Global Regulatory Brief: Digital finance, May 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
As cryptoasset markets developed with rapidity and increased market capitalizations, the effort to regulate them gained in importance. EU lawmakers recently were the first to approve a comprehensive regulatory framework for firms issuing and trading cryptoassets under the Markets in Crypto-assets (MiCA) regulation. Meanwhile, the UK and Israel signaled the direction on artificial intelligence regulation. The digital finance and artificial intelligence landscape is constantly evolving. Understand the latest regulations and trends so you can implement appropriate risk management strategies to identify opportunities and mitigate risk.
- European Parliament adopts rules on cryptoasset markets
- UK and Israeli authorities make progress on regulating artificial intelligence
- UK and Singapore step up their scrutiny of service providers in financial services
- UAE authorities make progress on digital asset regulation and enhances FinTech cooperation with India
- SEC Chair focuses on digital assets during hearing in front of the US House of Representatives Committee on Financial Services
- Hong Kong High Court rules cryptoassets are property in landmark case
European Parliament adopts rules on cryptoasset markets
The European Parliament had adopted the final text of legislation for a comprehensive, EU-wide regulatory framework for firms issuing and trading cryptoassets not currently covered by existing financial services rules, the markets in cryptoassets (MiCA). Specifically, MiCA will introduce requirements around transparency, disclosure, licensing, market abuse, and consumer protection. Official publication of the final rules in the EU rulebook will happen once the Council of the EU (representing the Member States) formally adopts the legislation in the coming months. The legislation will likely take effect formally sometime this summer with the majority of the rules kicking in after 12 months.
The text does not cover crypto lending, decentralized finance or non-fungible tokens, and critics argue the framework lacks tools that would have prevented some of the recent high-profile collapses within the sector, which has already led to calls for updates to the legislation. The agreed text of MiCA does however include measures to prevent money laundering, terrorist financing and other criminal activities. This remains a key global concern with the Financial Action Task Force (FATF) reiterating calls for all jurisdictions to implement rules to effectively regulate and supervise the crypto sector. Under Japan’s G-7 Presidency, parliamentary vice-minister for financial services Suzuki Eikei said in a keynote address that Japan is seeking to strengthen anti-money laundering measures in relation to virtual assets in light of the growing risk that they pose.
UK and Israeli authorities make progress on regulating artificial intelligence
The UK Government has published its context-sensitive approach to regulating artificial intelligence (AI) which confirms that the UK Government does not intend to introduce new legislation. With market developments in AI moving at a rapid pace, the framework aims to bring clarity and coherence to the underpinning regulatory landscape in the interests of facilitating responsible innovation. Instead of creating a new single regulator for AI, the UK will empower existing regulators to embed five key principles when approaching AI in their respective sector. These five principles are: i) safety, security and robustness, ii) transparency and explainability, iii) fairness, iv) accountability and governance, and v) contestability and redress. Regulators intend to issue practical guidance to set out how to implement these principles in their sectors over the next 12 months. Feedback on the whitepaper is open until June 21, 2023.
In a speech to UK Fintech week, UK Economic Secretary to the Treasury Andrew Griffith hailed the Government’s approach to AI as well as its plans to make the UK a safe jurisdiction for cryptoasset activity and wholesale digital currencies.
Meanwhile, Israel has launched an inter-agency taskforce to review the regulatory and legal implications of the use of artificial intelligence (AI) in the financial sector. The taskforce will recommend steps to promote innovation and suggest required amendments to current regulation. The announcement comes as the financial sector is increasingly adopting artificial intelligence and automated decision-making systems with advanced algorithms increasingly featuring in prediction and decision-making. The task force includes members from the Ministry of Finance, the Ministry of Justice, the financial regulators, and the Competition Authority. The taskforce is expected to present its recommendations by October 2023.
UK and Singapore step up their scrutiny of service providers in financial services
The UK Prudential Regulation and Financial Conduct Authorities (PRA, FCA) have requested input from third party service providers (such as cloud storage or other ICT) into estimating the implementation and compliance costs of future minimum resilience standards in a future UK critical third parties regime. The Financial Services and Markets Bill sets out a framework for overseeing the resilience of third party service providers. The survey comes as regulators are preparing to consult on the key elements of a future oversight regime for designated providers of services deemed material to the functioning and stability of the UK financial system such as services mapping, resilience testing, and systems and controls implementation. The survey is open to responses by May 17, 2023.
The Monetary Authority of Singapore (MAS) hosted the inaugural Financial Sector Cloud Resilience Forum for Asia Pacific financial regulators and Cloud Service Providers (CSPs) to exchange views on appropriate public cloud risk management practices for the financial sector. The Forum confirmed that there is increasing adoption of public cloud services by financial institutions (FIs), and some critical systems and workloads of FIs are already being hosted in the public cloud. This underlines the need for CSPs to assist their financial services clients to maintain high standards of operational resilience, as well as the importance of greater information sharing between CSPs and financial regulators. The Forum will convene twice a year.
UAE authorities make progress on digital asset regulation and enhances FinTech cooperation with India
The Securities and Commodities Authority (SCA) of the United Arab Emirates (UAE) announced that it has started receiving license applications from companies wishing to provide virtual asset services. This follows the UAE’s decision to regulate virtual asset service providers and require all UAE-based companies that provide virtual asset services (except for those licensed to operate in financial free zones) to ensure regulatory compliance and file their license application accordingly. Under the new legislation virtual asset platform operators are subject to a range of requirements such as operational resiliency, transparency, and supervisory cooperation. These developments regarding the licensing process come as the UAE introduces legislative amendments to the Financial Activities Rulebook with respect to virtual assets. This includes new financial activities such as virtual asset brokers, custodians, and platform operators and new virtual asset portfolio provisions in terms of creation, management and controls.
In addition, the Reserve Bank of India (RBI) and the Central Bank of the UAE (CBUAE) have agreed to enhance their cooperation on emerging areas of FinTech, especially Central Bank Digital Currencies (CBDCs). CBUAE and RBI will jointly conduct proof-of-concept and pilot to facilitate cross-border CBDC transactions of remittances and trade. This bilateral engagement of testing cross-border usecase of CBDCs is expected to reduce costs, increase efficiency of cross border transactions and further the economic ties between India and the UAE.
SEC Chair focuses on digital assets during hearing in front of the US House of Representatives Committee on Financial Services
SEC Chair Gary Gensler testified in a hearing before the US House of Representatives Committee on Financial Services in which he addressed the SEC’s efforts in the areas of efficiency and competition, equity markets, private funds, integrity disclosure, artificial intelligence and predictive data analytics, cryptocurrencies, climate risk disclosure, resiliency, and Treasury markets. During the hearing, cryptocurrencies and digital finance took center stage, with Republican lawmakers criticizing the SEC’s aggressive approach to regulating cryptos and decrying the “lack of clarity” around regulation in the sector. Gensler doubled down on his approach, which critics and many in the industry have called “regulation by enforcement”, saying: “It’s not a matter of lack of clarity. I think this is a field that in the main is built up around non compliance. And that’s their business model.” Gensler continued to argue that the existing securities frameworks are appropriate for regulating cryptocurrency firms, and that they need to “come into compliance”. In addition to cryptocurrency regulation, Gensler answered questions on the Commission’s ESG disclosure efforts and underlined the importance of the US providing consistency and comparability to disclosure regimes already taking place around the world.
Gensler’s testimony comes as the House Financial Services Committee released a new draft discussion bill to provide a regulatory framework for stablecoins. In particular, the bill would place the Federal Reserve in charge of non-bank stablecoins, enact a temporary ban on new stablecoins that are not backed by a hard asset, and allow federal banking regulators and the National Institute of Standards and Technology (NIST) to set interoperability standards between stablecoins. The bill also directs the Federal Reserve to study certain implications of a digital dollar on monetary policy and financial stability. It remains to be seen whether the bill is passed into law.
Hong Kong High Court rules cryptoassets are property in landmark case
Hong Kong’s High Court has ruled in a case involving now-shuttered Hong Kong based exchange, Gatecoin, that cryptocurrency assets are property that can be held in a trust. In effect this equates crypto with other intangible assets such as stocks and bonds. The question germinated from liquidators of the collapsed crypto exchange, who sought clarity from the court as to whether the crypto held by Gatecoin should be treated as property held in trust, or in the absence of a trust, “be made available to the general body of creditors.”
Currently, the US Internal Revenue Service treats crypto as property for the purposes of taxation, while a law commission in the UK found that crypto can be classified as property under existing law in England and Wales. The ruling is notable as the Hong Kong Monetary Authority is currently working to flesh out firmer regulations for the crypto space while also balancing the stability of the financial system.
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