a proof of concept platform using multiple wholesale CBDCs to explore the feasibility of faster and cheaper cross-border payments;
• a technological research project and associated prototype(s) for tiered retail CBDC distribution architectures; and
• a distributed ledger technology prototype for distribution of tokenised green bonds to retail investors.

The initiatives will be driven by the first three BIS Innovation Hub Centres in Hong Kong, Singapore and Switzerland which have been established in conjunction with their partner central banks: the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the Swiss National Bank. Other initiatives will be undertaken by the planned new Hub Centres across Europe and North America when they begin operations in the coming months, as well as a Strategic Partnership with the Federal Reserve Bank of New York.

On 19 January 2021, the BISIH also launched the BIS Innovation Network to support BISIH priorities, share knowledge about technology projects and discuss innovative answers to problem statements relevant to central banks. All 63 BIS member central banks were invited to the first meeting, which was introduced by a presentation from innovation expert Alexandre Janssen.

The BIS Innovation Network features six working groups, mirroring the BISIH's thematic priorities.”

Published: 22 January 2021

On 27 January 2021, the BIS published the results of its third survey regarding central banks’ plans to issue central bank digital currencies (CBDC). Notably, the report highlights that “while most have no plans to issue CBDCs in the foreseeable future, central banks collectively representing a fifth of the world's population are likely to launch retail CBDCs in the next three years”.

Published: 27 January 2021

International Capital Market Association (ICMA)

Press release as follows:

“ICMA has compiled a non-exhaustive list of recent publications on the topic of FinTech and sustainable finance, with a focus on bond markets. The FinTech and sustainable finance library intends to complement other ICMA members’ resources and help inform broader discussions on this topic.

The library aims to highlight the current views from academic, market, and official sector studies on the potential of FinTech to further sustainable debt capital markets. Recent literature on this topic tends to focus on the underlying requirement of data, the opportunities presented by digital innovation, and the use of DLT to grow the market. The list will be updated on an ongoing basis as the discussions on the role of FinTech in sustainable bond markets evolve and the impacts become clearer.

The library is available here and includes ICMA’s recent publication on FinTech and sustainable bond markets under the market studies tab.”

Published: 26 January 2021