RegTech Intelligence 
With new waves of regulation and enforcement coming fast, navigating cryptocurrency and digital assets rules has keeping middle and back offices hands on the tiller this quarter.
JWG’s Crypto asset RegRadars are hot and this article provides three dozen links to contextualise choppiest waters in Q12023 in advance of JWG’s 22 March Trading Compliance seminar.
2023 wave overview
International regulators have established the navigational compass for crypto-assets regulation through global recommendations and guidelines.
A patchwork of implementing measures to protect balance sheets (BCBS), prevent money laundering (FATF), collect taxes (OECD) and assessing risks of Decentralized Finance (FSB) will be tailored to suit local regulatory waters.
However, this is just part of the regulatory picture as each jurisdiction must also adapt its framework on product disclosures, trading venues, money laundering, client assets, clearing, settlement and a whole raft of issues for which there is unlikely to be any common guidance from the supervisory community.
United States (US): All fines
Since the first Securities and Exchange Commission (SEC) cryptocurrency-related enforcement action in 2013 through the end of 2022, 127 enforcement actions against digital-asset market participants have been taken.
All this has been achieved under the SEC’s current mission of protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets.
Following the FTX collapse in 2022 the agency has charged and fined Nexo $45 Million, Genesis and Gemini, Kraken $30 Million, Terraform and CEO Do Kwon and Actions on Hall of Famer Paul Pierce for violating the Securities Act of 1933 and the Exchange Act.
The Kraken action, however, did not go down well with SEC Commissioner Hester Peirce who in her statement expressed disapproval of the move, stating that the “just shut it down” card pulled by the regulator is “lazy” and “paternalistic” and a more uniform regulatory solution is needed.
In a recent interview, she likened the journey towards effective regulation to a long and arduous voyage. “We’re going to struggle for a while to get to a place where we really are productively regulating it,” Peirce said. With the next two years shaping up to be particularly consequential for the industry’s development, finding a balance between innovation and oversight will require a steady hand at the helm.
The 14th February 2022 Senate hearing appears to have shared the Commissioner’s sentiment with the title: “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets “. It is too early to tell what form of legislation is on the cards but in the last Congress, legislators like Senators Elizabeth Warren (D-Mass.) and Roger Marshall reintroduced their bill in a bid to aim for protecting investors and consumers alike by giving legal clarity other than enforcement.
The New York Department of Financial Services (DFS) issued consumer alerts effective 21st February 2023 that Paxos will cease issuance of new BUSD tokens because of several unresolved issues related to Paxos’ oversight of its relationship with Binance.
European Union (EU) and United Kingdom (UK): channel partners
The United Kingdom (UK) released the consultation and call for evidence on the future financial services regulatory regime for crypto assets this month which details their proposed framework under the Financial Services and Markets Act (FSMA). JWG’s in-depth analysis here has all the details.
The European Union (EU) has announced that the parliament will have its final say on regulation of crypto assets. The nearly 400-page Markets in Crypto assets Regulation (MiCA) was agreed on 5th October 2022 but is now expected to be finalized in April this year due to technical difficulties in the translation process.
Though it is difficult to predict the final form which the EU technical standards and the UK rules will take, divergence is emerging.
The first area of choppy water is authorization. MiCA allows certain authorized firms, including banks, to conduct crypto asset activities based on their existing regulatory authorizations. However, the HMT (HM Treasury) notes that banks and other already authorized firms will not automatically be granted authorization to undertake newly defined Regulated Activities Order (RAO) crypto asset activities.
A second area of turbulence may come from the UK’s robust framework that introduces new disclosure, trading venue, reporting, market abuse, consumer protection and custody rules. Future MiCA technical standards could diverge in many areas and crypto asset firms will need to chart the differences carefully.
Both the US and EU are key regulatory influencers globally, and other jurisdictions are closely watch their approaches and with the bumps of the crypto-assets market, regulatory clarity and oversight will continue to be a priority for jurisdictions around the world.
Australia: Token Mapping
The Government of Australia announced “token mapping” as a foundational step in developing appropriate regulation for the crypto ecosystem in August 2022.
Token mapping involves uncovering the characteristics of all digital asset tokens including charting the type of crypto asset, its underlying code and any other defining technological feature.
This month, it also introduced a token mapping framework that is applicable to crypto assets and related products and services in its Token Mapping consultation based on three key concepts: tokens, token systems, and functions.
According to the Government response to the final report, token mapping would provide definition and clarity as to those characteristics or activities that are excluded or captured by regulation’.
A framework focused on consumer protection and market integrity will be developed following the consultation that closes on 3rd March 2023.
Hong Kong: Flying the fiat flag
The Hong Kong Monetary Authority (HKMA) concluded that stablecoins which claim to be linked to one or more fiat currencies are top priority.
They will regulate them and engage in further consultation on the details of the regulatory framework. To support innovation in the fintech sector, the HKMA has established a Fintech Supervisory Sandbox, which allows banks and technology firms to conduct pilot trials.
Hong Kong’s open and inclusive policy towards the global community of innovators engaging in Virtual Asset (VA) businesses received a boost on 20th February 2023 when the Securities and Futures Commission (SFC) published its proposed rules for Virtual Asset Trading Platforms (VATPs) and a subsequent consultation seeking public comment by 31st March 2023.
In the consultation, SFC seeks to get all VATPs licensed by 1st June 2024. New Anti-Money Laundering Ordinance (AMLO) sections have been introduced, each with their own deadlines to help guide the new entrants and existing VATPs on how to achieve SFC licensing before the June date.
The HKMA aims to put in place the regulatory regime for stablecoins by 2023/24.
Singapore: Protection and Innovation
In October 2022 the Monetary Authority of Singapore (MAS) published two consultation papers proposing regulatory measures for cryptocurrency trading and stablecoin-related activities.
The papers focus on reducing risks of consumer harm from cryptocurrency trading and supporting the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.
These measures will be part of the Payment Services Act (PSA) and cover three broad areas: consumer access, business conduct, and technology risks. Digital Payment Token (DPT) service providers will be required to provide proper risk disclosures, disallow the use of credit facilities and leverage by retail consumers, and implement proper segregation of customers’ assets.
For stablecoins, MAS will regulate issuance that is pegged to a single currency where the value exceeds S$5 million. Banks will be allowed to issue stablecoins as well, and no additional reserve backing, and prudential requirements will apply when the stablecoin is issued as a tokenized form of bank liabilities.
Dubai: Port open for business
The United Arab Emirates (UAE) passed a law in February 2022 that establishes a regulatory regime for the cryptocurrency space at the federal level. The Dubai Virtual Assets Regulatory Authority (VARA), the competent entity in the Emirates, is now in charge of regulating, supervising, and overseeing Virtual Asset services.
This month, VARA released the Virtual Assets and Related Activities Regulations 2023 covering the use of Cryptocurrencies and all Virtual Asset activities associated with them. The new regulations address market offenses, including insider dealing, unlawful disclosure, and market manipulation, and aim to prevent money laundering and the financing of terrorism and other illegal organizations.
Charting the forward course
JWG’s 2023 digital asset Radars are hot, and we are busy mapping the interdependencies, gaps and overlaps in our RegDelta and RegRadar reporting services.
Let us know if your business needs help aligning this sea of change to your global ship.
Please join us at our 22 March Trading Compliance RegTech seminar which will cover digital assets on 22 March.
These events are ‘must go’ for many senior decision makers which help shape the future of the of RegTech and are at the forefront of this rapidly growing industry.
We look forward to having you on board!
