Regulatory and Legislative Analysis - December 2023

Regulatory and Legislative Analysis – December 2023

Time Stamp: January 3, 2024 11:37 AM
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Regulatory and Legislative Analysis – December 2023

January 3, 2024

Demetrios Tseas

Regulatory and Legislative Analysis – GLOBAL

Egmont Group releases report summary highlights for Terrorist Finance Risks of Virtual Assets

The Egmont Group (EG) released its Public Summary Report on Abuse of Virtual Assets (VAs) for Terrorist Financing Purposes. The report places emphasis on pinpointing vulnerabilities associated with virtual assets (VAs), showcasing EG Financial Intelligence Units’ (FIUs) best practices to counter the exploitation of VAs for terrorist financing as VAs pose a potential threat for TF.  The complexity of virtual assets tracing, coupled with the movement of funds for TF purposes, poses investigative challenges for authorities. Understanding trends and sharing best practices in emerging technologies can aid in the identification of potential vulnerabilities associated with new technologies. Of the FIUs surveyed for the report, 45% indicated their jurisdictions lacked regulatory requirements for VA transactions. Among the participating FIUs, 36% reported having a clear definition of VAs, 26% said they did not have definitions regarding VA, 6% failed to respond, and 32% provided alternative definitions of VA.

The International Organization of Securities Commissions publishes its final report with policy recommendations for Decentralized Finance

The International Organization of Securities Commissions (IOSCO) published its final report, outlining nine policy recommendations to address market integrity and investor protection issues in Decentralized Finance (DeFi). The recommendations encompass the need to: Understand DeFi products, services, activities etc.; Identify responsible persons and entities of a purported DeFi arrangement that could be subject to its applicable regulatory framework; Achieve common standards of regulatory outcomes; Identify and address of conflicts of interest; Identify and address material risks including operational and technology risks; Require clear, accurate and comprehensive disclosures; Enforce applicable laws; Promote cross-border cooperation and information sharing; Understand and assess interconnections among DeFi, the broader crypto-asset market, and traditional financial markets.

The Bank for International Settlements published a consultative document on amendments to its standards on cryptoassets exposure of banks

The Bank for International Settlements (BIS) published a consultation document on targeted amendments to its standard on the prudential treatment of banks’ crypto asset exposures. The BIS is seeking feedback on proposed amendments to SCO60: Cryptoasset Exposures. The review aims to assess, among other considerations, whether banks can include stablecoin exposure in the Group 1b category (i.e. cryptoassets with effective stabilisation mechanisms). Additionally, corresponding changes to the composition of the reserve assets for stablecoins are under scrutiny.  Banks must perform due diligence concerning the stabilization mechanism of the cryptoasset and its effectiveness. Banks exceeding the 1% of Group 2 (unbacked cryptoassets) limit must address the calculation of capital requirements. The deadline for responses is 28 March 2024.

Regulatory and Legislative Analysis – NAM (United States & Canada)

KuCoin to pay $22M, exit New York to settle State lawsuit

On December 12, Seychelles-domiciled virtual asset exchange KuCoin, agreed to pay $22 million and cease operations in New York State to settle charges brought by the New York’s State Attorney General. The lawsuit, initiated in March, accuses KuCoin, of failing to register before allowing investors to trade cryptocurrencies on its platform.  The exchange will refund $16.77 million to New York customers and pay $5.3 million to the New York Attorney General’s Office. KuCoin CEO Johnny Lyu confirmed the settlement via X, stating it solidifies their commitment to compliant operation.

Coinbase introduces spot crypto trading on its international exchange

On December 13, Coinbase announced spot crypto trading for international institutional investors, allowing them to trade BTC-USDC and ETH-USDC pairs.  The service is offered via Coinbase International Exchange (doing business as Coinbase Bermuda), a new entity established in May 2023. Coinbase International Exchange obtained a class F license from the Bermuda Monetary Authority in April 2023, with registration number 202302164.

CoinList settles with Office of Foreign Assets Control for $1.2M for sanctions violations

On December 13, the Office of Foreign Assets Control (OFAC) announced it had settled with San Francisco-based virtual asset service provider CoinList Markets LLC (CLM). The settlement requires CLM pay $1,207,830 to settle its potential civil liability arising from processing 989 transactions on behalf of users ordinarily resident in Crimea between April 2020 and May 2022, in violation of OFAC’s Russia/Ukraine sanctions. The settlement amount reflects OFAC’s determination that CLM’s apparent violations were not voluntarily self-disclosed and were non-egregious.

Financial Stability Oversight Council issues its annual 2023 report, highlights digital asset vulnerabilities

On December 20, the Financial Stability Oversight Council (FSOC) issued its 2023 Annual Report, a new analytic framework for financial stability risks and final guidance on its nonbank financial company determinations process.  The 2023 Annual Report, among other things, highlights areas of risk that FSOC believes should be monitored and addressed in the near future. Chapter 3.1.5. covers digital assets and highlights vulnerabilities inside the crypto-asset ecosystem which include: Price volatility, the high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from key ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

Regulatory and Legislative Analysis – EMEA

France’s Société Générale issues a first digital green bond on Ethereum

On December 4, Société Générale (SG) announced the issuance of its inaugural digital green bond as a Security Token, directly registered by SG-FORGE. SG-FORGE, a regulated subsidiary of the SG group, is authorized to provide digital asset structuring, issuing, exchange and custody services, licensed as an investment firm under MiFID 2 under the supervision of the Autorité de Contrôle Prudentiel et de Résolution (ACPR).  SG-FORGE is registered as a Digital Asset Service Provider (DASP) with the AMF. The issued bond is structured as a EUR 10 million senior preferred unsecured bond with a maturity of 3 years. An amount equivalent to the net proceeds of this bond will be exclusively used to finance or refinance Eligible Green Activities, as defined in the Sustainable and Positive Impact Bond framework of SG.

Crypto.com received UK’s FCA EMI Authorization

On December 4, Crypto.com announced that it had received authorization from UK’s Financial Conduct Authority (FCA) to operate as an Electronic Money Institution (EMI). As a result, the company will introduce a range of UK-localized e-money products. This approval follows Crypto.com’s registration as a cryptoasset business with the FCA in August 2022.

Binance withdraws its application for a license in Abu Dhabi

On December 8, Binance reportedly withdrew its application for an investment management license in Abu Dhabi, having deemed it unnecessary to the company’s global needs. The exchange still has an application to offer custody of digital assets to professional clients, according to its website.  The decision to pull the license application was “unrelated” to the U.S. settlement, according to a Binance spokesperson. One day earlier, on December 7, a US federal judge ordered former Binance CEO Changpeng Zhao to remain in the U.S. while awaiting sentencing, citing concerns about the risk of flight.

ECB calls for expression of interest to explore new technologies for wholesale central bank money settlement

On December 13, the Eurosystem invited financial market stakeholders, urging them to formally express their interest in participating in the upcoming planned exploration of new technologies for wholesale central bank money settlement. Financial market stakeholders will take part in trials with central bank money settlement and in experiments with mock settlement in a controlled testing environment. The trials and experiments will be conducted with three Eurosystem solutions enabling wholesale financial transactions recorded on distributed ledger technology platforms to be settled in central bank money within T2, the Eurosystem’s real-time gross settlement (RTGS) system.

Circle launches its EURC stablecoin on the Solana blockchain, receives provisional approval as a DASP in France

On December 18, U.S.-based Circle, the issuer of USDC dollar-pegged stablecoin, announced  it had launched EURC, its Euro-backed stablecoin on the Solana blockchain.  With this launch, Solana is now the fourth blockchain where EURC is natively available alongside Avalanche, Ethereum and Stellar.  With plans for EURC to achieve full Markets in Crypto Assets (MiCA) conformity as an e-money token when the new European regime enters into application, developers and users of EURC on Solana can continue to expect the highest standards of trust, and transparency and reliability.  On December 21, Circle announced it had received provisional approval as a Digital Asset Service Provider (DASP) from French regulator Autorité des Marchés Financiers (AMF) and announced Coralie Billman would lead Circle in France. Final approval is contingent on receiving an e-money license. Under the European Union’s (EU) MiCA Regulation, registration with one EU regulator allows a provider to operate across the EU.

Swiss FINMA issues staking guidance

On December 20, the Swiss Financial Market Supervisory Authority (FINMA) released new guidance specifically addressing staking services. The primary emphasis of the guidance was on safeguarding customers in case of a staking service provider’s bankruptcy.

Regulatory and Legislative Analysis – APAC

Hong Kong’s SFC warns public of HongKongDAO and BitCuped for involvement in suspected virtual asset-related frauds

On December 6, Hong Kong’s Securities and Futures Commission (SFC) issued a public warning regarding suspected virtual asset-related frauds involving entities operating under the names “Hong Kong Digital Research Institute” or “HongKongDAO” and “BitCuped.” HongKongDAO issued a token named “HKD” or “HongKongDAO” (HKD Token), which is available for purchase on HongKongDAO’s website. The SFC suspects that HongKongDAO may potentially be disseminating false and misleading information through online channels. According to the SFC, BitCuped falsely claimed that “Laura Cha” and “Nicolas Aguzin” serve as its Chairman and Chief Executive Officer respectively, despite having no affiliations with BitCuped. In response, the Hong Kong Police, at the SFC’s request, has taken steps to block access to the websites of HongKongDAO and BitCuped. The SFC also issued cease and desist letters to relevant website operators urging them to stop offering for purchase a token issued by HongKongDAO.

Hong Kong regulators unveil public consultation paper, proposing legislation to regulate stablecoin issuers and consider authorizing Exchange Traded Funds

On December 27, Hong Kong’s Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA), jointly issued a consultation paper, proposing legislation to regulate stablecoin issuers in Hong Kong. Stakeholders and the public are encouraged to provide feedback by February 29, 2024.  On December 22, the Hong Kong Securities and Futures Commission (SFC) and the HKMA issued a joint circular detailing the requirements under which the securities regulator would consider authorizing investments funds with exposure to virtual assets of more than 10% of their net asset value.

India’s government blocks URLs for nine offshore VASPs after issuing compliance “Show Cause Notices”

On December 28, India’s Financial Intelligence Unit (FIU IND) issued compliance Show Cause Notices[1] for nine offshore Virtual Digital Asset Service Providers (VDA SPs): Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex.  The Director FIU IND requested the Secretary, Ministry of Electronics and Information Technology to block the URLs of the nine entities allegedly operating illegally because they did not comply with the provisions of the Prevention of Money Laundering Act  2002  (PML Act) in India. VDA SPs operating in India (both offshore and onshore) and engaged in activities like exchange between virtual digital assets and fiat currencies, transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets etc. are required to register with FIU IND as Reporting Entity and comply with the set of obligations as mandated under PML Act. The obligation is activity-based and is not contingent on physical presence in India. The regulation casts reporting, record keeping, and other obligations on the VDA SPs under the PML Act which also includes registration with the FIU IND. As of January 2024, 31 VDA SPs registered with FIU IND. However, several offshore entities though catering to a substantial part of Indian did not register but fell under the purview of the Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework.

MUFG Japan’s largest financial institution announces partnership with JPYC, the Yen-backed stablecoin

On December 5, 2023, Japan’s Mitsubishi UFJ Financial Group, Inc. (MUFG) announced[2] a partnership with JPYC, the yen-backed stablecoin, that will unlock new stablecoin-based services such as cross-border payments. MUFG is Japan’s largest financial institution. MUFG will integrate JPYC into Progmat, an issuance and management platform for a range of digital assets, launched in Sept 2023, in partnership with other major Japanese banks.

Regulatory and Legislative Analysis – LATAM

Brazilian bank Itaú Unibanco launches a crypto trading and custody program

On December 4, Reuters reported that Itaú Unibanco, Brazil’s largest bank by assets, is launching a crypto trading service for clients of its investment platform. The service is initially offering crypto trading in bitcoin and ether, but the bank also reportedly aims to add others as well, according to the bank’s digital asset head Guto Antunes. Antunes also noted that Itaú clients will initially not be able to deposit and withdraw cryptocurrency using external crypto wallets. The news comes as Itaú and other large banks in Brazil are reportedly preparing for the launch of the digital Brazilian real, the Drex.  

Circle and Nubank partner to increase digital dollar access in Brazil

On December 5, both Circle and Brazilian neobank Nubank announced the introduction of the Circle-issued stablecoin USDC on Nubank’s crypto platform, Nubank Cripto. Nubank serves approximately 90 million customers Brazil, Mexico, and Colombia. Jeremy Allaire, co-founder and CEO of Circle, noted that, “We continue to see strong demand across Latin America for access to dollars, specifically in Brazil, which has emerged as a driving force for digital currency use and adoption in the region…Our partnership with Nubank marks a significant moment in expanding the global reach of USDC, and an important step towards building the new internet financial system.”

El Salvador announces “Freedom Passport” program, accepting $1 million in Bitcoin or Tether

On December 7, 2023, the government of El Salvador and stablecoin issuer Tether jointly announced the launch of the country’s “Adopting El Salvador Freedom Passport Program”, which is designed to attract high-net worth individuals within the digital asset community. Individuals who invest the equivalent of $1 million in either bitcoin or Tether (USDT) will be eligible for an El Salvadorian passport. The program reportedly is limited to 1,000 spots per year and all applicants are required to go through a KYC verification process. While the price is considerably higher than other countries’ visa investment programs, both Tether and the El Salvadorian government noted this as an opportunity to continue advancing digital asset technology and innovation in blockchain-based payment rails.

Argentinian government states that contracts can now be settled in bitcoin and other cryptocurrencies

On December 21, 2023, Argentina’s Minister of Foreign Affairs, International Trade and Worship, Diana Mondino posted on X (formally Twitter) that contracts in the country could now legally be settled in bitcoin. The post came a day after a presidential decree titled “Bases for the Reconstruction of the Argentine Economy.” Article 1196 of the decree states that parties of a contract, “have the liberty to specify the amounts and the type of currency used for the bond or security deposit, as well as the method for its reimbursement upon the lease’s conclusion.” While the decree does not specifically mention cryptocurrency, such provisions give debtors the choice to pay in currencies not recognized as legal tender in Argentina. Mondino further stated that parties to a contract may also settle in “any other crypto and/or species,” including commodities such as “kilos of steer or liters of milk”. President Javier Milei appointed Mondino as the foreign minister following his election victory in November 2023.

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