Global Regulatory Brief: Digital finance, April 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
The digital finance landscape is constantly evolving, as are local and international regulations along with cybersecurity threats. Understand the latest trends to help identify potential risks so you can implement the appropriate risk management strategies to mitigate them.
- Japan, Australia, Indonesia, and Iran make progress on CBDC initiatives
- White House signals skepticism over digital assets
- UK Government reintroduces data protection reforms
- EIOPA launches digitalisation market monitoring survey
- SEBI finalizes cloud adoption framework for the Indian market
- Australia publishes cyber security strategy
- Crypto friendly Signature Bank reportedly under DOJ, SEC investigation prior to collapse
- SEC continues build out of Crypto Assets and Cyber Unit
Japan, Australia, Indonesia, and Iran make progress on CBDC initiatives
The Bank of Japan (BoJ) has confirmed that it will launch a pilot programme for a Central Bank Digital Currency (CBDC) in April 2023. This launch follows the completion of Proof of Concepts in March and will involve simulated digital yen transactions with private businesses. The pilot program is expected to allow the BoJ to develop a system for experiments in which it can test end-to-end process flow while exploring the measures and potential challenges for connecting the experimental system with external ones. At present, no actual transactions will take place among retailers and consumers in the program. To establish the institutional arrangements for a CBDC the BoJ will establish a CBDC Forum to discuss and explore a range of topics relating to retail payments with industry. The BOJ will select participants for the CBDC Forum in the coming months and will consider expanding the scope of the pilot programme over time.
Second, the Reserve Bank of Australia (RBA) has announced the use case proposals and providers for its project to explore the potential of an Australian CBDC. The project will involve a variety of use cases including offline payments, livestock auction, high quality liquid assets securities trading, funds custody, and corporate bond settlement, among others. Selected participants will be granted a real digital claim on the RBA and the intention is that industry and policymakers will better understand how a CBDC can benefit the Australian financial system. A report on the project’s progress will be published later this summer.
Third, Bank Indonesia (BI) has issued a consultation paper on the development of a wholesale digital rupiah. BI seeks input in the area of functionality which covers access, issuance, fund transfer and technical capability. The second area of input that BI is looking for relates to general technological considerations such as scalability, resilience, implications for wider payment, financial and monetary systems. This paper builds on a white paper issued in November, which outlined the central bank’s plans for developing a digital rupiah under the banner of ‘Project Garuda’. The consultation is open for comment until July 15, 2023.
Finally, the Monetary and Banking Research Institute of Iran has completed preliminary research for the launch of a potential digital rial. Ten banks in Iran have applied to join the project and all banks and credit institutions in Iran are reportedly expected to start offering electronic wallets for the upcoming digital currency. There are some concerns that heavily sanctioned countries such as Iran could use digital currencies to bypass the international banking systems and sanctions.
White House signals skepticism over digital assets
The White House has issued the President’s annual Economic Report which includes a chapter on digital assets. Throughout the analysis, the White House was highly critical of the digital asset space, a sentiment which is best captured by this excerpt: “It has been argued that crypto assets may provide other benefits, such as improving payment systems, increasing financial inclusion, and creating mechanisms for the distribution of intellectual property and financial value that bypass intermediaries that extract value from both the provider and recipient. Looking under the hood at these arguments, however, shows a more complicated picture. So far, crypto assets have brought none of these benefits.” The White House has underlined its skepticism toward the long-term benefits of the digital asset space and is concerned about the potential for spillover into the traditional financial system.
This report comes on the heels of Treasury Secretary Janet Yellen’s remarks in late-February regarding the importance of establishing a robust regulatory framework for cryptocurrencies while also clarifying that the US has not proposed an outright ban.
UK Government reintroduces data protection reforms
The UK Government has reintroduced the revised Data Protection and Digital Information (DPDI) Bill to Parliament which aims to reform the inherited General Data Protection Regulation (GDPR) rules from the EU. The new Bill represents a slightly modified version of the original Bill unveiled in summer 2022 and the Government’s chosen narrative is that this legislation presents opportunities to reduce compliance burdens in the UK. Five key areas have been targeted for further reform: a new list of legitimate interests, clarification that scientific research includes for commercial purposes, reducing compliance for low-risk processing, clarification concerning existing international transfer mechanisms, and clarifications around human involvement in automated decision-making. The plans to reduce compliance for low-risk processing has generated some controversy with several civil society groups questioning how this might impact individual rights. The Government’s ambition is to finalize the legislation by the year-end if possible.
EIOPA launches digitalisation market monitoring survey
The European Insurance and Occupational Pensions Authority (EIOPA) has launched a new survey to understand and monitor digital transformation trends in the European insurance market. The survey will examine how financial innovation is reshaping Europe’s insurance sector and will look at developments such as digital distribution, communication channels, and partnerships with start-ups and technology companies. The adoption and governance of blockchain and artificial intelligence in insurance is also an area of focus for EIOPA. Findings from the survey will feed into EIOPA’s work as it seeks to detect emerging risks for insurers and consumers.
SEBI finalizes cloud adoption framework for the Indian market
The Securities and Exchange Board of India (SEBI) has finalized its new framework for Regulated Entities (REs) adopting cloud technology. This will impact stock exchanges, depositories, stock brokers, clearing corporations, asset managers, KYC registration agencies, and other REs operating across the Indian market.
The cloud adoption framework covers a wide range of considerations for firms including governance, risk and compliance, the selection of cloud service providers, data ownership and data localisation requirements, due diligence and security controls. The main purpose of the framework is to highlight the key risks and mandatory control measures which REs need to put in place before adopting cloud computing.
REs have one month to provide the SEBI with details of the cloud services they have deployed, three months to submit a roadmap for implementation of the new framework, and twelve months to ensure that all existing arrangements are in compliance with the new framework.
Australia publishes cyber security strategy
The Australian Government published on February 27 a discussion paper on its 2023-2030 Cyber Security Strategy, designed to position Australia as the world’s most cyber secure country by 2030 and an international standard-setter for carefully crafted cyber policy. The strategy is founded on the recognition that the current patchwork of policies and frameworks is not sufficient to keep up with the quickly-evolving digital economy.
The paper seeks input on ways to enhance and harmonize existing regulatory frameworks to strengthen cyber resilience across the digital economy. Specifically, the government wants to hear views on whether the Security of Critical Infrastructure Act needs reform, and whether existing definitions of ‘critical assets’ should extend to customer data and systems. It also asks whether company directors should be specifically required to address cyber security risks and the consequences, whether a new Cyber Security Act is needed, and what it should include. The discussion paper is open for comment until April 15, 2023.
Crypto friendly Signature Bank reportedly under DOJ, SEC investigation prior to collapse
Amidst the turmoil surrounding Silicon Valley Bank, First Republic Bank and Signature Bank, reports have emerged that investigators from the Department of Justice and Securities and Exchange Commission were looking into Signature Bank’s work with cryptocurrency-related firms before the bank was shut down by the New York State Department of Financial Services. Signature Bank was one of the few banks in the US taking crypto deposits. Reportedly, investigators were probing whether the lender took adequate steps to identify potential money laundering by its clients. Former Rep. Barney Frank, architect of the Dodd-Frank reforms following the 2008 financial crisis, was a board member at Signature Bank and has gone on record arguing that crypto panic sparked a deposit run on Signature. The bank has not been accused of wrongdoing yet, and the investigation could be closed without further action. However, it remains unclear when the investigation began and if it had any bearing on regulators’ move to close the failed bank.
SEC continues build out of Crypto Assets and Cyber Unit
The SEC is expected to ramp up its recent surge of cases targeting crypto firms as it continues to boost the size of its digital assets enforcement squad. In May 2022, the Commission announced it was adding 20 people to its newly named Crypto Assets and Cyber Unit, nearly doubling the size of the operation to 50 persons. The agency is expected to add additional staff to the unit, but the exact number of new positions remains to be confirmed. This expansion further underlies the priority that digital assets enforcement has become for the SEC.
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