Global Digital Assets Digest: June 2024

Welcome to this month's bumper edition of the Global Digital Assets Digest. In this edition, we feature important regulatory updates in relation to NFTs.  In the EU, there's news on the finalisation of a number of legislative packages, including the Capital Requirements Regime (which contain measures relating to cryptoasset exposures). There are also important updates in relation to MiCA. In the US, there is a lot of activity in relation to the Financial Innovation and Technology for the 21st Century Act, as well as news on the SEC's approval of rule changes concerning the listing of spot Ether ETFs.  

Updates and Guidance: International Bodies

1. EBA: Final report on draft RTS on governance arrangements for remuneration under MICA

On 6 June 2024, the EBA published a final report in respect of draft RTS on governance arrangements for remuneration under MiCA. These chiefly relate to issuers of significant ARTs and issuers of significant EMTs.

The draft RTS were first consulted on in October 2023 (please see our briefing here) and contain the main policy’s elements that should be adopted as part of the remuneration policy. 

The draft RTS:

• in respect of issuers of significant ARTs and EMTs, require that gender neutral remuneration policies for all staff are applied and are compatible with risk management objectives, business objectives, corporate and risk culture of the issuer;
• specify the elements of variable and fixed remuneration that can be granted and ensure that there are no incentives to lower risk standards (including by setting specific requirements for the variable remuneration of control functions); and
• require that remuneration policies are consistent with ESG risk-related objectives and take into account ESG risks and possible adverse impacts of ESG risk factors (notably alignment of variable remuneration to the ESG risk factors relevant for climate and other environmental impacts caused by the consensus and validation mechanisms used).

The draft RTS  will be submitted to the Commission for endorsement and will then be subject to scrutiny by  EU co-legislators. For more on MiCA, please see our briefings here and here.

2. EBA: Final report on draft RTS on conflicts of interest for issuers of ARTs under MiCA 

On 6 June 2024, the EBA published a final report containing draft RTS in relation to conflicts of interest for issuers of ARTs under MiCA. MiCA requires RTS to be developed in respect of policies and procedures to manage conflicts of interest. The RTS were first consulted on in October 2023.

The draft RTS:

• require the issuer to note conflicts of interest that could arise when it manages and invests the reserve of assets, including when third parties are involved;
• specify documentation requirements related to personal transactions;
• specify that the remuneration procedures, policies and arrangements of the issuer should not create conflict of interest; and
• specify the role of the issuer’s management body in defining, adopting, and ensuring the implementation of conflict of interest policies and procedures.

3. EBA: Final report on guidelines on the minimum content of the governance arrangements for issuers of asset-referenced tokens 

On 6 June 2024, the EBA published final report in respect of guidelines concerning the minimum content of the governance arrangements for issuers of ARTs. These are specified under article 34(13) of MiCA..The provisions within the guidelines are subject to the principle of proportionality. Areas covered by the guidelines include: role and composition of the management body; governance framework; risk culture and business conduct; internal control framework; business continuity management;  and internal audit function.

The guidelines apply from 3 months after the date of publication on the EBA's website of the guidelines in all EU official languages.

4. BIS (CPMI):Brief: Steady as we go: results of the 2023 CPMI cross-border payments monitoring survey 

On 4 June 2024, the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI), published the results of its 2023 cross-border payments monitoring survey. This has been published in light of the 2023 updated roadmap for enhancing cross-border payments and the progress report on G20 targets. It seeks to monitor progress made on the updated roadmap's three priority themes: payment system interoperability and extension; data exchange and message standards; and legal, regulatory and supervisory frameworks.

Notable findings

• 71% of RTGS systems and 91% of Faster Payment Systems have completed/are planning to complete at least two of the priority actions.
• All FPS already operate 24/7,  with many looking to implement ISO 20022 and planning interlinking initiatives.
• Most RTGS systems are also implementing ISO 20022, with results varying on whether there are plans to expand access, extend operating hours or link to another payment system.
• Challenges include resourcing and budget constraints resulting from competing priorities in the payments landscape; and difficulties in securing partner jurisdictions for multinational initiatives, owing to conflicting compliance, security or cultural practices.

5. BIS: Project Rialto: improving instant cross-border payments using wholesale CBDC settlement 

On 4 June 2024, BIS announced that it would be launching Project Rialto, an initiative involving BIS Innovation Hub Eurosystem and Singapore Centres in partnership with several central banks. The initiative looks at a new automatic FX settlement layer solution using wCBDC as a safe settlement asset that could be deployed for interlinked instant payment systems or digital asset systems.

6. EBA/ESMA: Discussion Paper: Call for advice on the investment firms prudential framework 

On 3 June 2024, the EBA issued a discussion paper on containing a call for advice on the investment firms prudential framework. Both the IFR and IFD mandate the Commission to submit a report to EU co-legislators in relation to the IFD and IFR. The report may also include a legislative proposal to amend the prudential framework applicable to investment firms. 

Among other areas, the discussion paper explores investment firms' exposures to cryptoassets and the provision of services related to those assets (specifically credit granting by extending crypto-asset based facilities and/or facilities backed by crypto-asset collateral); and the interaction of the interaction of MiCA and IFD/ IFR. The paper discusses the possibility of addressing the prudential treatment of cryptoassset exposures via: the introduction of a new K-factor based on the volume of cryptoassets in the non-trading book to capture the risk related to the potential loss of value resulting from the volatility of cryptoasset; or by expanding the scope of K-NPR.

7. ESMA: Final Report: Draft technical standards specifying certain requirements in relation to conflicts of interest for CASPs

On 31 May 2024, ESMA published a final report in respect of draft RTS on the policies and procedures for managing  conflicts of interests for CASPs under MICA. These aim to clarify aspects of be considered in relation to vertical integration of CASPs, and to further align with the draft  EBA rules applicable to issuers ARTs. ESMA states that though the conflicts of interest regime under MiCA and MIFID may be similar there are also some notable differences.  

The draft RTS:

• provide details as to the content of the policies and procedures, as well as the types of circumstances that should be taken into consideration by CASPs when drafting them;
• provide for some minimum language requirements that CASPs have to comply with to ensure that clients are duly informed (i.e. in a language that they understand) about conflicts of interest; and
• require that adequate resources be dedicated to the management of conflicts of interest.

The guidelines also provide that disclosures referred to in Article 72(2) of MiCA should information on where conflicts of interest may arise in relation to the role and capacity of the CASP (e.g. where the CASP  is presenting itself as an exchange but actually engages/combines multiple functions or activities such as operating a trading platform in crypto-assets, market-making, offering margin trading, facilitating custody, settlement, lending, borrowing and proprietary trading).

8. Council of EU: Formal adoption of Capital Requirements Package

On 30 May 2024, the Council of EU announced that it had formally adopted the  Capital Requirements package. These changes were introduced in an October 2021 legislative package published by the European Commission and consist of: a proposed Directive amending the Capital Requirements Directive (CRD VI); and a proposed Regulation amending the Capital Requirements Regulation (CRR III) (see our briefing here). The package contains measures in relation to management of cryptoasset exposures and introduces definitions such as “crypto-asset exposure and “tokenised traditional assets".

CRR III

• Reporting requirement: Amending Article 430 to require institutions to disclose their exposures to cryptoassets.
• Disclosure of exposures to cryptoassets and related activities: New article  Article 451b requires disclosure of exposures to cryptoassets and related activities including: the direct and indirect exposure amounts in relation to cryptoassets (including the gross long and short components of net exposures); the total risk exposure amount for operational risk; the accounting classification for cryptoasset exposures;  and a description of business activities related to crypto-assets, and their impact on the risk profile of the institution.
• Legislative proposal for prudential treatment: European Commission to submit a legislative proposal to introduce a dedicated prudential treatment for exposures to crypotassets, taking into account international standards. Standard to include: criteria for assigning cryptoassets to different cryptoasset categories based on their risk characteristics and compliance with specific conditions; specific own funds requirements for all the risks entailed by different cryptoassets; an aggregate limit for exposures to specific types of cryptoassets; and specific leverage ratio requirements for crypto-assets exposures.
• Own funds: Until entry into application of legislative proposal, institutions are to calculate own funds requirements for exposures to cryptoassets as follows: cryptoasset exposures to tokenised traditional assets are to be treated as exposures to the traditional assets that they represent; exposures to asset-referenced tokens whose issuers comply with MiCA and that reference one or more traditional assets to be assigned a 250 % risk weight; other types of exposures to cryptoassets to be assigned a 1 250 % risk weight.

CRD VI

• Risk management: Requiring institutions with direct or indirect exposures to cryptoassets/providing related services to any form of cryptoasset to have risk management policies, processes and practices in place to appropriately manage risks caused by their exposure to cryptoassets. Risk management activities of institutions to consider cryptoasset technology risks.
• Counterparty risk: Institutions to carry out ex-ante assessments of any cryptoasset exposures they intend to take on and of the adequateness of existing processes and procedures to manage counterparty risks.
• Concentration risks: Details on how to characterise concentration risks (for cryptoassets without issuers,  the concentration risk will be considered in terms of exposure to the crypto-assets with similar features cryptoassets).
• Market risk: Competent authorities to ensure that institutions conduct ex-ante assessments of any cryptoasset exposures they intend to take on and of the adequateness of existing processes and procedures to manage market risks, and report on those assessments to their competent authority.
• Operational risk: Policies and processes to evaluate and manage the exposures to operational risk, including risks arising from direct and indirect exposures to cryptoassets and CASPs.
• SREP: Review to include the assessment of institutions’ governance and risk management processes for exposures to cryptoassets and the provision of services related to cryptoassets (to include institutions’ policies and procedures for identifying risk).

For more on the EU capital requirements regime, see our briefing here.

9. Council of EU: Formal adoption of the Directive on cross-border law enforcement access to bank account registries

On 30 May 2024, the Council of the EU adopted the Directive amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the interconnection system.

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. The Directive will introduce a common format for CASPs to provide information on transactions carried out in a cryptoasset wallet (transaction records). The details of the format for the transaction record are to be laid out in an implementing act.

Member states are expected to apply the majority of the measures implementing the Directive three years following its entry into force.

The European Parliament formally adopted the Directive in April 2024.

10. EU Publications Office: Delegated acts supplementing MiCA published in the Official Journal

On 30 May 2024, the European Commission published delegated acts supplementing MiCA.

• Commission Delegated Regulation (EU) 2024/1506 specifying certain criteria for classifying asset-referenced tokens and e-money tokens as significant. The RTS contain information on Indicators for assessing significance on international scale and Indicators for assessing interconnectedness with the financial system.
• Commission Delegated Regulation (EU) 2024/1507 on RTS specifying the criteria and factors to be taken into account by ESMA, the EBA and competent authorities in relation to their intervention powers. These RTS were published by the European Commission in February 2024.
• Commission Delegated Regulation (EU) 2024/1504 specifying the procedural rules for the exercise of the power to impose fines or periodic penalty payments by the EBA on issuers of significant ARTs  and issuers of significant EMTs.

The European Commission adopted the Delegated Regulations in February 2024 and will enter into force 20 days after publication in the Official Journal.

11. Council of EU: Adoption of EU AML package

On 30 May 2024, the Council of EU formally adopted the  last elements of the EU AML Package. The Package consists of: the sixth AML directive; the Anti-Money Laundering Authority (AMLA) Regulation; and a Regulation on prevention of the use of the financial system for the purposes of money laundering or terrorist financing. It was introduced by the European Commission in July 2021 and has been proceeding through the EU legislative process. The package will introduce new obligations on CASPs. These include expanding the list of "obliged entities" under the regime to include CASPs; extending the current ban on anonymous accounts to include anonymous cryptoasset accounts; and measures for CASPs to apply when performing transactions with self-hosted addresses.

12. Council of the EU: Adoption of the CSDD

On 24 May 2024, the Council of the EU announced that it had formally adopted the Directive on Corporate Sustainability Due Diligence.  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.

13. EBA: Report on virtual IBANs

On 24 May 2024, the EBA issued a report on the issuance and use by payment service providers  of virtual IBANs (vIBANs). This follows a 2023 Opinion which stated that the use of vIBANs may pose ML/TF risks. The report notes that the industry issues vIBANs in different ways and for different purposes and notes divergence in the interpretation and application of regulatory requirements by national authorities. The report contains suggested actions to mitigate the risks identified.

14. BIS: CPMI work programme and strategic priorities for 2024–25

On 23 May 2024, the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI) published its work programme for 2024-25.

Key themes are: risk management of financial market infrastructures; enhancement of cross-border payments; and digital innovation in payments, clearing and settlement. 

Key priorities for the CPMI are: developing governance and oversight considerations relevant to the interlinking of FPS and recommendations for technical standards (such as ISO 20022 and APIs) that can help enhance cross-border payments. The CPMI will: produce a framework for the governance and oversight of FPS interlinking to the G20; organise two conferences with the G20 and G7 Presidencies on FPS interlinking; and develop recommendations for areas of greater harmonisation of API protocols.

15. ECB: TARGET2-Securities Annual Report 2023

On 22 May 2024, the ECB published the 13th edition of the TARGET2 Securities Annual Report. This provides an overview of the performance of T2S and settlement data for 2023. The report describes developments occurring in 2023, as well as incidents that had an impact on the platform. The report summarises recent migrations of CSDs to the platform and confirms that 24 CSDs from 23 European countries are now connected to the T2S platform.

16. BCBS: Report: Digitalisation of finance 

On 16 May 2024, the BCBS published a report on the implications of digitalisation of finance. The report builds on a 2018 report on the implications of FinTech developments for banks and bank supervisors, reviewing the use of key innovative technologies across various parts of the banking value chain. It notes that many of the benefits arising from innovative technologies include efficiency gains and enhanced risk management. The report also summarises various risks involved in the use of innovative technology, such as operational risks.  The report explores the use of DLT, noting that most banks are planning to use private permissioned rather than permissionless distributed ledgers. 

The report also summarises progress made in relation to Project Guardian, as well as supervisory approaches to digital finance:

• many supervisors have adopted conservative rules for banks’ exposures to cryptoassets, including total prohibitions in some jurisdictions;
• jurisdictions have adopted various approaches in relation to tokenisation initiatives; and
• other jurisdictions are working to understand how different tokenisation use cases fit within their current legal frameworks.

17. OECD: Instrument to measure digital financial literacy

On 14 May 2024, the OECD published a report on a digital financial literacy. The paper notes that digitalisation of financial services and products can worsen financial exclusion and present other risks. Financial literacy surveys carried out by the OECD indicate that sections of population may not have the requisite financial knowledge to make sound decisions. The OECD's survey instrument seek to gather comparable data on the financial literacy of adults to inform work undertaken by policymakers and researchers. It seeks to provide information on digital literacy; digital financial literacy and its three components: knowledge, attitudes, and behaviours; digital financial inclusion; and the risks faced by consumers in the light of their access to and understanding of specific digital products and services.

18. ECB: First DLT-related experiment for settlement in central bank money successfully completed 

On 14 May 2024, the ECB announced the completion of the first DLT-related experiment for settlement of wholesale transactions in central bank money. The project is seeks to demonstrate how TARGET Services and DLT platforms could interact, as well as explore the merits of the use of new technologies in wholesale financial markets. The Eurosystem exploratory work is focused on three interoperability-type solutions (Trigger / TIPS Hash Link / Full-DLT Interoperability).  The first experiment related to the tokenisation and simulated delivery versus payment (DvP) settlement of government bonds in a secondary market against central bank money.  The ECB confirms that trials and experiments will be carried out over the next six months on a variety of use cases.  

19. BCBS: Prudential standard for cryptoasset exposures – delay to implementation date

In May 2024, the BCBS confirmed that it would defer the implementation of the prudential standard for banks' cryptoasset exposures by one year to 1 January 2026.

The standard was endorsed by the GHOS in December 2022 and contains a global regulatory framework for internationally active banks' exposures to cryptoassets . In December 2023, the BCBS consulted on amendments to the standard (see Global Digital Assets Digest January 2024 edition).

For more on the BCBS Standard, please see our briefings here and here.

Updates and Guidance: UK

20. FMLC: Paper: Digital Assets: Governing Law and Jurisdiction

On 6 June 2024, the Financial Markets Law Committee (FMLC) published a paper on governing law and jurisdiction in relation to digital assets.  The paper has been published to take account of changes that have occurred since the FMLC last published its paper on DLT in 2018. The FMLC notes the many changes undergone by the DLT systems and digital assets sector (as well as legal developments such as the Law Commission’s work and UNIDROIT’s project on Digital Assets and Private Law).

The paper confirms that the three distinctions of DLT systems laid out in the 2018 report still remain valid: permissionless and permissioned systems; record and title ledgers; off-platform asset tokens and on-platform asset tokens.

To addresses uncertainties identified, the paper proposes a recommendations in relation to conflicts of law: 

• A statutory rule giving primacy to the system of law specified in a digital asset or in the DLT system. Where there is no a choice of law, the rule would set up a waterfall allowing the governing law to be identified with sufficient certainty in most cases.
• A "jurisdictional gateway" whereby the courts of England and Wales would have jurisdiction to determine proprietary disputes in relation to digital assets where the digital asset or DLT system contains an express election in favour of the jurisdiction on the courts of England and Wales. Where there is no express election, the governing law of the claim would be the law of England and Wales."

21. FCA: Speech by Nikhil Rathi, Chief Executive: International regulatory developments affecting investment management 

On 5 June 2024, the FCA published a speech by FCA CEO, Nikhil Rathi, on international regulatory developments concerning investment management. 

Notable points

• The FCA has been supporting innovation by firms via the Digital Securities Sandbox and its project work on fund tokenisation. The FCA stands ready to test use cases in relation to tokenisation via its regulatory sandboxes.
• Work with the Technology Group in relation to fund tokenisation has revealed the need for globally connected networks supporting globally connected firms in order to fully harness the benefits that tokenisation offers.
• Under Project Guardian, the FCA has partnered with international regulators to share knowledge and examine the benefits, regulatory challenges and commercial use cases of asset and fund tokenisation.

22. ASA/CAP: Statement on NFTs 

On 23 May 2024, the ASA issued a statement in relation NFT adverts. This provides an overview of the ASA’s role in regulating NFTs and precedent rulings for NFT adverts. The statement notes that this is an area of technology that is still under development and advises advertisers to note section 3 of the CAP Code as it relates to material information in adverts.

Notable points 

• NFTs as investments:  ASA  states that has NFTs that behave like collectibles are likely to be understood by consumers as investment products, adding that this will require considering the rules for financial products, services and investments in Section 14 of the CAP Code.  Adverts for NFTs viewed as investments will need to have a clear and prominent statement that makes clear the risks of NFTs.  Any claims about the past performance of the value of an NFT will need to make clear that this does not provide an indication of future performance.
• Technical considerations: Advertisers should not leave out information concerning technical requirements (e.g. detail on wallet requirements) for obtaining and holding an NFT if the omission of the information is likely to mislead.
• Costs and fees: Products, price claims must not mislead consumers by omission, and the minting or method of sale of NFTs can incur costs.

23. BoE: Speech by Sasha Mills, Executive Director, Financial Market Infrastructure: The UK’s Digital Securities Sandbox: supporting the next frontier of innovation 

On 21 May 2024, the BoE published a speech by Sasha Mills, Executive Director, on the UK Digital Securities Sandbox. In the speech, Ms Mills  explores the  tension between disruptive technology and market stability and the role that DSS can play in promoting safe and sustainable innovation.

Main points

• Post-trade architecture has not kept pace with advances in digital assets and still relies on time consuming manual processes. These inefficiencies create financial and operational costs for financial market participants.
• Tokenisation could help to streamline processes and introduce more liquidity to a wider range of financial assets, as well as bring more programmability to financial transactions.
• Same risk, same regulatory outcome does not mean that the BoE expects the same approach to be used to achieve the outcomes.
• The structure of the DSS Sandbox allows regulators to adapt rules as the programme progresses and as they gather feedback from participants. The BoE also want to ensure that firms are given "goalposts" to provide firms with some clarity on objectives they should be seeking. The BoE aims to update this guidance over the course of the duration of the DSS.
• The DSS brings with it a greater risk of market disruption, meaning that certain guardrails need to be imposed in order to preserve financial stability.

For more on the DSS, please see our briefings here and here.

24. FCA: Speech by Sarah Pritchard, Executive Director, Markets and Executive Director, International: Aiming for calm seas in our market reforms

On 20 May 2024, the FCA published a speech by Sarah Pritchard, Executive Director, Markets. The speech provides an overview of the FCA's role in supporting the UK's position in global wholesale markets, as well as an overview of FCA initiatives. Ms Pritchard refers to the Smarter Regulatory Framework and the series of reforms introduced by the Government in December 2022 (see our briefing here for more information). 

In the speech, Ms Pritchard also refers to the innovation sandbox, now in its tenth year, noting  that the model has been replicated by a number of other regulators. Ms Pritchard summarises the work done by the FCA in relation to the Global Financial Innovation Network and also comments that the FCA would like to see more applications from wholesale firms. 

25. BoE: Report: Point-of-sale proof of concept: Digital pound experiment report 

On 16 May 2024, the BoE published a report in relation to the proof of sale concept for the digital pound. This follows the BoE's Technology Working paper and Consultation paper on the digital pound published in February 2023. The report confirms that the BoE and HMT have moved from the research and exploration phase of the digital pound to the design phase, with a decision on whether to create a digital pound to be made in the middle of the decade. Part of the design phase involves the BoE carrying out experiments and proof of concept with a number of stakeholders. These look at the technical feasibility and technology and policy implications of potential digital pound design features.

The report summarises the experiment looking into the technical feasibility of using existing point-of-sale (POS) hardware to initiate digital pound payments. This involved a PoC that used EMV standards to send payment instructions from smart cards to POS devices, and then to an API. The report concludes that: existing POS terminals could be sued to initiate the digital pound payments; and the terminals do not appear to need modification in order to make digital pound payments.

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

26. Law Commission: Annual report 2023-24 

On 14 May 2024, the Law Commission published its Annual Report 2023-24. The report provides an overview of the work carried out from October 2023 to March 2024 and includes reference to work relating to decentralised autonomous organisations (DAOs) and digital assets. This includes: the call for evidence on DAOs and the Commission's scoping paper planned for the first part of 2024; the final report in digital assets, as well as draft legislation published in February 2024 concerning the proposed third category of personal property rights able to accommodate certain digital assets; and work on digital assets and electronic trade documents in private international law. 

Updates and Guidance: Europe

27. Interview with Burkhard Balz on the digital euro

On 5 June 2024, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank) ,gave an interview to the Focus on the digital euro.

Balz explained in the interview that the digital euro will allow for a European payment method accepted throughout the Eurosystem for the first time. It was also noted that the introduction of the digital euro has entered the preparatory phase, which is essential for the evaluation of the most suitable technological basis for the digital euro: either blockchain technology or a solution based on tokenisation. 

With regard to the limit for the digital euro, Balz mentioned a range between EUR 500 and EUR 3,000, adding that payments above these amounts should also be possible thanks to a "waterfall system" similar to PayPal. With regard to the existing resistance of the banking sector, in particular due to the supposed lack of deposits for lending as a result of the digital euro, Balz argued that there will still be sufficient deposits due to the waterfall system and the holding limit, and that banks will also be able to generate revenues from payment transactions. 

At the end of the interview, Balz emphasised the point that the digital euro will not be issued to replace central bank cash, but only to complement it, and that the digital euro aims to achieve a high level of privacy for its users. According to Balz, the digital euro should be introduced by the end of this decade. 

28. Interview with Joachim Nagel on the digital euro

On 22 May 2024, Joachim Nagel, President of the German Central Bank (Deutsche Bundesbank) gave an interview to the Handelsblatt, amongst others, on the digital euro.

In the interview, Nagel stressed that the digital euro should be seen as an opportunity for the first truly European cloud and a huge step forward for the European payment system. According to Nagel, consumers will benefit from a payment method that is accepted throughout the euro area, is competitive and meets a high level of privacy. 

Nagel underlined the importance of the digital euro for Europe's resilience and autonomy, owing to the fact that  payment systems are part of the critical infrastructure. Nagel is certain that the digital euro will be a success. 

Finally, Nagel also emphasises that the digital euro does not mean that cash will be phased out, but that as digitalisation progresses, it will be necessary to create a complementary digital product – the digital euro – alongside cash.

Updates and Guidance: APAC

29. SFC statement on the end of non-contravention period for virtual asset trading platforms

On 28 May 2024, the SFC reminded the public that the non-contravention period for virtual asset trading platforms (VATPs) operating in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615) (AMLO) will end on 1 June 2024.  All VATPs operating in Hong Kong must be either licensed by the SFC, or "deemed-to-be-licensed" VATP applicants under the AMLO.  It is a criminal offence to operate a VATP in Hong Kong in breach of the AMLO, and the SFC will take all appropriate actions against any breaches of the law.  In addition, the SFC urged investors to trade virtual assets only on SFC-licensed VATPs, and reminded investors that deemed-to-be-licensed VATP applicants are not formally licensed by the SFC.

30. SFC: Speech at the listing ceremony of first bitcoin and ether spot ETFs

On 30 April 2024, the SFC participated in the listing ceremony of the first batch of six Bitcoin and Ether spot ETFs managed by three fund managers, namely Bosera Asset Management (International) Co., Limited, China Asset Management (Hong Kong) Limited and Harvest Global Investments Limited. The six virtual asset (VA) spot ETFs listed are the first of their kind in Asia. Unlike other VA spot ETFs available on overseas exchanges, these ETFs offer in-kind subscription and redemption, and are subject to a more comprehensive regulatory framework regarding the key players in their operation, including fund managers, custodians, trading platforms and participating dealers.  These institutions must be licensed, recognised or approved by the SFC and must strictly comply with SFC requirements applicable to authorised public investment products, covering asset custody, liquidity, valuation, information disclosure and investor education.

Updates and Guidance: North America

31. White House: Veto of  House of Representatives Resolution on SEC SAB 121 

On 31 May 2024, the White House/President Biden announced that the President would not be approving H.J.Res 109, the resolution that would repeal the SEC Staff Accounting Bulletin No. 121 (SAB 121). The resolution was passed by the House of Representatives in May 2024 (see Global Digital Assets May 2024 edition). SAB 121 was issued in 2022 and provides guidance on how entities in scope should account for their obligations to safeguard cryptoassets held for platform users; relevant disclosures; and application of rules to financial statements

U.S. Congressman Mike Flood issued a statement in response to the news.

32. SEC: Omnibus Order in relation to US-listed spot ETF Ether.

On 23 May 2024, the SEC issued an Omnibus Order approving a rule change in relation to US-listed spot ETF Ether. The SEC confirms that NYSE Arca, Inc. (NYSE Arca), the Nasdaq Stock Market LLC (Nasdaq), and Cboe BZX Exchange, Inc. (BZX), filed proposed rule changes to list and trade shares of ETH-based commodity-based trust shares. In January, the SEC approved bitcoin ETFs (see Global Digital Assets Digest January 2024 edition).

33. House of Representatives: The Financial Innovation and Technology for the 21st Century Act (FIT21)

On 22 May 2024, it was announced that the House of Representatives had passed the Financial Innovation and Technology for the 21st Century Act (FIT 21) (H.R. 4763). The legislation was introduced in July 2023 by Chairman Glenn Thompson, Rep. French Hill, Rep. Dusty Johnson, Whip Tom Emmer, and Rep. Warren Davidson. The legislation: confers the CFTC with jurisdiction over digital commodities and clarifies the role of the SEC over digital assets offered as part of an investment contract; provides for the secondary market trading of digital commodities where initially offered as part of an investment contract; and introduces disclosure, and asset safeguarding requirements.

In May 2024, the SEC issued a Statement from SEC Chair, Gary Gensler on FIT21 assessing aspects of the proposed legislation and its likely impact.

In May 2024, a letter signed by groups in the digital assets sector expressing support for FIT21 was published. The letter argues that the US has fallen behind other jurisdictions, such as the EU and UK, in terms of developing an adequate regulatory framework for digital assets and states that the proposed legislation provides adequate protections.

34. Federal Reserve: Speech by Governor Christopher J. Waller "Payments Innovation, Technical Standards, and the Federal Reserve's Roles"

On 17 May 2024, the Federal Reserve published a speech made by Governor Christopher J Waller delivered at the International Organization for Standardization Technical Committee 68 Financial Services 44th Plenary Meeting, hosted by the Federal Reserve Bank of Minneapolis, Minneapolis, Minnesota. The speech looks at technological innovation in payments, the payment system dynamics and role of technical standards. The speech advocates an open and transparent development process under which technically sound standards supportive of business and public objectives are adopted. The speech notes the Federal Reserve's role in using its expertise as a payment system operator to inform future standards and wider changes in the payment system. It notes that the FedNow Service, which went live in July 2023, was built using the ISO 20022 messaging standard. Benefits cited by Mr Waller include improved information exchange between financial institutions and support for straight-through processing. The speech confirms plans to adopt the ISO 20022 messaging standard for the Federal Reserve's wholesale payments service, the Fedwire Funds Service, by March 2025.  Mr Waller argues that this should improve the speed of wholesale cross-border payments by promoting consistent communication across global platforms.

35. Federal Reserve: Testimony of Vice Chair for Supervision Michael S. Barr before the Committee on Financial Services, U.S. House of Representatives

On 15 May 2024, the Federal Reserve published the testimony provided by Vice Chair for Supervision Michael S. Barr before the Committee on Financial Services, U.S. House of Representatives, on the Federal Reserve's supervisory and regulatory activities. Mr Barr notes the importance of  a flexible supervisory framework able to accommodate banks of varying sizes and levels of complexity. According to Barr, this involves noting changes in market, economic, and financial conditions and identifying new and different patterns of risk. 

Mr Barr confirms that supervisory processes are being modified to allow for issues be addressed more quickly once identified. Mr Barr also refers to regional bank failures occurring in 2023, arguing that this underscores the importance of proactive and agile supervision.

Mr Barr submitted dentical remarks to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate on 16 May 2024.

36. Federal Reserve: Speech by Governor Michelle W. Bowman "Innovation and the Evolving Financial Landscape" 

On 15 May 2024, the Federal Reserve published remarks by Governor Michelle W. Bowman at the Digital Chamber DC Blockchain Summit 2024, Washington, D.C. This speech considers how the regulatory framework can accommodate new technology and services, while maintaining appropriate guardrails. The speech focuses on DLT and cross-border payments. The speech notes considerable benefits brought by financial innovation, as well as the risks, adding that innovation can worsen pre-existing risks, as well as introduce new financial risks. Ms Bowman cites DLT as an example of the types of challenges presented to regulators and refers to various use cases of DLT. Ms Bowman argues for regulators to be receptive to innovation and that long term financial stability could be achieved by creating an enabling environment for disruptive but transformational technology. Ms Bowman argues new technology alone cannot solve issues associated with cross-border payments without also addressing the required safeguards.

37. OCC: Testimony of Acting Comptroller of the Currency Michael J. Hsu before the Committee on Financial Services U.S. House of Representatives 

On 15 May 2024, the OCC published the testimony provided by Acting Comptroller of the Currency, Michael J. Hsu, before the House of Representatives Committee on Financial Services. 

The testimony contains an overview of the state of the federal banking system; details on the OCC’s work in relation to the four critical agency priorities outlined by Mr Hsu on  becoming Acting Comptroller; and a description of recent key regulatory developments. 

The testimony notes increase in relationship between banks and Financial technology companies. The testimony also describes the OCC's work on reviewing tokenisation of real-world assets and liabilities, including a public symposium organised by the OCC on tokenisation on legal and risk management foundations. 

The OCC published identical remarks in relation to a testimony before the Senate Committee on Banking, Housing, and Urban Affairs.

38. FDIC: Risk Review

On 22 May 2024, the FDIC published its Risk Review. This includes an overview of banking risks in 2023 in five broad categories, including cryptoasset risks. The cryptoasset risks section of the report examines the FDIC’s approach to understanding and evaluating cryptoasset-related markets and activities and action taken. This includes: coordination with the other federal banking agencies to monitor cryptoasset-related activities of banking organizations (such as the February 2023 Joint Statement on Liquidity Risks to Banking Organizations Resulting from CryptoAsset Market Vulnerabilities); updating regulations to modernise the rules governing use of the official FDIC sign and amending the definition of “non-deposit product” to include cryptoassets; and action taken against entities/persons making false or misleading representations about the existence or extent of deposit insurance.

39. White House Statement of Administration Policy: Financial Innovation and Technology for the 21st Century Act.

On  22 May 2024, The White House released a Statement of Administration Policy in relation to the Financial Innovation and Technology for the 21st Century Act. This calls for a  comprehensive and regulatory regime for digital assets that promotes the responsible development of digital assets.

40. FDIC: Remarks by Martin J. Gruenberg, Chairman, FDIC, "Lessons Learned from the U.S. Regional Bank Failures" at 2023 Florence School of Banking and Finance

On 17 May 2024, the FDIC published a speech by Martin J. Gruenberg, Chairman, FDIC, delivered at the Florence School of Banking and Finance. The speech focused on lessons learnt in relation to US regional bank failures in 2023. Mr Gruenberg argues that the episode provided important lessons in relation to monitoring and managing interest rate risks and concentrations of uninsured deposits. The speech argues that progress on rules related to capital requirements for unrealised losses and improved resolution planning at the bank level can help lower the likelihood of a repeat episode.

41. FDIC: Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation on "Oversight of Prudential Regulators"

On 16 May 2024, the FDIC published remarks made by Martin J. Gruenberg, Chairman of the FDIC, before the hearing "Oversight of U.S. Financial Regulators: Accountability and Financial Stability" held by the Senate Committee on Banking, Housing, and Urban Affairs. The testimony provides an overview of state of the banking industry and the condition of the FDIC’s Deposit Insurance Fund.  The testimony also looks at regulatory activities undertaken including action against crypto companies in relation to misrepresentations by some companies regarding FDC insurance. Mr Gruenberg also considers possible improvements in regulation and bank supervision to prevent a repeat of the US  regional bank failures. 

Mr Gruenberg delivered identical remarks before the House of Representatives Committee on Financial Services.

42. US Treasury: 2024 National Illicit Finance Strategy

In May 2024, the US Treasury published the 2024 National Strategy for Combatting Terrorist and Other Illicit Financing, which sets out planned action to disrupt and prevent illicit financial activities. The Strategy addresses the key risks from the 2024 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments, noting that illicit actors have exploited the technological advancements made since the 2022. 

The Strategy outlines four Priorities (including supporting responsible technological innovation and harnessing technology to mitigate illicit finance risks) and Supporting Actions, which Treasury and other relevant U.S. government stakeholders will collaborate to implement between now and the 2026 Strategy. A supporting Action set out in the Strategy is to consider updates to the regulatory requirements and supervisory framework for virtual asset activities. 2026 benchmarks for this Supporting Action include: continue monitoring the evolution of the payments and virtual assets sectors to understand evolving risks, including in DeFi services; and technical assistance on potential legislation, as well as regulatory proposals on the application of the BSA and sanctions frameworks to new and emerging parts of the virtual asset sector.

43. US Treasury: 2024 Illicit Finance Risk Assessment: NFTs

The US Treasury published a 2024 NFT Illicit Finance Risk Assessment. The risk assessment  is not intended to introduce new regulatory interpretations or new supervisory expectations. It follows the Treasury’s commitment in the 2022 “Digital Asset Action Plan to Address Illicit Finance Risks” to monitor emerging risks in the digital assets sector, in line with Executive Order 14067 “Ensuring Responsible Development of Digital Assets”. The assessment contains an overview of NFTs, including their types and functions, and the NFT market. It examines associated vulnerabilities  of NFTs and NFT platform. The risk assessment concludes with several recommended actions for Treasury, the broader U.S. government, and the private sector.

Updates and Guidance: Middle East

44. Qatar: QCB announces news on CBDC project

In June 2024, it was announced that Qatar Central Bank (QCB) has completed the development of the infrastructure for the CBDC. 

The QCB plans to proceed with trials involving banks to settle large payments in a trial environment. The project will focus on DLT and emerging technologies. The project's experimental phase will be extended to October 2024 and will focus ion DLT and emerging technologies. 

Press/Articles

Contributors: Tobias Bauerfeind, Senior Associate; Greta Muller; Anson Chan, Junior Associate