Global Digital Assets Digest: July 2024

Welcome to this month's edition of the Global Digital Assets Digest. In this edition, we have some interesting items from the BCBS, as well as further publications from the ESAs in relation to MiCA. There's also news on the EU capital requirements regime .In Germany, there are some noteworthy updates in relation to digital euro. In the UK, the FCA has released interesting research in relation to digital engagement practices.

Updates and Guidance: International Bodies

1. FATF: Publication: Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs

2. BCBS: Update on framework for banks' cryptoasset exposures

3. BCBS: Outcome of July 2024 meeting

4. ESMA: Final report: Draft Technical Standards specifying certain requirements in MiCA – second package

5. EBA Final Report: Guidelines on information requirements in relation to transfers of funds and certain cryptoassets transfers

6. CSDD published in the Official Journal

7. CRD VI and CRR III published in the Official Journal

8. EU AML Package published in the OJ

9. BIS: Report on phase 3 of Project Nexus

10. ESMA/EBA: Final report: Guidelines on the suitability assessment and qualifying holdings under MiCA

11. SMSG advice to ESMA on its third consultation paper on MiCA

12. ECB: Report: First progress report on the digital euro preparation phase

13. ESMA: Annual Report 2023

14. BIS: Paper: Results of the 2023 BIS survey on CBDCs and crypto

15. BIS: Launch BIS Toronto Innovation Centre

16. EBA: Final report on guidelines on recovery plans under MiCA

17. EBA: Final report on draft RTS to specify the minimum content of liquidity management policy

18. EBA: Final report on draft RTS to specify the highly liquid financial instruments in the reserve of assets

19. EBA: Final report on draft RTS further specifying the liquidity requirements

20. EBA: Final report on draft regulatory technical standards on adjusting own funds

21. EBA: Final report on draft RTS on additional own funds requirements and stress testing

22. ECB: Blog: Making the digital euro truly private

23. ECB: TARGET Annual Report 2023

24. BIS: Project Meridian FX: joint project to test synchronised settlement in FX

Updates and Guidance: UK

25. BoE: Speech by Victoria Cleland, Executive Director, Payments: A multi-tool for cross-border payments: the power of Legal Entity Identifier

26. FCA: Research note: Digital engagement practices: a trading apps experiment

Updates and Guidance: Europe

27. Deutsche Bundesbank: Speech of Joachim Nagel on the digital euro and the protection of privacy

28. Deutsche Bundesbank: Speech by Joachim Nagel on the digital euro

29. Deutsche Bundesbank: Speech of Burkhard Balz at the German Central Bank Symposium

30. Deutsche Bundesbank: Keynote address by Burkhard Balz at the Central Bank Payments Conference

Updates and Guidance: APAC

31. BDF and HKMA: Collaboration unlocks new CBDC cross-border opportunities

32. HKIMR reports on "Decentralised Finance: Current Landscape and Regulatory Developments" and "The Metaverse: Opportunities and Challenges for the Financial Services Industry"

33. MAS: Announcement on asset tokenisation for financial services

34. Singapore: Updated Money Laundering National Risk Assessment

35. Legislative Council Subcommittee on issues relating to the development of Web3 and Virtual Assets

36. SFC: Briefing sessions on VATP and regulatory requirements

Updates and Guidance: Australia

Updates and Guidance: North America

37. US Treasury: Reporting rules on sales and exchanges of digital assets

38. CFTC: Testimony of Chairman Rostin Behnam Before the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate

39. Federal Reserve: Speech by Governor Michelle W. Bowman "Innovation in the Financial System"

40. CFTC: Achieving Growth and Progress: Statement of Commissioner Caroline D. Pham at the Global Markets Advisory Committee June 4 Meeting

41. OCC: Semi-annual Risk Perspective, Spring 2024

Updates and Guidance: Middle East

Press/Articles

Updates and Guidance: International Bodies

1. FATF: Publication: Virtual Assets: Targeted Update on Implementation of the FATF Standards on VAs and VASPs

On 9 July 2024, the FATF issued a targeted update on its standards for cryptoassets and CASPs. The update concerns FATF recommendation 15 (R.15) and related interpretative note (INR.15), as well as recommendation 16 (R.16) and related interpretative note (INR.16). The FATF states that CASPs and cryptosssets remain vulnerable to misuse owing to the continued lack of implementation of the relevant FATF Standards globally. The report cites lack of progress made in relation to the implementation of the Travel Rule, adding that supervision and enforcement remains low, even among jurisdictions who have passed legislation implementing the Travel Rule.

Key action to be undertaken by the FATF in light of the findings include:

• outreach and assistance to lower-capacity jurisdictions; and
• facilitating sharing of best practices, finding, and challenges, including relating to DeFi, stablecoins, unhosted wallets, and P2P and monitoring market trends.

2. BCBS: Update on framework for banks' cryptoasset exposures

On 5 July 2024, the BCBS issued a document setting out proposed amendments and FAQs in relation to the Basel framework. The document includes proposed changes to the framework concerning cryptoassset exposures. This includes a minor change to the calculation for aggregating curvature risk positions within a bucket for Group 2a cryptoasset exposures set out in Paragraph SCO60.80 (2022 version) of the cryptoasset exposure standard.

For more on the BCBS prudential framwework for cryptoasset exposures, see our briefings here and here.

3. BCBS: Outcome of July 2024 meeting

On 5 July 2024, the BCBS issued a press release on the outcome of a meeting held on 2 and 3 July 2024. The BCBS confirmed that it would publish a disclosure framework for banks' cryptoasset exposures and amendments to its standard on the prudential treatment of banks' cryptoasset exposures. This follows consultations undertaken in 2023 (see previous Global Digital Assets Digest here and here for more information). The framework will be applicable from 1 January 2026.

The BCBS also refers to the prudential implications of banks as potential issuers of tokenised deposits and stablecoins, noting that it considers that the risks are captured by the Basel framework, but that it would keep this area under review.

For an overview of the EU prudential framework for banks' cryptoasset exposures, please see our briefing here.

4. ESMA: Final report: Draft Technical Standards specifying certain requirements in MiCA – second package

On 4 July 2024, ESMA published the final report in respect of proposals for six draft RTS and two draft ITS under MiCA. These were first consulted on in October 2023 (see our briefing here).

The standards cover: RTS on sustainability indicators in relation to climate and other environment-related adverse impacts; RTS on business continuity measures for CASPs: RTS on pre-and-post-trade transparency for CASP trading platforms; two RTS on record-keeping requirements for CASPs; RTS and ITS on white paper formats and data for their classification in the MiCA register; and ITS on disclosure of inside information.

The draft technical standards are to be submitted to the European Commission for adoption, with the Commission to decide whether to adopt the technical standards within 3 months.

ESMA also published the independent study on the available machine-readable formats that could meet data requirements or the purposes of MiCA and the European Single Access Point.

ESMA published a final report on its first set of RTS and ITS under MiCA in March 2024.

5. EBA Final Report: Guidelines on information requirements in relation to transfers of funds and certain cryptoassets transfers

On 4 July 2024, the EBA published a final report in respect of guidelines concerning the recast Wire Transfer Regulation. The Regulation extended the existing obligation to include information about the originator and beneficiary to CASPs (the Travel Rule) and provides that CASPs authorised under MiCA are subject to the same AML/CFT requirements and AML/CFT supervision as credit and financial institutions.

The guidelines specify the information that should accompany a transfer of funds or cryptoassets. The guidelines also list the action that PSPs, intermediary PSPs, CASPs and intermediary CASPs should take to detect missing or incomplete information, as well as action to take if a transfer of funds/transfer of cryptoassets lacks the required information.

The guidelines apply from 30 December 2024.

6. CSDD published in the Official Journal

On 5 July 2024, the Directive on Corporate Sustainability Due Diligence was published in the Official Journal. The Directive sets out a corporate due diligence duty in relation to adverse impacts on human rights and the environment in a company's own operations, its subsidiaries and its chain of activities. The CSDD will have a phased implementation, depending on the size of the entity, and applies to companies meeting certain criteria laid out in the Directive. Entities in scope include so-called "Regulated Financial Undertakings" meeting the criteria laid out in the CSDD, with the list including CASPs authorised under MICA. In-scope entities will be required to review the chain of activities where this concerns upstream activities. The CSDD also requires in scope entities to adopt a transition plan to ensure that the business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C.

For more information on the CSDD, please see Ashurst briefings here and here.

7. CRD VI and CRR III published in the Official Journal

On 19 June 2024, the CRR III Regulation and the CRD VI Directive were published in the Official Journal. Both sets of legislation entered into force on 9 July 2024. CRR III will apply for the most part from 1 January 2025. Most of CRD VI applies from 11 January 2026.

The legislative package introduce a transitional regime for the risk-weighting of EU banks' exposures to cryptoassets as well as new provisions on the disclosure, governance of cryptoasset exposures.

For an overview of the EU Capital Requirements regime see here.

For more on the EU Capital Requirements Regime and cryptoassets, see here.

8. EU AML Package published in the OJ

On 19 June 2024, the legislative package updating EU AML rules was published in the Official Journal of the European Union. The package consists of:

• Regulation EU 2024/1624 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AML Regulation).
• Regulation (EU) 2024/1620 establishing the Anti-Money Laundering Authority (AMLA) (AMLA Regulation).
• Sixth Money Laundering Directive ((EU) 2024/1640) (MLD6).

The package brings CASPs within the scope of obliged entities, resulting in them being subject to the same AML and CTF requirements as other financial institutions when undertaking transactions equal to €1000 or more. The regime also extends customer and beneficial ownership identification requirements to virtual IBANs. The regime will also require enhanced due diligence measures in respect of cross-border correspondent relationships involving CASPs. Under the regime, AMLA will directly supervise institutions (including CASPs) that are considered to be high risk.

On 19 June 2024, Directive (EU) 2024/1654 amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the interconnection system was also published in the Official Journal.

The Directive aims to ensure more effective investigations into illicit finance by making it easier to retrieve data across borders from centralised bank account registries.

Key Dates

• The AML Regulation enters into force on 9 July 2024 and will apply for the most part from 10 July 2027.
• The AMLA Regulation enters into force on 26 June 2024 and the majority of it will apply from 1 July 2025.
• MLD6 enters into force on 9 July 2024 and the majority of its provisions must be transposed by 10 July 2027.
• The Directive on cross-border law enforcement access to bank account registries enters into force on 9 July 2024 and the majority of it must be transposed by 10 July 2027.

9. BIS: Report on phase 3 of Project Nexus

On 1 July 2024, BIS published a report on phase 3 of Project Nexus, an initiative designed to promote instant cross border payments by connecting multiple domestic instant payment systems (IPS) globally. The initiative is the first BIS Innovation Hub project in the payments area to proceed to live implementation. The report provides an overview of: the governance, scheme and oversight arrangements; business and revenue model for Nexus; and the Nexus technology architecture.

Phase 4 of the project will involve the Reserve Bank of India joining the Bank Negara Malaysia, Bangko Sentral ng Pilipinas, the Monetary Authority of Singapore, the Bank of Thailand and domestic IPS operators. Bank of Indonesia will continue its association with the project as a special observer.

10. ESMA/EBA: Final report: Guidelines on the suitability assessment and qualifying holdings under MiCA

On 27 June 2024, ESMA and the EBA published joint guidelines under MiCA.

• Joint Guidelines on the suitability assessment of the members of the management body of issuers of ARTs or of CASPs. These set out the common criteria for assessing the knowledge, skills, experience, honesty and integrity of members of the management body, as well as time commitment for performing duties.
• Joint Guidelines on the suitability assessment of shareholders and members with qualifying holdings in issuers of ARTs or of CASPs. These seek to harmonise the suitability assessment of shareholders and members with direct or indirect qualifying holdings in issuers of ARTs and CASPs, when applying for an authorisation. The guidelines also seek to clarify the circumstances giving rise to a qualifying holdings e.g. acting in concert, indirect shareholders and significant influence.

11. SMSG advice to ESMA on its third consultation paper on MiCA

On 26 June 2024, ESMA published the advice provided to it by SMSG in relation to ESMA's third consultation paper under MiCA. The advice set out the SMSG's opinions in relation to: market abuse in cryptoassets; suitability requirements for portfolio management activities under MiCA; and transfer services for cryptoassets systems and security access protocols.

Notable points

• The SMSG supports the approach put forward by ESMA to monitor market abuse, as it is a key aspect for the long term success of the crypto ecosystem.
• The outsourcing sensitive tasks (such as the prevention and detection activity, including the performance of data analysis and generation of alerts) should consider systemic risks (e.g. when several persons professionally arranging or executing transactions delegate to the same provider).
• ESMA should try to ensure similarity in the regulation of cryptoassets and securities regulation and note the investor protection implications of requiring a "basic" understanding of the risks involved in purchasing cryptoassets when a similar requirement in MIFID calls for understanding (i.e. without reference to "basic").
• The MiCA suitability guidelines and the MiFID II guidelines need to be fully aligned. At present, they differ in relation to sustainability preferences.

12. ECB: Report: First progress report on the digital euro preparation phase

On 24 June 2024, the ECB published a first progress report on the digital euro preparation phase. The report contains the results of the technical work caried out in relation to: privacy; the digital euro's offline functionality, and the rulebook.

The digital euro project seeks to ensure central bank money can evolve alongside current payment preferences. In October 2023, the Governing Council of the ECB approved the launch of the two year preparation phase of the euro. The preparation phase seeks to prepare for the potential issuance of the digital euro and involves finalising the digital euro rulebook and choosing providers that could develop the digital euro platform and infrastructure.

Notable points

• Work is underway in relation to an offline functionality under which digital euro users could pay without an internet connection after pre-funding their digital euro account via the internet or an ATM.
• The digital euro holdings would not be remunerated and would be subject to holding limits. The ECB has begun work on a calibration methodology to define holding limits.
• The digital euro Rulebook Development Group has completed an interim review of the first draft of the rulebook (this sets out the rules and procedures to standardise digital euro payments across the euro area) and expects to produce an updated version of the rulebook by the end of 2024.
• The ECB has been providing assistance in relation to the legislative process concerning the digital euro, with examples including: technical input on the dynamics in the euro retail payments market; and technical analysis of the feasibility and implications of allowing multiple digital euro accounts per user

The ECB has published correspondence between Piero Cipollone, Member of the Executive Board of the ECB, to Irene Tinagli, ECON Chair, on the digital euro preparation phase.

For more information on the digital euro, please see our briefing here.

13. ESMA: Annual Report 2023

On 15 June 2024, ESMA published its Annual Report 2023. This sets out the key achievements of the authority in the first year of implementing its new 5-year strategy. Highlights include:
preparation for implementation of MiCA; working with NCAs to promote convergence on key aspects; and collaborating with international bodies on cryptoasset regulation (e.g. FSB and IOSCO work on crypto assets and decentralised finance).

The report also contains an overview of key activities carried out by the SMSG. This includes presentations on the implications of the demise of a prominent crypto exchange for the EU context, the use of crypto currencies to elude financial sanctions, the role of social media platforms in facilitating misleading promotion of cryptoassets.

ESMA confirms that it has increased its risk monitoring activities for retail investors in the area of cryptoassets.

14. BIS: Paper: Results of the 2023 BIS survey on CBDCs and crypto

On 14 June 2024, BIS published a paper containing the results of the 2023 BIS survey on CBDCs. The paper also looks at the use of stablecoins for payments and regulatory approaches to cryptoassets globally.

86 central banks participated in the survey, providing responses on their engagement in the development of retail and wholesale CBDCs.

Key findings

• Central banks are intensifying their work on wholesale CBDCs.
• Interoperability is a key consideration for central banks when it comes to wholesale CBDCs.
• Central banks forsee a variety of use cases for their potential CBDCs.
• Medium-term issuance is more likely for wholesale than for retail CBDC.
• The likely features of retail CBDC are: limits on holdings, domestic interoperability, offline functionality and non-remuneration.
• Central banks are deepening engagement with stakeholders.
• The use of stablecoins for payments outside the crypto market is still negligible.
• Two out of three jurisdictions (will soon) regulate cryptoassets.

15. BIS: Launch BIS Toronto Innovation Centre

On 13 June 2024, BIS and the Bank of Canada announced the launch of the BIS Toronto Innovation Centre. Toronto is the first BIS Innovation Hub Centre in Americas and the seventh to be opened by BIS. The centre will focus on projects concerning next generation financial market infrastructures, innovation for regulatory supervisory and oversight purposes (SupTech) and open finance.

The BIS Innovation Hub was set up in 2019 by BIS to provide insights into critical trends concerning financial technology relevant to central banks, and to provide as network for central bank experts in relation to innovation.

16. EBA: Final report on guidelines on recovery plans under MiCA

On 13 June 2024, EBA published a final report on guidelines specifying the format of the recovery plan and the information to be provided.

Articles 46 and 55 of MiCA require issuers of ARTs and issuers of EMTs to develop and maintain a recovery plan on measures to be taken by the issuer to restore compliance with the requirements applicable to the reserve of assets.

The guidelines have been based on existing legislative framework and supervisory experience in relation to recovery planning for credit institutions, but adapted to realities of ART and EMT issuers.

The guidelines provide that recovery plans should contain: a summary of the key elements of the recovery plan, the information on governance, the description of the applicable recovery options, and a communication and disclosure plan. The EBA confirms that as part of the information on governance requirement, each issuer should include the most appropriate recovery plan indicators and thresholds reflecting the issuer’s specific size, complexity, nature and business model, as well as the token’s specific risk profile and operating environment.

The guidelines further specify the content of the communication and disclosure plan. ESMA has made some amendments to the guidelines in light of feedback, including new definitions and clarificatory amendments.

17. EBA: Final report on draft RTS to specify the minimum content of liquidity management policy

On 13 June 2024, EBA published a final report on draft RTS to specify the minimum content of liquidity management policy. Under Article 45(3) of MiCA, issuers of significant ARTs must establish, maintain and implement liquidity management policy and procedures, as well as assess and monitor their liquidity needs to meet any redemption of ARTs. Article 45(7)(b) requires that the reserve of assets for significant ARTs consists of at least 60% of deposits referenced in each official currency.

The draft RTS set out procedures for identifying, measuring and managing liquidity risk, a contingency policy and mitigation tools, as well as minimum aspects of liquidity stress testing.

The draft RTS will be submitted to the Commission for endorsement, following which they will be subject to scrutiny by EU co-legislators. They will then be published in the Official Journal of the EU.

18. EBA: Final report on draft RTS to specify the highly liquid financial instruments in the reserve of assets

On 13 June 2024, EBA published a final report on draft RTS to specify the highly liquid financial instruments in the reserve of assets.

Article 38(1) of MiCA requires that issuers of ARTs, whether significant or not, investing the proceeds receive from the issuance of tokens must do so in highly liquid financial instruments with minimal market risk, credit risk and concentration risk. These instruments must be able to be liquidated quickly with minimal adverse price effect, so as to meet redemption request promptly at any time (including under stress). The requirement also applies to e-money institutions issuing significant EMTs by virtue of Article 58(1) of MiCA and can be expanded to e-money institutions issuing EMTs that are not significant if the competent authority of the home Member State requires it.

The draft RTS set the highest quality liquid assets in the liquidity coverage ratio as eligible highly liquid financial instruments. For ARTs referencing assets other than official currencies, financial instruments tracking the value of the assets referenced by the token or derivatives relating to them, are deemed eligible as highly liquid financial instruments. The draft RTS set concentration limits of highly liquid financial instruments by issuer.

The draft RTS will be submitted to the Commission for endorsement following which they will be subject to scrutiny by EU co-legislators. They will then be published in the Official Journal of the EU.

19. EBA: Final report on draft RTS further specifying the liquidity requirements

On 13 June 2024, EBA published a final report on draft RTS further specifying the liquidity requirements. The draft RTS set specific minimum percentages of the reserve of assets and establish the minimum amount of deposits in each official currency referenced. They contain details in relation to overall techniques of liquidity management (e.g. minimum creditworthiness and liquidity soundness of the credit institutions receiving deposits from issuer of token, the maximum amount of the reserve of assets that can be deposited in a single credit institution and mandatory overcollateralisation of the market value of the reserve of assets relative to the market value of the assets referenced).

The draft RTS will be submitted to the Commission for endorsement following which they will be subject to scrutiny by EU co-legislators. They will then be published in the Official Journal of the EU.

20. EBA: Final report on draft regulatory technical standards on adjusting own funds

On 13 June 2024, the EBA published a final report in respect of draft RTS specifying the procedure and timeframe for an issuer of significant ARTs or significant EMTs to adjust the amount of own funds to 3% of the average amount of the reserve of assets. Article 45(5) of MiCA amends own funds requirements for issuers under article 35(1) of MiCA to be an amount that is at least the highest of:

• EUR 350000;
• 3% of the average amount of the reserve assets
• A quarter of the fixed overhead of the preceding year.

Once classified as significant, issuers will be given a timeframe within which to adjust their own funds to meet the requirements under article 45(5). Issuers will be required to prepare a plan to adjust the level of own funds to the required level within the timeframe required. The plan will include time-bound steps and procedures to carry out the own funds’ adjustment within the required timeframe; and ensure that the own funds items and instruments that will be used to comply with the adjusted requirement fulfil the conditions set out in Article 35(2) of MiCA. Implementation of the plan will be monitored by the competent authority.

The draft RTS will be submitted to the Commission for endorsement, following which they will be subject to scrutiny by EU co-legislators. They will then be published in the Official Journal of the EU.

21. EBA: Final report on draft RTS on additional own funds requirements and stress testing

On 13 June 2024, the EBA published a final report in respect of draft RTS on the adjustment of own funds requirement and minimum features of stress testing programmes of issuers of ARTs and of EMTs subject to such requirements.

The draft RTS specify how and when competent authorities assess whether to require an issuer of ARTs to increase the own funds amount. They provide criteria on how to assess the possible "higher risk" of an issuer of ARTs. The draft RTS also provide the procedure for competent authorities to determine the specific period of time considered appropriate for issuers to increase the own funds amount to the new requirements and the measures to be adopted. The RTS also set minimum requirements for issuers for the design and implementation of stress testing programmes.

The draft RTS will be submitted to the Commission for endorsement following which they will be subject to scrutiny by EU co-legislators. They will then be published in the Official Journal of the EU.

22. ECB: Blog: Making the digital euro truly private

On 13 June 2024, the ECB published a blog for future users of the digital euro on privacy considerations in relation to the digital euro. The blog argues that payment data will be protected via a strong legal framework and that state-of-the-art privacy and data protection are key parts of the digital euro project. The blog explains that ways strong data protection is being implemented in the digital euro design include: digital euro identity will be separated from payment data and the Eurosystem will hold only very limited data.

The blog states that a data protection compliance and audit framework will be established and that an independent group of data protection officers will assess how data protection safeguards are implemented.

23. ECB: TARGET Annual Report 2023

On 7 June 2024, the ECB published the TARGET Annual Report 2023. The report contains information in relation to covering traffic, performance and main developments in TARGET2/T2 in 2023. In addition to the core content, the explores topics of particular relevance in 2023, such as the evolution of turnover and traffic in TARGET2/T2; TIPS volume development; and the TARGET2/T2S consolidation project.

The report notes that in March 2023 TARGET2 was replaced by T2, which consists of a new RTGS system and a central liquidity management tool across all TARGET Services.

24. BIS: Project Meridian FX: joint project to test synchronised settlement in FX

On 4 June 2024, BIS announced details of a joint project by the Eurosystem and London Centres, and the BoE, to test synchronised settlement in FX. Project Meridian FX will build on the findings of Project Meridian (see edition of Global Digital Assets Digest for more information) and will focus on FX transactions.

The project will look at how operators of RTGS can enable interoperability with new payment technologies (e.g. DLT) and will highlight opportunities offered by the synchronisation model (such as more innovative and effective settlement).

Project Meridian FX will test the usability of the synchronisation operator(SO), which was developed for the first Meridian Project, for different types of assets and technologies. It will also look at additional features that could form part of an SO's offering (e.g. those reducing the liquidity needs of participants).

The experiments will involve connecting Meridian FX's SO to the three solutions being explored as part of the Eurosystem's wider work on wholesale settlement:

• the Trigger Solution developed by Deutsche Bundesbank;
• the TIPS Hash-Link developed by Banca d'Italia; and
• the DL3S DLT Interoperability Solution developed by the Banque de France.

Findings will be reported in Spring 2025.

Updates and Guidance: UK

25. BoE: Speech by Victoria Cleland, Executive Director, Payments: A multi-tool for cross-border payments: the power of Legal Entity Identifier

On 9 July 2024, the BoE published a speech by Victoria Cleland, Executive Director, exploring the benefits Legal Entity Identifiers (LEI) for payments and the role that they can play in enhancing cross-border payments. The speech also looked at what could be done to increase their uptake and use.

In the speech, Ms Cleland explains that LEIs and GLEIFs bring more transparency and efficiency in the financial system, adding that use of LEIs could offer benefits at all stages in the cross-border payments journey. The speech, however, notes that adoption of LEIs by non-financial corporates is too low to make an appreciable impact on cross-border payments, adding that a number of recent regulatory initiatives should encourage the use of LEIs. These include the FATF consultation on Recommendation 16, which makes references to LEIs in cross-border payment messages; and CPMI Joint Task Force requirements on harmonised ISO 20022 data requirements for enhancing cross-border payment, which highlights the benefits of LEIs in cross-border payments.

The speech concludes by calling for standard setters to consider incorporating LEIs as a compulsory data element, noting that the BoE is pursuing this for CHAPS from 1 May 2025.

26. FCA: Research note: Digital engagement practices: a trading apps experiment

On 20 June 2024, the FCA published a research note on digital engagement practices (DEPs). This looks at the effect of different DEPs, including gamification, on trading behaviour. This has been published in light of the FCA's Consumer Duty and concerns about problem behaviours linked to trading app design.

The DEPs considered were:

• "flashing prices” (real-time price changes being indicated with red and green flickers and directional arrows);
• “push notifications”(frequent pop-up messages about price movements);
• trader leaderboard” (a table of traders with the highest returns which participants could attempt to climb); and
• “points & prize draw” (a lottery to which participants received an increased chance of winning if they traded more).

The research finds that DEPs can lead to changes in trading and investment risk, with some evidence pointing to DEPs having larger impact on: those with lower financial literacy; women; and participants aged between 18-34.

The research suggests greater attention should be paid to the effect of trading app design features on consumer investment decisions.

Updates and Guidance: Europe

27. Deutsche Bundesbank: Speech of Joachim Nagel on the digital euro and the protection of privacy

On 5 July 2024, Joachim Nagel, President of the German Central Bank (Deutsche Bundesbank), delivered a speech on the digital euro and the protection of privacy at the International Conference on Payments and Securities Settlement.

Nagel addressed the key question of whether cash should be complemented by a CBDC as an "analogue core product" and whether such a CBDC should be issued to the general public or to payment professionals (in the euro area both options are being considered).

Nagel began by looking at the development of CBDC in the wholesale sector, noting that three Eurosystem solutions are being tested that would allow wholesale financial transactions to be recorded on DLT platforms and settled in central bank money. Nagel concluded that the trigger solution, a settlement mechanism offered by the Bundesbank, has attracted significant market interest, is highly efficient and relatively easy to implement, as it would not require the T2 system to be upgraded.

In the speech, Nagel also touched on the need of a digital euro in the retail sector, owing to the fact that digital means of payments are rising and cash use is low. Nagel also noted that all current cross-border payment options are non-European and that this imposes a restriction on strategic autonomy in critical infrastructure.

According to Nagel, it is crucial for the success of the digital euro that the highest level of privacy is ensured, while at the same time complying with anti-money laundering regulations. He therefore emphasises that the Eurosystem will not be able to personally attribute online transactions and that no personal information will be shared with third parties when paying offline (in a way that is comparable to cash).

28. Deutsche Bundesbank: Speech by Joachim Nagel on the digital euro

On 24 June 2024, Joachim Nagel, President of the German Central Bank (Deutsche Bundesbank), delivered a speech on the digital euro at the Vigoni Lecture.

Nagel began with a description of his idea of the digital euro as a digital form of central bank money, universally accepted and with the highest privacy levels of any electronic payment option. Nagel then discussed the current status of the digital euro project, noting it entered the preparatory phase in November 2023.

In the speech, Nagel outlined factors that support the argument for a digital euro as complementary means of payment:

• ongoing digitalisation in the payment sector is resulting in a lower relevance of cash, so this change in payment behaviour should be accommodated with a digital complement to cash;
• the digital euro would strengthen the strategic autonomy and resilience of Europe, as the digital euro would be built exclusively on European infrastructure (digital means of payment currently rely on non-European companies);
• the digital euro could support the development of innovative payment solutions in the private sector;
• the digital euro would provide the highest level of privacy, surpassed only by cash; and
• the universal acceptability and usability that is currently envisaged across the euro area.

Nagel stressed that the digital euro will need a strong legal and regulatory framework, adding that work relating to infrastructure necessary to enable the digital euro is still in the planning phase. Finally, Nagel stated he is deeply convinced about the potential economic success of the digital euro, and of its potential to further connect the people of Europe.

29. Deutsche Bundesbank: Speech of Burkhard Balz at the German Central Bank Symposium

On 12 June 2024, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank), delivered a speech at the German Central Bank Symposium on the supervision and digitalisation in the EU.

Balz began the part of his speech on digitalisation in the financial sector contrasting earlier period, when FinTechs and crypto assets had not yet received mainstream attention, with the current environment where cryptoassets have assumed greater prominence. Balz observed that the risks of cryptoassets are obvious and need to be regulated, adding that MICA provides a solid regulatory framework in the EU. Balz also noted that FinTechs have evolved and become part of the financial sector's value chain.

Balz then addressed the future developments resulting from digitalisation in the financial sector and noted great potential for change, particularly in connection with artificial intelligence (AI). Balz argued that although current applications are still limited, it seems conceivable that AI could be used extensively in the future, from credit checks to risk management. The speech identified specific risks with AI that require a regulatory framework, noting that a cross-sector regulatory framework has been created at EU level with the AI Regulation (see Ashurst briefing here for more information).

30. Deutsche Bundesbank: Keynote address by Burkhard Balz at the Central Bank Payments Conference

On 10 June 2024, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank), delivered the keynote speech at the Central Bank Payments Conference.

Balz began his speech by stating that digitalisation has changed the way we pay, that electronic means of payment are on the rise and that this poses challenges for central banks. Balz further pointed out that as banknotes and cash are the only means of access to central bank money for the greater public, central banks should offer the CBDC. Balz stressed that CBDCs could fundamentally change the operation of the financial system and that central bankers should carefully consider CBDC implications, particularly relating to consistency with the mandate of price stability, financial stability and payment system security conferred on central banks.

Balz outlined three key motivations behind the possible introduction of a digital euro in Europe:

• sovereignty of payments (given the fragmented nature of the European payment landscape and its reliance on non-European infrastructure, it is crucial to develop own solutions to strengthen Europe's resilience and independence in the payment sector as critical infrastructure);
• digital means of payments are on the rise and the only central bank money that is available for the greater public is cash. The digital euro would therefore provide access to central bank money for everyone in the digital world; and
• the digital euro could promote competition and innovation in the European payment sector (e.g. possible developments of new financial products and services).

Balz emphasised that the digital euro would be an additional means of payment, providing users with the option to pay electronically, while offering the highest possible level of privacy.

Concerning the current status of the digital euro project, Balz noted that stakeholders have a clearer picture of how a digital euro could look following the completion of the investigation phase. Balz also identified risks relating to the digital euro concerning financial stability (e.g. possible incentive to shift deposits out of the banking sector into the digital euro) and noted that any concerns in this regard could be addressed by holding limits.

Balz concluded closed his speech by looking at the preparation phase in relation to the digital euro platform and noted that a stable legal framework must be finalised and established before a final decision on the introduction of the digital euro can be made.

Updates and Guidance: APAC

31. BDF and HKMA: Collaboration unlocks new CBDC cross-border opportunities

On 27 June 2024, the Banque de France and the Hong Kong Monetary Authority announced their collaboration relating to wholesale CBDC. The two central banking institutions will delve into the study of interoperability between their wholesale CBDC infrastructure, i.e. the BDF's DL3S and the HKMA's Project Ensemble Sandbox, with the main focus on real-time cross-border and cross-currency payments. The cross-border experiment aims to explore how to optimise settlement efficiency of cross-border transactions, and facilitate interoperability between financial market infrastructures in different jurisdictions.

32. HKIMR reports on "Decentralised Finance: Current Landscape and Regulatory Developments" and "The Metaverse: Opportunities and Challenges for the Financial Services Industry"

On 25 June 2024, the Hong Kong Institute for Monetary and Financial Research, the research arm of the Hong Kong Academy of Finance, released two new research reports titled, "Decentralised Finance: Current Landscape and Regulatory Developments"; and "The Metaverse: Opportunities and Challenges for the Financial Services Industry" respectively. The reports explore two frontier technologies, decentralised finance and the metaverse. Together they provide an in-depth analysis on these technologies and their uses in the financial services industry, as well as an overview of the regulatory landscape internationally and in Hong Kong.

33. MAS: Announcement on asset tokenisation for financial services

On 27 June 2024, the Monetary Authority of Singapore (MAS) announced the expansion of initiatives to scale asset tokenisation for financial services. MAS refers to past work with financial institutions on asset tokenisation under Project Guardian, adding that a number of new participants will be joining the project. MAS provides detail of workstreams to promote the development of standards and frameworks in relation to: fixed income; FX; and asset and wealth management.

34. Singapore: Updated Money Laundering National Risk Assessment

On 20 June 2024, the updated Money Laundering National Risk Assessment in respect of Singapore was published. The report combines observations from supervisory and law enforcement agencies, as well as feedback from the private sector. The report states that Singapore authorities are closely monitoring the risks involved in relation to digital payment token service providers.

35. Legislative Council Subcommittee on issues relating to the development of Web3 and Virtual Assets

On 17 June 2024, the Hong Kong Legislative Council (LegCo) convened an inaugural meeting of its subcommittee. The LegCo set the agenda for future meetings of its newly established subcommittee to include, amongst other things, studying the policies, legal framework and enforcement in relation to the regulation to virtual assets and decentralised autonomous organisations; and to explore how to collaborate with mainland China, to promote Hong Kong as a Web3 centre with global connection.

36. SFC: Briefing sessions on VATP and regulatory requirements

On 12 June 2024, the Securities and Futures Commission (SFC) held a briefing session to explain its regulatory expectations to the virtual asset trading platform (VATP) applicants who are now deemed to be licensed as of 1 June 2024. Further to the elapsing of the non-contravention period for VATPs operating in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615) (AMLO), all VATPs operating in Hong Kong must be either licensed by the SFC, or VATP applicants which are deemed-to-be licensed by operation of the AMLO.

Updates and Guidance: Australia

No new entries. 

Updates and Guidance: North America

37. US Treasury: Reporting rules on sales and exchanges of digital assets

On June 28, 2024, the U.S. Treasury Department and the Internal Revenue Service published final rules requiring broker reporting of sales and exchanges of digital assets, including cryptoassets. The rules require reporting by brokers taking possession of digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset wallet providers, digital asset kiosks and certain processors digital asset payments.

38. CFTC: Testimony of Chairman Rostin Behnam Before the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate

On 12 June 2024, the CFTC published the testimony of Chairman Rostin Behnam before the US Senate Appropriations Subcommittee on Financial Services and General Government. The testimony surveys the expanding remit of the CFTC; the introduction of new products, including the digital commodity asset class; and the expansion of market participants. Mr Benham notes the importance of keeping pace with technology developments to ensure that the CFTC fulfil its mission and Congressional mandate. According to Mr Benham, this calls for an update to existing rules.

Mr Benham also summarises enforcement action undertaken by the CFTC in relation to digital assets and notes that public enthusiasm for digital assets has not been dampened by the absence of a comprehensive regulatory and legislative framework in respect of the digital commodity asset spot market.

39. Federal Reserve: Speech by Governor Michelle W. Bowman "Innovation in the Financial System"

On 17 June 2024, the Federal Reserve published a speech by Governor Michelle W. Bowman in relation to financial innovation. The speech refers to recent episodes of banking stress and considers whether an appropriate bank regulatory and supervisory framework exists in relation to innovation. The speech calls for an open attitude towards innovation to prevent financial innovation from stagnating and being kept out of the banking system. The speech emphasises the importance of regulators understanding technology; the users of a particular technology (such as DLT); its use cases; and the consequences of specific innovations.

Ms Bowman argues that "same activity same risk regulation" requires either a broad-based legislation coordinating standards or an effective interagency approach incorporating non-bank regulators.
The speech calls for innovators to share their knowledge with regulators and offer views on how the regulatory framework can manage risks.

40. CFTC: Achieving Growth and Progress: Statement of Commissioner Caroline D. Pham at the Global Markets Advisory Committee June 4 Meeting

On 4 June 2024, the CFTC published remarks delivered by Commissioner Caroline D. Pham at the Global Markets Advisory Committee Meeting held in June 2024. The speech provided an update on the status of the GMAC's 11 recommendations and future action. Ms Pham provided a background on GMAC's Digital Assets Markets Subcommittee recommendation on adoption of an approach for the classification and understanding of digital assets (see this edition of Global Digital Assets Digest), arguing that a GMAC digital asset taxonomy framework provides guidelines and promotes regulatory clarity.

Ms Pham confirmed that the GMAC's recommendations were delivered at IOSCO's 49th Annual Meeting.

41. OCC: Semi-annual Risk Perspective, Spring 2024

On 18 June 2024, the OCC published its Semiannual Risk Perspective. The publication looks at key issues facing banks and contains data in four main areas: the special topic; operating environment; bank performance; and trends in credit risk, market risk, operational risk, and compliance risk.

In relation to operational risk, the OCC notes the importance of prudent risk management practices when dealing with cryptoasset products and services. The OCC reminds banks to consider the process set out in OCC Interpretative Letter 1179 before undertaking certain cryptocurrency, distributed ledger, and stablecoin activities.

Updates and Guidance: Middle East

No new entries. 

Press/ Articles

No new entries. 

Contributors: Tobias Bauerfeind, Senior Associate; Cornelius Hille, Associate; Anna He, Associate; Anson Chan, Junior Associate; Ashleigh Smithson, Trainee; Victoria IP, Intern; Aiyin Tan, Intern; Valentin Eicken, Intern