FinTech Global FS Regulatory Round-up – w/e 20 January 2023

The Payment Systems Regulator (PSR) has published a summary of the discussion at its roundtable on 29 November 2022 on the Digital Payments Initiative. The roundtable was particularly focused on barriers to the use of digital payments, exploring why people depend on cash, the role prepaid cards can play in meeting the needs of cash-dependents, and ways to provide access to cash-dependent customers.

Alongside the summary, PSR’s policy manager Kate Fitzgerald has written a short think piece on barriers to the use of digital payments. Ms Fitzgerald writes that protecting access to cash is a priority for PSR, and then outlines the Digital Payments Initiative, PSR’s work on this topic and the roundtable discussion.[19 Jan 2023]

The Financial Services Consumer Panel (one of the independent statutory panels consulted by the FCA when developing policy) has published its response to Discussion Paper 22/5: Potential competitive impacts of Big Tech entry and expansion in retail financial services (DP22/5) . FSCP’s comments cover:

• how the FCA should approach its assessment of the changes in the market, in particular that the FCA should start by looking at potential harm to end users of financial services and then “work backwards”;
• how current regulatory gaps can lead to embedded anti-competitive practices;
• the potential for disruption of markets, affecting consumer choice and protection;
• use of personal data; and
• economic exclusion and/or access barriers. [19 Jan 2023]

LawtechUK has released a Discussion Paper (DP) on the adoption and development of AI in legal services. The questions in the article focus on understanding the risks, risk management techniques, and areas of legal services regulation that may require clarity to support the responsible use of machine learning. Feedback is requested by 5 February 2023. [18 Jan 2023]

The European Insurance and Occupational Pensions Authority (EIOPA) has released its Consumer Trends Report 2022 which focuses on the financial health of consumers and small businesses through their use of insurance and pension savings products. Among EIOPA’s findings is that digitization and technology are gradually transforming the pension value chain, reducing costs and improving members’ and beneficiaries’ engagement in their pensions.

The report is accompanied by a video, a heat map of key findings and several Eurobarometer reports, some covering the whole of the EU-27 and others with extracts for specific EU Member States. [18 Jan 2023]

The European Commission (EC) has published its indicative list of agenda items for university meetings in the period 25 January to 28 June 2023. With regard to the regulation of financial services, the following dates are relevant:

• 8 March: Banking crisis and deposit insurance package – reviews of the Bank Recovery and Resolution Directive (BRRD), Deposit Guarantee Schemes Directive (DGSD) and Single Resolution Mechanism Regulation (SRMR);
• 5 April: Investment package – improving the retail framework and the retail investment strategy;
• 24 May: Strengthening the role of the euro – digital euro, and the scope and effects of legal tender for euro notes and coins;
• 13 June: Regulation on ESG rating; and
• 28 June: Data access in financial services – open financial framework and revision of EU rules on payment services. [18 Jan 2023]

The HKMA has launched a consultation on proposed changes to the Anti-Money Laundering and Counter-Financing of Terrorism Guidelines (for Authorized Institutions) (the AML/CFT Guidelines). Feedback on the proposals is required by 8 March 2023.

The proposed changes are intended to provide guidance in light of the recent enhancements to the AML/CFT requirements under the Anti-Money Laundering and Counter-Terrorism Financing Regulation (see our previous update). The areas that have changed include (among others):

• When customer due diligence should be carried out, including in relation to virtual assets and third party cash transactions;
• Identification and verification of identity – Additional guidance is proposed in relation to beneficial owners, including those who are natural persons, and trusts or similar legal arrangements;
• Improved due diligence;
• Politically Exposed Persons (PEPs) – Guidance has been added on the treatment of former non-Hong Kong PEPs and updated in relation to the treatment of former PEPs from Hong Kong or international organisations;
• The customer is not physically present for identification purposes – Additional guidance is provided, including on the use of a recognized digital identification system;
• Ban on anonymous accounts;
• Orders institutions in relation to bank transfers. [18 Jan 2023]

The Securities and Exchange Commission of Thailand (SECT) has issued regulations requiring digital asset custodian operators to establish a digital wallet management system to accommodate the efficient and secure escrow of clients’ digital assets and keys. The regulation covers the following requirements:

• policy and guidelines to monitor risk management and handling of digital wallets and keys as well as communication to clarify such policy, action plans and procedures, work supervision and internal control to ensure compliance with the policy;
• policies and procedures for designing, developing and managing digital wallets and creating, maintaining and accessing keys or other related information appropriately, securely and safely; and
• contingency plan in the event of an incident that could affect the management system for digital wallets and keys. This includes laying out and testing action procedures, designating responsible persons and reporting the incident. An audit of system security is also required, as well as digital forensic investigation in the event of any incident affecting the security of systems related to digital assets.

The regulation is effective from 16 January 2023. [17 Jan 2023]

The Bangko Sentral ng Pilipinas (BSP) has announced that the Visayas Regional Office (VRO) offered currency exchange services in Tagbilaran City to encourage the public to replace their unfit notes and coins with digital cash. The ‘BSP Piso Caravan’ currency exchange program was conducted for the first time in the Visayas to replace unfit money by depositing equivalent amounts to customers’ e-wallets. The BSP VRO staff also helped those without e-wallets to set them up. The BSP Piso Caravan is in line with the central bank’s commitment to preserve the integrity of the Philippine currency and promote digital payments to strengthen financial inclusion. [16 Jan 2023]

The Securities and Exchange Commission (SEC) has accused Nexo Capital Inc. of failing to register the offering and sale of its private crypto asset lending product, Earn Interest Product (EIP).

Pursuant to the SEC’s order, in or about June 2020, Nexo began offering and selling EIPs in the United States. The EIP allowed US investors to offer their crypto assets to Nexo in exchange for Nexo’s promise to pay interest. The order states that Nexo marketed the EIP as a means for investors to earn interest on their crypto assets, and Nexo exercised its discretion to use the investors’ crypto assets in various ways to generate income for its own business and to fund interest payments to EIP investors. The order states that EIP is a security and that the offer and sale of EIP did not qualify for exemption from SEC registration. Therefore, Nexo was required to register its offer and sale of EIP, which it failed to do.

To settle the SEC’s charges, Nexo agreed to pay a $22.5 million fine and cease the unregistered offering and sale of EIP to US investors. In parallel actions, Nexo agreed to pay an additional $22.5 million in fines to settle similar allegations by state regulators. [19 Jan 2023]

The Commodity Futures Trading Commission (CFTC) has published a keynote address by Commissioner Christy Goldsmith Romero, of The Wharton School and the University of Pennsylvania Carey Law School. In his speech, Goldsmith Romero outlines his assessment of the lessons to be learned from FTX’s collapse, including:

• Financial markets rely heavily on public trust, and while crypto originated as a trustless system, investors and customers have come to rely on centralized exchanges for access to crypto markets;
• FTX sought to build public trust by positioning both itself and its founder as trustworthy, including using celebrity endorsements and social media to.;
• good corporate governance, starting with the top, is necessary to establish and maintain trust. [18 Jan 2023]

The Department of Justice (DoJ) has announced that the founder and majority owner of a cryptocurrency exchange, Bitzlato Ltd, has been arrested for his alleged operation of a money transfer business that transported and transferred illicit funds and failed to meet US regulatory safeguards, including anti-money laundering requirements ( AML).

The defendants allegedly helped run a cryptocurrency exchange that failed to implement required AML safeguards and enabled criminals to profit from their wrongdoing, including ransom and drug trafficking. The individual must have knowingly allowed Bitzlato to become a perceived safe haven for funds used for and resulting from a series of criminal activities,

French authorities and the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) are simultaneously taking enforcement action. [18 Jan 2023]