Global Regulatory Brief: Digital finance, March edition
The Global Regulatory Brief provides monthly insights from regulatory bodies on developments within risk and regulation. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Digital finance regulatory developments
Navigate the regulatory challenges that are reshaping financial markets with confidence.
- UK unveils comprehensive proposals to regulate cryptoasset activities
- EU begins two-year countdown to flagship operational resilience rules in financial services
- CFTC Chair Rostin Behnam speaks on enhancing risk management and resilience
- SEC proposes enhanced safeguarding rule for registered investment advisers
- US federal agencies issue joint statement on cryptoasset risks to banking organizations
- Hong Kong explores regulation of virtual asset trading platforms
- Australia sets out plans to modernise financial system
UK unveils comprehensive proposals to regulate cryptoasset activities
HM Treasury (HMT) set out on February 1 proposals for consultation on a UK financial services regulatory regime for cryptoassets. In its proposed framework, HMT underlines the principle that cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities. Importantly, the UK intends to regulate the activities rather than the asset itself. These activities include issuance and offering, trading, custody, lending, and exchange. For each activity, the consultation sets out key design features of the regime, such as prudential requirements, data reporting, consumer protection, location policy and operational resilience. The paper concludes with consideration of the sustainability impact of cryptoassets and decentralized finance (‘De-Fi’) protocols. The proposals are open for feedback until April 30, 2023.
On February 7, the Bank of England and HMT released their assessment of the case for a retail central bank digital currency (CBDC). The intention is that the introduction of a retail CBDC would promote innovation and efficiency in payments. This paper is open for comments until June 7, 2023.
EU begins two-year countdown to flagship operational resilience rules in financial services
The Digital Operational Resilience Act (DORA), published in the Official Journal of the EU on January 17, 2023, will apply from January 17, 2025. This legislation seeks to embed digital and operational resilience in the EU financial sector through new requirements relating to digital risk management, incident reporting, resilience testing, and third-party outsourcing. It will also establish an oversight regime for so-called ‘critical third parties’ that service financial institutions. European policymakers have argued that DORA is needed to enhance the regulatory scrutiny of the technology providers that financial market participants increasingly rely on for the smooth running of their operations.
Detailed technical rules are to be developed by the European Supervisory Authorities in the run-up to January 2025. A virtual public event was held on February 6 to share views and concerns between industry and policymakers.
CFTC Chair Rostin Behnam speaks on enhancing risk management and resilience
In a keynote speech delivered on February 3, 2023, CFTC Chair Rostin Behnam stated that cybersecurity, among other risk management and resilience topics, will receive its own rulemaking. Behnam expects to establish a CFTC operational resilience rule for futures commission merchants and swap dealers that are designed to adapt to the risk profiles of those registrants and the evolving nature of the cyber risk landscape. He further noted the financial industry’s reliance on third-party service providers and risks created therein. Any cyber rule developed is expected to provide registrants guidance on their oversight obligations with respect to critical third-party service providers to help ensure their risk management practices are adequately designed to preserve the integrity, availability, and confidentiality of critical systems and information.
SEC proposes enhanced safeguarding rule for registered investment advisers
The SEC proposed changes to enhance protections of customer assets managed by registered investment advisers. The proposed rules would exercise Commission authority under Section 411 of the Dodd-Frank Act by broadening the application of the current investment adviser custody rule beyond client funds and securities to include any client assets in an investment adviser’s possession or when an investment adviser has authority to obtain possession of client assets. An implication of the rule is that it proposes to expand the existing qualified custodian rules to asset classes where the rules previously did not apply, such as cryptocurrencies and digital assets. The comment period on the proposal will remain open for 60 days following publication of the proposing release in the Federal Register.
US federal agencies issue joint statement on cryptoasset risks to banking organizations
Federal bank regulatory agencies issued a statement highlighting key risks for banking organizations associated with cryptoassets and the cryptoasset sector and describing the agencies’ approaches to supervision in this area. The agencies will continue to closely monitor cryptoasset-related exposures of banking organizations, and, as warranted, will issue additional statements related to engagement by banking organizations in cryptoasset related activities.
Hong Kong explores regulation of virtual asset trading platforms
The Hong Kong Securities and Futures Commission (SFC) has issued proposals for consultation on February 20 setting out requirements for virtual asset trading platforms. Under a new licensing regime set to take effect on June 1, 2023, all centralized virtual asset trading platforms operating in Hong Kong or actively marketing to Hong Kong investors will need to be licensed by the SFC. Platforms that do not plan for a license should begin preparations for an orderly closure of their business. The SFC’s proposed regulatory requirements for virtual asset trading platforms are comparable to those for licensed securities brokers and automated trading venues, though there are some potential modifications. The SFC is keen to understand whether to allow licensed platform operators to serve retail investors, and if so, how this should inform the regulatory regime.
The announcement comes weeks after the Hong Kong Monetary Authority (HKMA) confirmed it intends to bring various activities relating to ‘stablecoins’ into the regulatory perimeter over the course of 2023-24. Specifically, the HKMA intends to issue detailed proposals soon to introduce a mandatory licensing regime for key activities relating to ‘stablecoins’ such as governance, issuance, stablization, reserve management, and wallets.
Australia sets out plans to modernize financial system
Following the election last May of Anthony Albanese as Australian Prime Minister, the Australia Treasury set out on December 14 its intention to modernize the financial system over the course of 2023. Specifically the Government intends to update its payments system and establish a regulatory framework for crypto service providers. The Government’s consultation on its strategic plan to promote the transition to more modern payments infrastructure in light of the evolving landscape for payments closed on February 6, 2023. The Strategic Plan is expected for release in the first quarter of 2023 and work is ongoing with the Reserve Bank of Australia (RBA) to explore the policy case for an Australian central bank digital currency.
In an effort to clarify the rules for crypto service providers, the Government intends to consult soon on the scope of digital assets to be regulated by financial services law and how custody and licensing settings should be calibrated to safeguard consumers. The Government intends to introduce a custody and licensing framework following consultation.
View the additional regulatory briefs from March:
How we can help
Bloomberg’s Public Policy and Regulatory team brings you insight and analysis on policy developments to help navigate the complex and fast changing global regulatory landscape. Please get in touch with our specialists to discuss regulatory solutions or read more insights from our Regulatory team.