Global Regulatory Brief: Digital finance, June edition
The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Digital finance regulatory developments
Artificial intelligence (AI) is fast rising up the list of priorities for regulators with the European Parliaments approving its position on Europe’s AI Act and the OpenAI CEO testifying to the US Congress. The UK competition regulator has launched an initial review into AI models. Progress is being made on central bank digital currencies with Hong Kong launching a pilot programme and the European Central Bank publishing an update on the digital euro ahead of legislation later this year.
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- EU Parliament approves its position on the AI Act
- Hong Kong launches pilot programme on central bank digital currency
- OpenAI CEO calls for AI regulation in testimony to Congress
- UK and US competition regulators focus on artificial intelligence
- Coinbase sues SEC over petition for rulemaking
- UK MPs call for crypto to be regulated as gambling as HMT consults on taxation of DeFI
- Saudi Arabia confirms revisions to personal data protection law
- House of Representatives holds rare joint committee hearing on digital assets
EU Parliament approves its position on the AI Act
The European Parliament has approved its position on a new risk-based framework for governing artificial intelligence (AI) in the EU. Under the Parliament’s approach AI systems with an unacceptable level of risk to people’s safety would be strictly prohibited, including systems that deploy subliminal or purposefully manipulative techniques, exploit people’s vulnerabilities or are used for social scoring. MEPs expanded the classification of high-risk areas to include harm to people’s health, safety, fundamental rights or the environment. With regard to foundational models, MEPs have taken a stricter approach. Generative foundation models such as GPT will need to comply with additional transparency requirements such as disclosure that the content is AI-generated, protections against generating illegal content and publication of summaries of copyrighted data used for training the models. Exemptions to the rules for research activities are also being considered and the EU AI Office will be tasked with monitoring how the AI rulebook is implemented. Final negotiations on the AI Act will begin once the Parliament endorses the negotiating mandate, which is expected in mid-June.
Hong Kong launches pilot programme on central bank digital currency
The Hong Kong Monetary Authority (HKMA) has commenced a e-HKD Pilot Programme to allow the industry and regulators to consider different use cases and design choices and co-create new payment functionalities and infrastructures. The Pilot Programme will inform future decisions on whether to implement e-HKD, which would depend on whether it can make payment more efficient and convenient than the existing payment methods and unlock new business opportunities. 16 companies have been selected to participate in the first batch of the Pilot Programme for 2023 and will work on 14 pilots spanning across six major categories, covering programmable payments, “dual offline” payments, and other new developments with the use of blockchain technology, such as settling Web3 transactions and tokenized assets. Key findings from the pilot programme are expected to be shared at the Kong Kong FinTech Week in November later this year. Additionally, the HKMA is looking to foster closer government-industry-academia collaboration on central bank digital currency (CBDC) and plans to form a CBDC expert group to study a range of issues such as privacy protection, cybersecurity, and interoperability.
The announcement comes as CBDC becomes a key focus for central banks globally. The European Central Bank (ECB) has published an update on its CBDC project as it enters the final stage of the investigation phase exploring the design and distribution implications of a digital euro. The report underlines the importance of availability, holding limits, onboarding, cross-currency functionality, and contactless technology. The EU intends to issue proposals to establish a digital euro this summer.
Fabio Panetta, Member of the ECB Executive Board, has called for legal tender status for the digital euro with mandatory acceptance by merchants. He also suggested requiring euro-area banks to make the digital euro available to their customers to ensure broad access.
OpenAI CEO calls for AI regulation in testimony to Congress
In testimony before the Senate Judiciary Committee, OpenAI CEO Sam Altman called for regulation of artificial intelligence (AI) to ensure responsible use and prevent significant harm. OpenAI is the firm behind the development of ChatGPT, the large language model (LLM) AI platform that many have now come to know since GPT-4 rolled out in March 2023.
In his prepared testimony, Altman stated that OpenAI was funding research into potential policy that might help mitigate future economic impacts from technological disruption, such as modernizing unemployment-insurance benefits and creating adjustment-assistance programs for workers impacted by AI advancements. Currently, AI regulation occupies a relatively unique non-partisan space, with both Democrats and Republicans harboring their own concerns about the technology. During the hearing, Sen. Richard Blumenthal (D-CT) voiced concerns about potential job loss, while Sen. Josh Hawley (R-MO) expressed concerns about the role AI could play in spreading false information during elections. AI is set to be a hot topic in Washington as policymakers work out their regulatory and policy response.
UK and US competition regulators focus on artificial intelligence
The UK Competition and Markets Authority (CMA) has opened an initial review of competition and consumer protection considerations in the development and use of artificial intelligence (AI) foundation models, which include large language models and generative AI. Following the publication of the UK government’s white paper on AI, the CMA has been tasked with exploring how its mandate to support competitive markets intersects with the rise of foundation models. Specifically this review will explore the implications for competition and barriers to entry within the AI market, the impact on competition in other markets, and consumer protection. The CMA expects to produce guiding principles to advance principles as AI foundation models develop. The CMA is seeking views and evidence from stakeholders and welcomes submissions by June 2, 2023. The CMA will publish a report which sets out its findings in September 2023.
The role of the CMA has been in the spotlight with the introduction of the Digital Markets, Competition and Consumers (DMCC) Bill to Parliament by the UK Department for Business and Trade. This Bill provides the CMA with stronger tools to investigate competition problems and to take proportionate action, and establishes a Digital Markets Unit (DMU) within the CMA specifically to look at competition issues in digital markets. For example, if a firm is deemed to have strategic market status in key digital services, the DMU will be able to step in to set tailored rules on how they behave and operate.
Concerns around the implications of AI are not just limited to the UK. In the US, the Chair of the Federal Trade Commission (FTC) published a joint-statement with officials from three other federal agencies (Department of Justice, Consumer Financial Protection Bureau, Equal Employment Opportunity Commission) committing to combating unfair and non competitive practices within the AI space.
Coinbase sues SEC over petition for rulemaking
Coinbase is suing the SEC in an attempt to force regulatory clarity for the digital asset industry. In July 2022, Coinbase filed a petition for rulemaking, asking the SEC to identify which digital assets are considered securities and how securities laws would apply. However, according to Coinbase, the SEC has not provided a response or commented on the request, which they are required to do by law. The exchange says that the only formal communication it has received from the SEC is a Wells notice, indicating that the Commission intends to pursue an enforcement action. Coinbase argues that the lack of clarity from the SEC has created uncertainty for crypto companies and prevented them from appropriately planning for the future. This development could have implications for broader SEC rulemaking if the court ultimately rules the Commission must respond.
Of note, the US Chamber of Commerce, an influential advocacy group, filed an amicus brief in support of Coinbase, stating in part: “The SEC has deliberately muddied the waters by claiming sweeping authority over digital assets while deploying a haphazard, enforcement-based approach”.
UK MPs call for crypto to be regulated as gambling as HMT consults on taxation of DeFI
The House of Commons Treasury Committee has published a report that calls for crypto regulation to mirror gambling regulation rather than traditional financial services regulation. The report concludes that crypto has no intrinsic value and serves no useful social purpose while consuming large amounts of energy and offering criminals opportunities to scam, fraud and money launder. The Committee is concerned that regulating consumer crypto trading as a financial service, as proposed by the Government, would create a ‘halo’ effect, wrongly leading consumers to believe this activity is safe and protected. The report recognizes that the underlying technologies may bring benefits to financial services, particularly for cross-border transactions and payments in less developed countries. It further argues that in the absence of clear, beneficial use-cases the Government should avoid spending public resources on projects.
Meanwhile, HM Treasury has announced an open consultation regarding the taxation of cryptoasset loans and ‘staking’ within the context of Decentralised Finance (DeFi). These activities reward users who deposit cryptoasset tokens into a pool or lend them to other individuals for a certain period to earn passive income returns, often referred to as ‘interest’. HMT is considering applying capital gains tax (CGT) when cryptocurrencies are disposed of in a non-DeFi transaction. The call for evidence is open for 8 weeks until June 22, 2023.
Saudi Arabia confirms revisions to personal data protection law
The Saudi Arabia Council of Ministers has approved a series of changes to the Kingdom’s Personal Data Protection Law (PDPL) that was issued in 2021. The revisions aim to align Saudi’s data privacy rules more closely with other international standards such as the General Data Protection Regulation (GDPR) in the EU. Specifically, the changes include more business-friendly data transfer mechanisms, a relaxation of the data breach notification timeline, and the removal of registration requirements for controllers. Businesses operating in Saudi Arabia or processing any data of Saudi residents are encouraged to start assessing their data processing activities to assess the impact of the PDPL. The legislation is expected to take effect from September 14, 2023 and the one-year grace period means that in-scope firms have until September 14, 2024 to comply.
House of Representatives holds rare joint committee hearing on digital assets
A joint committee hearing of the House Financial Services and House Agriculture Committees revealed a strong consensus around the need for new rules for crypto and other digital assets, while also underscoring that there still are differing visions of what those policies should look like. Rep. Patrick McHenry, the Republican chair of the House Financial Services Committee, called for the Securities and Exchange Commission (SEC) to modify its rules for broker dealers and securities exchanges. McHenry also argued that the Commodity Futures Trading Commission (CFTC) needs more authority to regulate non-security digital assets such as bitcoin, adding that SEC disclosure rules should be modified for digital assets that fall under that regulator’s regime.
Rep. Maxine Waters, the Ranking Democrat on the committee, agreed on the need for legislation and noted the bipartisan cooperation in the development of a comprehensive regulatory framework for stablecoins. Her priorities are stablecoin regulation, increasing the SEC’s ability to go after overseas firms, and giving the CFTC more power over spot markets for digital commodities such as bitcoin. Though House Republicans do not need Democratic votes to pass a bill, bipartisan buy-in would boost the odds of a bill passing the Democratic-controlled Senate.
While Congress continues to debate the regulation of digital assets, the White House has published an outline of the areas where it plans to focus standard development efforts to maintain a global competitiveness. Notably, the publication confirms that the US Government considers distributed ledger technology (DLT) and digital identity infrastructure to be essential technologies for US competitiveness and national security given the wide range of economic sectors that they impact.
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