Global Digital Assets Digest February 2024

Welcome to this month's Global Digital Assets Digest. In this month's edition there are important papers from ESMA on reverse solicitation and the characterisation of financial instruments. In the UK, we have the response from UK regulators to their consultation on the digital pound. In APAC, there are a number of important developments, including the HKSAR Government's landmark digital green bonds offering.

Finally, in the US we have news on the SEC's approval of spot bitcoin exchange-traded products, as well new rules from the SEC in relation to the definition of a dealer and government securities dealer.

Updates and Guidance: International Bodies

1. EBA: Speech by José Manuel Campa, EBA Chair: Digital finance: Confidence and resilience as foundation of well-functioning financial markets 

On 30 January 2024, the EBA published a keynote speech by José Manuel Campa, EBA Chair, on "Digital finance: Confidence and resilience as foundation of well-functioning financial markets" at the AFORE Consulting 8th annual FinTech and Regulation Conference. The speech referred to a number f of EU initiatives relating to digital finance, including key pieces of EU legislation such as MICA (see our briefings here and here) and the EU AML package (see our briefing here). The speech confirms that the EBA will be undertaking the following:

• a stocktake of potential models for deposit tokenisation to promote a common understanding of opportunities and risks, and develop a common supervisory stance;
• reporting to the European Commission later in 2024 on some activities that fall outside the scope of MiCA, such as crypto lending and staking activities (looking at in particular poor disclosures of terms and conditions, conflicts of interests and enforceability of claims).

2. ESMA: Consultation paper on the draft guidelines on the conditions and criteria for the qualification of cryptoassets as financial 

On 29 January 2024, the EBA issued a consultation paper on draft guidelines in relation to the conditions and criteria for qualifying cryptoassets as financial instruments. These guidelines seek to clarify the boundary between the scope of the MICA and MiFID regimes.  

MiCA provides that MICA does not apply to cryptoassets that qualify as a financial instrument under MiFID. 

The guidance seeks to avoid a one-size-fits-all approach to the idea of financial instruments and the definition of cryptoassets. Areas covered include: MiCA categorisation of cryptoassets; and hybrid tokens.

ESMA expects to publish a final report by the end of 2024 at the latest.

3. ESMA: Consultation paper on the draft guidelines on reverse solicitation under MiCA 

On 25 January 2024, ESMA issued a consultation paper on draft guidelines on reverse solicitation under MiCA. This confirms the previous position that the provision of cryptoasset service by a third country firm is limited to instances where the service is initiated at the own exclusive initiative of a client. ESMA confirms that reverse solicitation cannot be used by EU-based firms to escape the authorisation/notification requirements under MiCA. It also confirms that article 61(2) can only be used to permit third country firms to offer to a client cryptoassets/cryptoasset services of the same type as the one originally requested.

Areas covered by the guidelines include:

• Means of solicitation (i.e. clarifying that solicitation should be construed broadly and in a technology neutral way and confirming that this includes promotion, advertisement or offer of cryptoasset service/activities);
• The meaning of exclusive initiative of the client (confirming that contractual arrangements or disclaimers will not override circumstances);
• The party carrying out the solicitation (e.g. third country firm itself/ person acting explicitly or implicitly on behalf of the third-country firm or having close links) and confirmation that solicitation done on behalf of a third country firm by a firm regulated in the EU will be deemed a breach of MiCA.

The deadline for comment is 29 of April 2024, with a final report expected in Q4 2024.

For more information, please see our briefing here.

4. EU co-legislators: Political agreement reached on AML package 

On 18 January 2024, EU co legislators announced that a political agreement had been reached in respect of aspects of the AML legislative package introduced by the European Commission in July 2021 (see our briefing here for a background). The package includes a proposed Regulation on the AML/CTF prevention and a proposed Directive on AML/CTF repealing Directive. The regime expands the list of "obliged entities" subject to AML/CTF rules to include CASPs, who will be required to carry out customer due diligence measures when undertaking transactions amounting to €1000 or more. Other measures include enhanced due diligence measures for cross-border correspondent relationships for CASPs.

The legislative texts are to be finalised before formal adoption by EU co-legislators.

5. ECB: Article on central bank money settlement of wholesale transactions in the face of technological innovation 

The ECB published an article on central bank money settlement of wholesale transactions in light of technological innovation. Areas covered in the article:

• the role played by TARGET Services in the settlement of wholesale financial transactions in central bank money;
• ways DLT could transform wholesale financial transactions: the automation of  two leg transactions; reducing the need for reconciliations; and 24/7 instant settlement and broader access for stakeholders to FMIs;
• the implications of market DLT uptake for Eurosystem TARGET Services and settlement in central bank money; and
• further exploratory work to be taken by the Eurosystem, such as testing three cross-platform settlement solutions to assess wholesale use cases for DLT.

Updates and Guidance: UK

6. BoE: Discussion paper on reviewing access to RTGS accounts for settlement 

On 8 February 2024, the BoE published a discussion paper on reviewing access to RTGS accounts for settlement. This summarises the BoE's vision for RTGS, as well as changes being made to reflect developments in the payments landscape.

The BoE considers that the review provides an opportunity to ensure that processes behind the BoE's access policies allow for realising any gains made from the renewed RTGS service. Other motives for the review include: supporting the BoE's objectives in a rapidly evolving payments landscape; and the BoE's commitment under the G20 Roadmap to improve cross-border payments.

The BoE summarises four areas where enhancements could be made to its access policies:

• enhancing the BoE/FCA process for consideration of non-bank payment service providers (NBPSPs) seeking access to the RTGS;
• understanding the demand of foreign banks for access to RTGS to support payment system settlement;
• clarifying requirements for FMIs; and
• review of the CHAPS value threshold.

The BoE states that the renewed RTGS service will benefit the industry in four ways: increased resilience; greater access; wider interoperability; and improved user functionality. 

7. BoE: Discussion paper: Exploring longer operating hours for RTGS 

On 8 February 2024, the BoE issued a discussion paper on longer operating hours for the RTGS. This follows the publication of BoE's Roadmap for RTGS, which outlined plans to enhance RTGS services after 2024 to increase resilience and promote innovation.  Motives for the review include: supporting the BoE’s strategy to facilitate sustainable innovation in the UK financial system; helping to address frictions currently affecting cross-border payments; and leveraging the technical capabilities of its renewed RTGS service. 

To analyse the impact of extending operating hours on the speed of cross-border payments, the discussion paper includes a simplified model of delays to cross border payments caused by lack of overlap in RTGS operating hours across jurisdictions. 

Topics covered in the discussion paper include: cost drivers for extended hours; risks and challenges for extended hours; optionality of new operating hours; and services provided in new operation hours.

Feedback received on the discussion paper will inform the BoE's analysis and decision on future RTGS and CHAPS operating hours. The BoE is also planning further engagement with the industry to understand the impacts of and demand for an extension.

The closing date for comments is 30 April 2024.

8. FCA: Updated webpage on cryptoasset registration: information for applicants  

On 7 February 2024, the FCA update its webpage on cryptoasset registration. This has been updated to include information on whether applicants can discuss their business with the FCA prior to applying for registration.

9. HM Treasury: Joint statement on the UK-US Financial Regulatory 

On 5 February 2024, a Joint Statement between the US Treasury and HM Treasury was issued in relation to the ninth Financial Regulatory Working Group (FRWG). The statement explains what was discussed at the FRWG and the key outcomes of the meeting. Areas covered in the meeting included digital finance and the importance of comprehensive regulation, with the group noting FSB guidance on the regulation of the cryptoassets sector, as well as work being undertaken in respect of CBDCs 

10. ECB: Economic bulletin: The Eurosystem policy response to developments in retail payments  

On 5 February 2024, the ECB published a Bulletin on Eurosystem policy response to developments in retail payments. This notes the increasing role being played by digitalisation and the proliferation of payment solutions. It also examines the Eurosystem's attempt to create multifaceted approaches to respond to developments in retail payments. 

The Bulletin summarises the Euroystem's oversight activities in retail payments ecosystem, citing principles adopted by the Eurosytem e.g. “same function – same risk – same rules”, technological neutrality and proportionality.

Key points 

• Further action is needed to achieve integrated, innovative and competitive euro retail payments markets.
• The Eurosystem will need to remain vigilant to ensure the safety and efficiency of retail payments and the access to public money under diverse scenarios given the likely acceleration of current trends in the euro retail payments market.
• The Eurosystem cooperates with other central banks and relevant authorities worldwide, given the global nature of the developments and use cases.
• The digital euro is complementary to cash, as well as the development of a market-led pan-European payment solution.

11. House of Commons (Treasury Committee): Government and Bank of England Response to the Committee’s First Report: The Digital Pound: A solution in search of a problem? 

On 31 January 2024, the House of Commons Treasury Committee published a report containing  the response of HMT and the BoE to the committee's December 2023 report on the digital pound.

Key points

• HMT and BoE's approach mirrors the key message of the committee's report, which emphasised the need to proceed with care, while noting the value of further exploratory work;
• The commitments made by BoE and HMT align with the recommendations made in the committee's report (i.e. on access to users' personal data and access to cash);
• As the design phase progresses, HMT and the BoE will continue to engage with Parliament and seek stakeholder input in relation to the design of the digital pound;
• The decision to launch a digital pound would depend on the extent to which doing so would contribute to the statutory objectives of HMT and the BoE;
• A range of regulatory and legal standards would be applicable to firms processing personal data in a digital pound ecosystem. A digital pound could be privacy enhancing by design;
• Costs on CBDC are disclosed in the BoE's annual report; procurement costs related to CBDC are publicly available.

For a background on the consultation on the digital pound, please see our briefing here.

12. BoE/HM Treasury: Response to the Bank of England and HM Treasury Consultation Paper on the digital pound

On 25 January 2024, the BoE and the Government published a response to their consultation on the digital pound  and their working paper (see our briefing here for a background). The response confirms that a decision has yet to be made in respect of whether to proceed with the digital pound. The response confirms that the BoE and HMT are in the design phase, with decision on whether to move to the build phase to occur.

Key points

• The platform model is the main focus but the BoE and the Government will develop in more detail and assess business models and requirements for PIPs.
• Legislation is to be introduced to prevent the BoE or the Government from accessing personal data.
• The BoE are planning to proceed with the proposed holding limit in the range of £10,000 to £20,000 during the introductory period, but are open to revisiting these numbers should new information come forward. The degree of access and level of holding limits most appropriate for corporates will be explored during the design phase.
• Further work will be undertaken in respect of the access of non-resident corporate access to a digital pound.

13. BoE: Speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation: The Real Time Gross Settlement service: an open platform to drive innovation 

On 25 January 2024, the BoE published a speech by Victoria Cleland, Executive Director for Banking, Payments and Innovation, in relation to the RTGS service. This refers to developments in cross border payments.

Key points

• The BoE is looking at whether improvements could be made to access to RTGS and has been using the CPMI self-assessment framework for cross-border payments. There are now 260 RTGS account holders and there are now 38 CHAPS Direct Participants.
• The BoE is reviewing the case for extending RTGS operating hours. Areas that the RTGS will be looking into include: the demand for extended hours and the more strategic, global, and long-term drivers of an RTGS extension, especially concerning future innovation in the payment landscape; and the use cases, operational aspects, and approaches to operating RTGS and CHAPS longer.
• Further initiatives to foster wholesale settlement innovation include providing more resilient channels to connect RTGS and synchronisation. Project Meridian was a joint Proof of Concept with the London BIS Innovation Hub that looked into how synchronisation would work in practice.
• Many of the benefits associated with wholesale CBDC could be achieved with RTGS service open for longer that enables wider participation and that offers synchronisation to a wide range of ledgers.

Updates and Guidance: Europe

None

Updates and Guidance: APAC

14. South Korea: Financial Services Commission announcement on crypoassets legislation

On 8 February 2024, the Financial Services Commission provided further details in relation to preparations being made for the Act on the Protection of Virtual Asset Users. The FSC confirms that the Act will take effect from 19 July 2024. The Act covers: protection of assets held by users of virtual assets; prohibition of unfair trading activities in the virtual asset market; and supervision and sanctions authority over virtual asset service providers and related market activities. The Act also confers supervisory and enforcement powers on the SFC in respect of VASPs.

15. HKMA: HKSAR Government's digital green bonds offering

On 7 February 2024, the Hong Kong Monetary Authority (HKMA) announced the successful offering of a multi-currency denominated digital green bond under the Government Green Bond Programme. Building on the inaugural tokenised green bond offering in February 2023, this second issuance is the world's first multi-currency digital bond offering and the first digitally native bond issuance in Hong Kong.  The new digital green bond attracted a total subscription of around HKD6 billion equivalent from institutional investors globally, facilitated by the Central Moneymarkets Unit's external linkages with Euroclear and Clearstream.  The proceeds raised from the issuance would be used to finance sustainable projects that fall under the eligible categories set out the HKSAR Government's Green Bond Framework.

Ashurst acted as the legal adviser to HSBC, being the platform provider. Commenting on the deal Ben Hammond, Partner and Hong Kong Office Managing Partner of Ashurst noted: "We are proud to have been involved in this ground-breaking digital bond issuance as advisers to HSBC, the Platform Provider to the CMU, to have helped in demonstrating the capacity of Hong Kong law and regulation to accommodate financial market innovation, and so to have helped expand the boundaries of what Hong Kong offers as a global financial centre."

16. FSTB: Upcoming consultation on OTC virtual asset trading venues

On 2 February 2024, the Financial Services and the Treasury Bureau (FSTB) discussed, amongst other things, its intention to introduce a regulatory framework for OTC VA trading venues.  Public consultation on the proposed regulatory framework is expected to be launched "very soon".  The proposed regulatory regime would cover OTC venues often in the form of physical shops or online platforms, which are easily accessible to the general public.  The FSTB believes it is necessary to bring OTC VA trading venues under regulation, especially in light of the OTC venues' involvement in last year's VA-related scams, where investors were misled to channel funds into unlicensed trading platforms.

17. PCPD: Caution against the Worldcoin project and disclosing biometric data arbitrarily

On 31 January 2024, the Office of the Privacy Commissioner for Personal Data (PCPD) revealed an ongoing investigation against the Worldcoin project for suspected contravention of the Personal Data (Privacy) Ordinance (PDPO) in relation to the project's collection of iris scans.  Participants provide their iris scans to obtain a "World ID" on the Worldcoin platform, in exchange for Worldcoin crypto tokens.  The PCPD considers iris information to be a kind of biometric data which can be regarded as sensitive personal data, with the requirements under the PDPO and relevant data protection principles imposed on any person or organisation controlling the collection, holding, processing or use of such data.  Members of the public are advised to exercise caution with the Worldcoin project and to protect their sensitive biometric data.

Updates and Guidance: Australia

18. AUSTRAC: 2024 priorities with focus on Digital Currency Exchanges 

Australian Transaction Reports and Analysis Centre (AUSTRAC) has announced that it will increase its regulatory activities in the digital currency exchanges (DCEs) sector this year with the release of its 2024 priorities. This increased focus on DCEs is a result of rapid and significant growth in this sector as well as due to concerns about AML/CTF compliance and significant variation in compliance between reporting entities in this sector. Managing AML/CTF concerns is one of AUSTRAC's enduring priorities for 2024, and it is likely that its focus on DCEs will be conducted through this lens.

Updates and Guidance: North America

19. CFTC: Customer Advisory alerts app and social media users on fraud

On 7 February 2024, the CFTC's Office of Customer Education and Outreach issued a Customer Advisory on online financial romance frauds, alerting app and social media users of messages from strangers promoting cryptocurrency investments. The advisory sets out warning signs of a financial grooming fraud, including claims of wealth from cryptocurrency. The CFTC also refers to a recent filing it made in relation to a financial grooming fraud.

20. SEC: Changes to the definition of a dealer and government securities dealer

On 6 February 2024, the SEC announced final rules designed to address where market participants are undertaking de facto market making and therefore required to register as dealers or government securities dealers.

The rules have been introduced to adapt to technological innovations and recent changes in markets. The rules aim to provide further clarity in the regime by defining the phrase “as a part of a regular business” as used in the statutory definitions of “dealer” and “government securities dealer” under the Securities Exchange Act of 1934. Under the final rules, persons engaging in certain activities as part of a regular business would be a “dealer” or “government securities dealer" absent relevant exemptions or exceptions. They would thus be subject to certain obligations (e.g. registration with the SEC, membership of a self- regulatory organisation, compliance with certain federal securities laws and regulatory obligations).

The proposals were first proposed in March 2022, and the SEC confirms that despite feedback received, it is not specifically excluding certain types of securities (i.e. crypto asset securities/persons transacting in crypto assets that are securities) from the application of the rules.

The SEC also published a statement by SEC Chair, Gary Gensler, in support of the changes, as well as dissenting statements from Commissioners including Mark T Uyeda and Hester M Peirce  (who questions the appropriateness of rules to providers of liquidity in crypto asset securities).

21. US Energy Information Administration: Tracking electricity consumption from US cryptocurrency mining operations

In February 2024, the EIA published a statement on tracking electricity consumption. This cites a notable growth in electricity demand associated with US cryptocurrency mining operations and cites challenges in tracking, such as the difficulty of identifying cryptocurrency mining activity, as well as the dynamic nature of the cryptoassets market.

The statement follows correspondence from several members of Congress to the US Secretary of Energy about the effects of cryptocurrency mining on electricity.

The agency confirms that it will be carrying out a mandatory survey to look at the electricity consumption associated with cryptocurrency mining activity and that that it will refine estimates of electricity consumption associated with cryptocurrency activities in the US. 

For more on developments elsewhere in relation to this matter, please see here.

22. CFPB: Congressmen urge a review of Consumer Payment Proposed Rule

On 31 January 2024, it was announced that US Congressman Mike Flood, Chairman of the House Financial Services Committee and other members of the House of Representatives had sent a letter to the CFPB concerning a proposed rule to define a market for general-use digital consumer payment application. The letters calls for the CFPB to reopen and extend the public comment period, arguing that the rule would introduce more regulatory uncertainty into the payment industry, particularly with respect to third-party service providers and digital asset companies. 

23. US Senators introduce Preventing Illicit Finance Through Partnership Act of 2024

In January 2024, US Senators Bill Hagerty (R-TN) and Cynthia Lummis (R-WY) introduced the Preventing Illicit Finance Through Partnership Act of 2024. The legislation is designed to encourage communication between federal law enforcement agencies and private companies in order to combat illicit finance. The legislation envisages a pilot program, chaired by the Attorney General, in which federal agencies and the private sector would share information related to illicit finance. The program would comprise 20 voluntarily participating money services businesses and cryptocurrency companies and would involve federal agencies investigating a potential illicit finance violation.

24. FINRA: Report on cryptoasset communications

On 23 January 2024, FINRA published a report identifying potential violations of FINRA Rule 2210 (Communications with the Public) in 70 percent of cryptoasset communications reviews. This follows the launch of a targeted exam in November 2022 to assess the practices of certain member firms that issue communications with retail customers in relation to cryptoassets and cryptoasset related services. 

The exercise involved the review of more than 500 cryptoasset related retail communications. Breaches involved failures to differentiate between cryptoassets offered through an affiliate of the member or another party; and unclear and misleading explanations as to how cryptoassets work and their core features and risks.

25. FDIC: Letters demanding entities cease making false or misleading representations about deposit insurance

On 19 January 2024, the FDIC announced that it had issued letters ordering a number of entities and certain associated parties to cease and desist from making false and misleading statements about FDIC deposit insurance. 

Examples of false representations cited include: stating/suggesting that entities were FDIC-insured/certain uninsured financial products were insured by the FDIC; misuse of the FDIC name or log; and failing to clearly identify relationships with insured depositary institutions in respect of the placement of customer deposits. 

In December 2023, the FDIC adopted a final rule updating its regulations concerning false advertising, misrepresentation of deposit insurance coverage and misuse of FDIC name and logo (see Global Digital Assets Digest edition here).

26. CFTC: Statement of Commissioner Kristin N. Johnson regarding CFTC Charges in “Pig Butchering” Case

On 19 January 2024, the CFTC announced the filing of a complaint in the United States District Court for the District of Arizona at Phoenix in respect of “Pig Butchering” scheme that had defrauded customers via digital asset allocations. In Pig Butchering schemes, the unsuspecting victim is sought to participate in a fraudulent investment opportunity in a process likened to that of fattening up a pig prior to its slaughter.

Commissioner Kristin N. Johnson states that fraud involving cryptocurrency, such as Pig Butchering, had increased considerably in the past year and urged the public to be vigilant, adding that she has often emphasised the role of regulators can play in consumer protection. 

27. SEC: Statement on SEC's approval of proposed rule changes to list and trade shares of spot Bitcoin Exchange-Traded Products

On 10 January 2024 the SEC announced the approval of the listing and trading of a number of spot bitcoin exchange traded product ETP.  The SEC also published a statement by SEC Chair, Gary Gensler, in respect of the filing:

• rule filings by any national securities exchange are based on whether investors and public interests will be protected;
• approval by the SEC in this case relates to ETPs holding one non-security commodity bitcoin and is not to be viewed as general willingness to approve listing standards for cryptoasset securities, nor an indication of SEC's position in relation to status of cryptoassets under federal securities law;
• the approval will include investor protection measures (sponsors of Bitcoin will be required to provide full, fair and truthful disclosure concerning the products;  the exchange that the products are listed on will be required to observe rules designed to prevent fraud and manipulation; and SEC staff are reviewing the registration statements in respect of the ETPs).

The SEC also published a dissenting statement made by Commissioner Mark Uyeda.

Chairman of the House Financial Services Committee, Patrick McHenry, and the Chairman of the Digital Assets, Financial Technology and Inclusion Subcommittee, French Hill also published a statement on the proposals.

28. Subcommittee on Digital Assets, Financial Technology, and Inclusion Hearing: “Regulatory Whiplash: Examining the Impact of FSOC’s Ever-changing Designation Framework on Innovation

On 10 January 10 2024, Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled: “Regulatory Whiplash: Examining the Impact of FSOC’s Ever-changing Designation Framework on Innovation”. 

The FSOC was established in 2010 as an interagency body to identify and address potential threats to financial stability. The hearing follows a number of reports, such as the FSOC's October 2022 report on digital asset financial stability risks and regulation (published in response to Executive Order 14067 on ensuring responsible development of digital assets). 

The hearing included testimonies from a number of witnesses, including the Crypto Council for Innovation.

29. FINRA: 2024 Regulatory Oversight Report

On 9 January 2024, FINRA published its Annual Regulatory Oversight Report, which provides an overview of key insights and observations from recent activities of FINRA regulatory operations. The report contains a section on cryptoasset developments, outlining key cryptoasset related risks and aspects for firms to note when considering undertaking crypto asset related activities.

30. Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion: Remarks by Vice Chairman on illicit finance proposals

In January 2024, Warren Davidson, Vice Chairman of the Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion, published remarks in relation to various legislative proposals to address illicit finance in the digital assets sector. 

Mr Davidson refers to initiatives launched by the US Treasury and calls for a greater transparency and understanding of aspects of the cryptoassets sector and for legislation by the House Financial Services Committee and House Agriculture Committee to be advanced.

Updates and Guidance: Middle East

31. DFSA: Consultation on regulatory regime for cryptoassets

In January 2024, the Dubai Financial Services Authority (DFSA) released a consultation on updates to its regulatory regime in respect of cryptoassets. The DFSA is publishing the consultation paper in light of global developments that have occurred since the coming into force in November 2022 of its comprehensive regulatory regime for cryptoassets. 

Changes proposed in the consultation paper relate to: collective investment funds; crypto token recognition; custody of crypto tokens; unauthorised or incorrectly executed transfers; third party agents; and the Travel Rule.

The deadline for providing comments is 4 March 2024.

Press/Articles

None

Contributors: Julian Pipolo, Senior Associate; Ankita Rao, Trainee; Oscar Tsoi, Trainee.