Global Digital Assets Digest March 2024
14 March 2024
Welcome to this month's Global Digital Assets Digest. In the UK, there's an update from the FCA on its position regarding cryptoasset Exchange Traded Notes, as well as news on financial promotion trends. We also feature developments in relation to the change of control regime for cryptoasset service providers. In Germany, there are developments in relation to the cross-border payments and the digital euro, while in Hong Kong we feature news on supervisory standards concerning the sale and distribution of tokenised products.
Updates and Guidance: International Bodies
1. European Commission: Report on MLD4
2. European Parliament: Formal adoption of eIDAS
3. FSB: Speech by Klaas Knot, Chair: At a cross-roads: the path towards responsible innovation in the crypto-asset ecosystem
4. IMF: Report: IMF and World Bank approach to cross-border payments technical assistance
5. FATF: Public Consultation on Recommendation 16 on Payment Transparency
6. Council of the EU: Formal adoption of SEPA 2
7. European Commission: Adoption of Delegated Regulations under MiCA
8. ECB: Blog: Digital euro: Debunking banks' fears about losing deposits
Updates and Guidance: UK
9. HMT: Consultation on effectiveness of AML regime: Change in control regime for CSPs under MLRs
10. FCA: Statement on cryptoasset Exchange Traded Notes for professional investors
11. HM Treasury: Consultation on Private Intermittent Securities and Capital Exchange System (PISCES)
12. Law Commission: Consultation on digital assets as personal property
13. Law Commission: Call for evidence on digital assets and electronic trade documents
14. ECB: Blog: Digital euro: Debunking banks’ fears about losing deposits
15. FCA: Financial promotions quarterly data Q4 2023
16. BoE: Minutes of the CBDC Engagement Forum of 17 January 2024
Updates and Guidance: Europe
17. Speech of Burkhard Balz on the digitalisation of payment in a globalised world16. German Banking Industry Committee on the digital euro in the public debate of the German Parliament
Updates and Guidance: APAC
18. HKMA: Commencement of new wholesale central bank digital currency project
19. BIS and HKMA: Launch of Project Aurum 2.0 on privacy for retail central bank digital currencies
20. Indonesia to potentially reassess cryptocurrency taxes
21. HKMA: Circulars on sale and distribution of tokenised products and provision of custodial services for digital assets
22. Revised Bill proposes Japanese investment funds and venture capital firms to hold cryptocurrency assets
23. South Korea: Measures to increase protection of virtual assets users and oversight of digital asset taxes
24. FSTB: Stablecoin OTC licensing regime
Updates and Guidance: Australia
25. AUSTRAC: 2024 priorities with focus on Digital Currency Exchanges i.e Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd (Block Earner): One of the first cases applying Australian financial services regime to crypto asset based products
Updates and Guidance: North America
26. CFTC: Proposed Rule on requirements for DCMs and SEFs regarding governance and the mitigation of conflicts of interest
27. OCC: Remarks by Acting Comptroller of the Currency Michael J. Hsu at the Financial Stability Board’s Crypto Working Group
28. Financial Services Committee: Letter to Treasury Secretary on regulatory gaps in spot market for digital assets that are not securities
29. Financial Services Committee: Financial Services Innovation Act reintroduced
30. Financial Services Committee: Bill to reverse SEC SAB 121
31. Federal Reserve: Speech by Governor Michelle W. Bowman "Advancing Cross-Border Payments and Financial Inclusion"
Updates and Guidance: Middle East
Press/Articles
32. Interview with Burkhard Balz and Alexandra Hachmeister on the digital euro
Updates and Guidance: International Bodies
1. European Commission: Report on MLD4
On 11 March 2024, the European Commission published a report to the EU co-legislators on MLD4. Article 65(1) of MLD4 requires the Commission to produce the report and also requires the Commission to assess the need to make new legislative proposals on certain areas (e.g. virtual currency user databases).
In the report, the European Commission argues that it has reacted effectively to changes in the risk environment and that substantial improvements have been made in relation to information exchange between supervisors. It refers to its 2021 AML legislative package (see our briefing here), which includes a proposed Regulation extending the list of "obliged entities" to include CASPs. It argues that MICA (see our briefing here) and the Revised Wire Transfer Regulation will increase the monitoring of cryptoasset transfers for ML/TF.
2. European Parliament: Formal adoption of eIDAS
On 29 February 2024, the European Parliament formally adopted the Proposed Regulation amending Regulation (EU) No 910/2014 concerning establishing a framework for a European Digital Identity amending eIDAS (eIDAS 2).
eIDAS 2.0, which was introduced by the European Commission in June 2021, aims to (among other things) boost reliability of electronic identification and trust services within the EU. It introduces an EU Digital Identity Wallet framework in EU Member States for EU natural and legal persons, with the aim of providing easier access to goods and services. The digital wallet will be available to use on a voluntary basis and users would be able to provide free "qualified electronic signatures" that have the same legal standing as a handwritten signature.
The next stage is for the legislation to be formally approved by the Council of EU, following which it will be published in the Official Journal.
3. FSB: Speech by Klaas Knot, Chair: At a cross-roads: the path towards responsible innovation in the crypto-asset ecosystem
On 29 February 2024, the FSB published a speech by Klaas Knot, Chair of the FSB, in relation to responsible innovation in the digital assets sector. The speech summarises the FSB's oversight of systemic implications of cryptoassets, noting the importance of the principle of "same activity, same risk, same regulation" in the FSB's regulatory framework. The speech also discusses the risks posed by "multifunction crypto-asset intermediaries". Mr Knot reiterates the FSB's willingness to collaborate with other standard setting bodies.
The speech also cites the benefits offered by distributed ledger technology, noting the importance of trust in harnessing the benefits of tokenisation.
4. IMF: Report: IMF and World Bank approach to cross-border payments Technical Assistance
On 29 February 2024, the IMF published a report prepared by the IMF and the World Bank outlining the role that Technical Assistance plays in achieving the G20 Cross-Border Payments Roadmap targets. The 2020 Roadmap for Enhancing Cross-Border Payments seeks to address the challenges faced in relation to cross-border payments. The FSB issued 11 quantitative targets to define the Roadmap’s aims, outlining a common vision. The report notes that the IMF and the World Bank's Technical Assistance programs are, however, wider in scope than the G20 Roadmap priority themes.
The report states that certain regions face significant challenges in relation to cross border payments and argues that technical assistance could assist in addressing diverse needs at a regional level and at country level. The report summarises stocktakes undertaken by the IMF and World Bank of recent and ongoing Technical Assistance concerning cross-border payments. The IMF confirms that areas of focus will include: extending and aligning operating hours; the interlinking of payment systems; and ISO 20022 harmonisation.
5. FATF: Public Consultation on Recommendation 16 on Payment Transparency
On 26 February 2024, the FATF issued a public consultation setting out changes to Recommendation 16 Wire Transfers (R.16), its Interpretive Note (INR.16) and the related Glossary of specific terms. The FATF is seeking to adapt them to the changes in payment business models and messaging standards. FATF considers that there is a need to update R.16/INR.16 to ensure that the FATF Standards are technology neutral and follow the principle of same activity, same risk and same rules. The initiative is also part of the G20 Priority Action Plan in relation to cross border payments.
The deadline for comments is 3 May 2024.
6. Council of the EU: Formal adoption of SEPA 2
On 26 February 2024, the Council of the EU confirmed that it had formally adopted the proposed Regulation amending the SEPA Regulation and other EU legislation (SEPA 2). SEPA 2 was introduced by the European Commission in October 2022. Key aspects include: a requirement that PSPs offering a payment service of sending and receiving credit transfers also offer the service of sending and receiving instant credit transfers in euro; requiring all providers of instant payments in euro to offer a verification service; and requiring payment and e-money institutions to offer the service of sending and receiving instant credit transfers after a transitional period.
7. European Commission: Adoption of Delegated Regulations under MiCA
On 22 February 2024, the European Commission adopted Delegated Regulations supplementing MiCA. The delegated acts were initially published in November 2023 and consist of:
- Commission Delegated Regulation on the fees charged by the EBA to issuers of significant asset-referenced tokens and issuers of significant e-money tokens;
- Commission Delegated Regulation 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;
- Commission Delegated Regulation on criteria for classifying ARTs and EMTs as significant; and
- Commission Delegated Regulation on the criteria and factors to be taken into account by ESMA, the EBA and competent authorities in relation to their intervention powers.
The delegated acts will now be reviewed by EU co-legislators. They have a period of three months to object, which can be extended for another three months.
8. ECB: Blog: Digital euro: Debunking banks’ fears about losing deposits
On 19 February 2024, the ECB published a blog to address concerns about the risks of bank disintermediation posed by the introduction of digital euro (see our briefing here for more on the digital euro). The blog refers to the ECB's 2023 publication on the scope and key features of a digital euro and also notes that the digital euro project is now in the preparation phase. The blog argues that customers would be unlikely to hold large amounts of money in a digital euro wallet, owing to the combination of a "reverse waterfall" and the holding limit set out in the legislative proposal. It also argues that other players may pose a greater risk to bank funding than CBDCs.
Updates and Guidance: UK
9. HMT: Consultation on effectiveness of AML regime: Change in control regime for CASPs under MLRs
On 11 March 2024, HM Treasury launched a consultation on improving the effectiveness of the MLRs. Areas covered include: making customer due diligence more proportionate and effective; strengthening system co-ordination; and providing clarity on the scope of the MLRs;
The consultation also looks at the regulation of CASPs, noting that most crypto firms operating in the UK are registered under the MLRs. It refers to plans by the Government to expand regulation beyond existing regime of CASPs registered under MLRs (see briefing on proposals). HMT seeks views on extending the scope of the current AML regime for cryptoassets so as to cover firms and activities that would not fall within FSMA perimeter.
HMT notes that the authorisation/registration and change in control assessments under FSMA and the MLRs differ in how they identify and assess the risks associated with controllers of crypto firms, owing to the use of different definitions. In the consultation, the Government seeks views on whether there should be two different concepts of control for crypto firms depending on whether they are FSMA authorised or not.
Depending on feedback received, the Government may align the current MLR regime for crypto firms more closely with the FSMA model. This would lead to changes to those who would fall in scope of fit and proper tests, as well changes to the thresholds for assessing controllers.
10. FCA: Statement on cryptoasset Exchange Traded Notes for professional investors
On 11 March 2024, the FCA published a statement confirming that it would not object to requests from Recognised Investment Exchanges to create a UK listed market segment for cryptoasset-backed Exchange Traded Notes (cETNs). The FCA confirmed that these products would be available for professional investors. The FCA states that exchanges will need to continue to ensure sufficient controls are in place to enable orderly trading and adequate investor protection. cETNs would be required to comply with the requirements of the UK Listing Regime (e.g. prospectuses and on-going disclosure).
The FCA confirms that its ban (introduced in January 2020) on UK firms offering or selling crypto derivatives and ETNs that reference certain types of cryptoassets to UK retail consumers remains in place.
11. HM Treasury: Consultation on Private Intermittent Securities and Capital Exchange System (PISCES)
On 7 March 2024, HM Treasury published a consultation on a new Private Intermittent Securities and Capital Exchange System (PISCES). This follows an announcement in December 2022, made as part of Edinburgh Reforms, in which the Government confirmed that it would develop an intermittent trading venue (see Ashurst briefing here for background).
The PISCES platform would allow private companies to trade their securities in a controlled environment and on an intermittent basis and would incorporate aspects from public markets and from private markets.
PISCES will be developed using a financial market infrastructure (FMI) sandbox. The framework for this was introduced via FSMA 2023 (see Ashurst briefing here). This framework allows government to disapply/modify certain rules and legislation applicable to FMIs to facilitate the operation of new sandboxes. The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 were published in December 2023 (see Ashurst briefing here).
Key features include:
- PISCES will operate as a secondary market, facilitating the trading of existing shares
- PISCES will operate as a multilateral system but will be subject to its own standalone regulatory requirements within the PISCES Sandbox
- Rules PISCES would be subject to include the following: transparent rules and procedures for fair and orderly trading; and objective criteria for the efficient execution of orders.
- Any amendments and disapplication of legislation will only apply to the activities related to the trading of shares on PISCES within the PISCES Sandbox while it is in operation.
- Only institutional and professional investors would be able to buy shares on PISCES in the first instance.
12. Law Commission: Consultation on digital assets as personal property
On 22 February 2024, the Law Commission issued a consultation on digital assets as property. This follows the publication of a June 2023 final report on digital assets (see our briefing here), which argued that certain types digital assets could be assigned property rights, despite not fitting into the classes of personal property traditionally recognised by English law. The report recommended legislation to confirm the existence of a third category of personal property rights that could accommodate certain digital assets including cryptotokens.
The Law Commission is using the third category to describe a category of a thing distinct from both things in possession and things in action. The Law Commission argues that a statutory confirmation would send a signal to the industry of a commitment to protect personal property rights and provide greater clarity.
13. Law Commission: Call for evidence on digital assets and electronic trade documents
On 22 February 2024, the Law Commission issued a call for evidence on the applicability of existing methods and approaches of private international law to digitalised and decentralised contexts. The Law Commission's final report and Bill on electronic trade documents noted private international law difficulties in relation to electronic trade documents (such as determining the geographic location of documents). The Law Commission committed to exploring these issues further as part of a general project on private international law and emerging technology. The work is intended to complement ongoing initiatives by Law Commission.
Areas views are sought include:
- the law applicable to property disputes in relation to digital assets and ETDs;
- the merits of introducing a new conflict of laws regime for property rights in digital assets and ETDs;
- jurisdiction over consumer contracts; and
- localising damage arising in tortious claims relating to crypto-tokens for the purposes of applicable law.
The deadline for comments is 16 May 2024.
14. FCA: Financial promotions quarterly data Q4 2023
On 14 February 2024, the FCA published financial promotions data in respect of Q4 2023. The FCA refers to financial promotion rules for cryptoassets that came into force in October 2023 (see our briefing here for more information) and outlines key findings observed since the introduction of the rules. The FCA also refers to crypto firms that applied for modification by consent, noting that the customer journey financial promotion rules came into force on 8 January 2024 (see our briefing here for more information).
The FCA also cites action it has taken in relation to poor practices. This includes firms offering qualifying cryptoassets not identifying webpages that constituted financial promotion; and crypotoasset firms using affiliates for promoting products.
15. BoE: Minutes of the CBDC Engagement Forum of 17 January 2024
On 17 February 2024, the CBDC Engagement Forum published the Minutes of its meeting held in January 2024.
The Forum noted that Sarah Breeden was co-chairing the Forum for the first time since replacing Jon Cunliffe as Deputy Governor for Financial Stability.
Items covered in the session included: an update from Simon Coles in relation to membership and objectives of the Retailer Needs Working Group, including questions posed by the BoE/HMT in the Request for Information; a presentation by the Offline Payments Working Group; and discussion on the proposed pipeline of four additional working groups (privacy, intermediaries, interoperability and consumer protection) expected to be launched over the course of 2024.
For more on the UK CBDC, please see our briefing here.
Updates and Guidance: Europe
16. Speech of Burkhard Balz on the digitalisation of payment in a globalised world
On 7 March 2024, Burkhard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank), delivered a speech on the digitalisation of payments in a globalised world in Buenos Aires, in cooperation with the Konrad Adenauer Foundation and with the Latin American Economics Research Foundation (Fundación de Investigaciones Económicas Latinoamericanas).
Balz pointed out the advantages of digital payments, noting that they make the payment process more efficient, enable secure payments and offer the potential for global reach. Balz however noted that cross-border payments can still often be slow, expensive, and non-transparent when compared to domestic payments. Balz added that this was the reason why the G20 is working on a roadmap to enhance the cross-border payments experience, noting that several proposals related to faster payments at an infrastructural level have been developed. The speech notes the importance of collaboration between public and private actors, arguing that private actors provide innovative services and public actors create the regulatory framework. According to Balz, the different national regulatory frameworks must be harmonised across borders, so as to encourage a safe and equitable growth in innovation.
17. German Banking Industry Committee on the digital euro in the public debate of the German Parliament
On 19 February 2024, the German Banking Industry Committee (Deutsche Kreditwirtschaft, DK) contributed to a debate on the digital euro at a public hearing of the German Parliament's (Bundestag) Finance Committee.
The DK pointed out the recognised potential of the digital euro as an advanced, sovereign means of money and payment instrument. However, The DK also emphasised the existing concerns of the banking industry, since a digital euro can only be effective if it gains the trust of the population. A key area of concern cited were risks to financial stability posed by an outflow of bank money into central bank money – a concern that is even shared by the European Central Bank and the European Commission. According to DK, these risks must be discussed in advance.
Updates and Guidance: APAC
18. HKMA: Commencement of new wholesale central bank digital currency project
On 7 March 2024, the HKMA announced the commencement of Project Ensemble to develop interbank settlement of tokenised money through wholesale central bank digital currency (wCBDC). As the key part of the new project, a wCBDC sandbox will be launched by the HKMA in 2024 to test different tokenisation use cases (including settlement of tokenised real world assets) and help to explore new financial market infrastructure to bridge the existing gap between tokenised assets and money in transactions. The HKMA will also engage local and multinational banks, key players in the digital asset industry, technology companies and the CBDC Expert Group in a wCBDC Architecture Community to set industry standards and future strategies. Subject to the outcome of the wCBDC sandbox, the HKMA is open to conduct a "live" issuance of the wCBDC at appropriate time if the project generates sufficient interest from the industry.
19. BIS and HKMA: Launch of Project Aurum 2.0 on privacy for retail central bank digital currencies
On 6 March 2024, the BIS Innovation Hub Hong Kong centre announced the launch of the second phase of Project Aurum with the HKMA, focusing on improving privacy for retail central bank digital currencies (rCBDC). Under Project Aurum 2.0, the BIS and HKMA will collaborate with universities and privacy experts to explore the effectiveness of privacy-enhancing technologies (e.g. pseudonymization and zero knowledge proof), and to advance central banks' understanding around privacy when designing their own CBDCs.
20. Indonesia to potentially reassess cryptocurrency taxes
On 2 March 2024, the Indonesian Commodity Futures Trading Supervisory Agency (CoFTSA or commonly referred to as Bappebti) requested the Ministry of Finance to assess the current digital assets tax regime. This comes after the total national 2023 tax revenue generated from cryptocurrency transactions declined by 62% compared to 2022, which has been attributed to a 51% decrease in cryptocurrency transactions.
Since May 2022, the cryptocurrency tax regime has taxed cryptocurrency as a commodity or asset and imposed dual taxation, including VAT on cryptocurrency transactions conducted on registered platforms and income tax on crypto asset transactions. Tirta Karma Senjaya, the head of CoFTSA's Market Development and Development Bureau, justified the request for an assessment on the premise that VAT and income taxes should be assessed in accordance with other annual tax reviews, noting it has been nearly two years since the tax was imposed. Further changes to the tax classifications of cryptocurrency are expected to be implemented by January 2025, when the national cryptocurrency supervision is set to transfered to the Financial Services Authority (commonly referred to as OJK or Otoritas Jasa Keuangan).The Ministry of Finance has welcomed CoFTSA's input and noted that the tax rates will be internally assessed.
21. HKMA: Circulars on sale and distribution of tokenised products and provision of custodial services for digital assets
On 20 February 2024, the HKMA issued a circular setting out the supervisory standards expected of authorized institutions (AIs) in the sale and distribution of tokenised products (except for those regulated under the Securities and Futures Ordinance and governed by the relevant requirements issued by the SFC and the HKMA from time to time). As a general principle, the prevailing supervisory requirements and consumer/investor protection measures for the sale and distribution of the underlying product are also applicable to its tokenised form. AIs are expected to implement the consumer/investor protection measures in respect of due diligence, disclosure and risk management for tokenised products, and discuss with the HKMA in advance before engaging in tokenised product-related activities.
On 20 February 2024, the HKMA also issued a circular setting out the expected standards on AIs’ provision of digital asset custodial services, covering: governance and risk management; segregation of client digital assets; safeguarding of client digital assets; delegation and outsourcing; disclosure; record keeping and reconciliation of client digital assets; anti-money laundering and counter-financing of terrorism; and ongoing monitoring. AIs and their subsidiaries who intend to provide digital asset custodial services should discuss with the HKMA in advance. For AIs and their subsidiaries already engaging in digital asset custodial activities, they should notify the HKMA and confirm that they meet the expected standards by 20 August 2024.
22. Revised Bill proposes Japanese investment funds and venture capital firms to hold cryptocurrency assets
On 16 February 2024, the Japanese Ministry of Economy, Trade and Industry confirmed that Prime Minister Fumio Kishida's cabinet approved the "Bill to partially amend the Industrial Competitiveness Enhance Act, etc. to promote the creation of new business and investment in industry" (Bill).
The Bill seeks to provide intensive support to Japanese medium-sized companies and start-ups. Among other revisions, the Bill proposes to allow investment funds and venture capital firms (VCs) to directly hold digital assets by implementing measures to "add cryptocurrency assets to the list of assets that can be acquired and held by investment limited partnerships" (LPS). Currently in Japan, restrictions are in place that prevents LPS from holding cryptocurrency assets and VCs investing in Web 3.0 firms which limits overseas VCs sourcing. If the revision is approved, the new legislation would provide greater support and prospects for Japanese-based Web3 firms and widen the scope of the Japanese investment sector in digital assets. The Bill has been submitted to the 213th Ordinary Session of the Diet for debate and a vote, which is currently in session.
23. South Korea: Measures to increase protection of virtual assets users and oversight of digital asset taxes
South Korea has sought to increase protection of virtual assets users and virtual asset oversight in the last month, as the country continues to prioritise cryptocurrency regulations.
On 8 February 2024, South Korea's Financial Services Commission (FSC) announced enforcement mechanisms under the Act on the Protection of Virtual Asset Users (Act). The Act aims to protect users of virtual assets and maintain order in virtual assets transactions by, among other things, prohibiting unfair trading activities in the virtual asset market and enforcing supervision and sanctions over virtual assert service providers (VASPs).
Key Points
- The Act is Korea's first consumer protection law on virtual asset users and takes effect on 19 July 2024;
- The Act sets high standards for VASPs including a duty for safely managing and storing customer's deposits and virtual assets which will be enforced upon VASPs; and
- The Act enforces oversight over VASPs and cryptocurrency exchanges.
These mechanisms will act in conjunction with the efforts of the Financial Supervisory Service (FSS) and the Korea Financial Intelligence Unit (KoFIU") to tighten regulation and governance in a growing cryptocurrency market. In the KoFIU's annual work plan published on 12 February 2024, the Unit announced various initiatives to counter the anti-money laundering of coin exchanges.
More recently, on 11 March 2024, The National Tax Service of South Korea (NTS) announced plans to launch a Virtual Asset Integrated Management System (VAIMS). The analytical system seeks to oversee and analyse transactional data associated with digital currencies obtained through new mandatory reporting requirements in the Corporate Tax Act and Income Tax Act. In an effort to address digital asset-related tax evasion and bolster compliance and oversight within the expanding cryptocurrency sector, the VAIMS is set to take effect in 2025.
24. FSTB: Stablecoin OTC licensing regime
On 8 February 2024, the Financial Services and the Treasury Bureau (FSTB) issued a consultation paper on the proposed licensing regime for OTC virtual asset trading service (VA OTC service) providers. The proposed VA OTC service licensing regime will be implemented by amending the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and regulate the provision of the service of spot trade of virtual assets in Hong Kong. Under the legislative proposal, any person who conducts a business in providing services of spot trade of virtual asset for money in Hong Kong must be licensed by the Commissioner of Customs and Excise, irrespective of whether the services are provided through a physical outlet or other platforms.
The consultation period ends on 12 April 2024. To facilitate the effective implementation of the VA OTC services licensing regime, the FSTB plans to provide a transitional period of 6 months for pre-existing VA OTC service providers before the commencement of the regime.
Updates and Guidance: Australia
25. AUSTRAC: 2024 priorities with focus on Digital Currency Exchanges i.e Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd (Block Earner): One of the first cases applying Australian financial services regime to crypto asset based products
On 9 February 2024, the ASIC v Block Earner judgment was released. This is a one of the first judicial considerations of the application of the Australian financial services regime to crypto asset based products.
The focus of the litigation was on determining the legal characterisation of the following two Block Earner products:
- Earner - a product that allowed users to lend cryptocurrency to Block Earner to receive a fixed rate return over the term of the loan. In the usual cases, Block Earner converted the customer's AUD into the cryptocurrency nominated by the customer and at the end of the loan the customer was entitled to an AUD amount calculated by reference to the price of the crypto currency plus a fixed rate of return.
- Access - a product that provided users access to the "Aave" and "Compound" Decentralised-Finance (DeFi) protocols. They provided a platform for users to lend out their crypto currency holdings to borrowers and earn interest on that basis, using algebraic models to adjust interest rates based on supply and demand.
ASIC alleged that Block Earner had engaged in unlicenced financial services conduct in offering these products as they were either:
- managed investment schemes (facilities though which a person makes a financial investment); or
- derivatives for the purposes of the Corporations Act 2001 (Cth) (Corporations Act).
The Court found that:
- the Earner product was a managed investment scheme and a facility for making a financial investment, meaning that Block Earner had operated an unregistered managed investment scheme and carried on a financial services business without an Australian Financial Services License; and
- the Access product was not a financial product of the kind alleged by ASIC.
In finding that the Earner product was a managed investment scheme and a facility for making a financial investment, the court's analysis relied heavily on representations made by Block Earner about the product on its website and in its promotional material.
The Court will determine separately the amount of any pecuniary penalty against Block Earner.
It is expected that ASIC will continue to test the application of the regulation and the regulatory boundaries in relation to crypto asset based products in court.
Ashurst's article on this case provides further insight into this case and the potential implications for providers of crypto asset-based products. You can read these insights here: ASIC v Block Earner: when are crypto asset based products regulated Financial Products? (ashurst.com)
Updates and Guidance: North America
26. CFTC: Proposed Rule on requirements for DCMs and SEFs regarding governance and the mitigation of conflicts of interest
On 20 February 2024, the CFT issued a proposed rule for designated contract markets and swap execution facilities, introducing governance requirements concerning market regulation functions and related conflicts of interest standards. The types of conflicts of interests covered by the proposed rules include: conflicts concerning the market regulation functions, including the responsibilities related to trade practice surveillance, market surveillance and real-time market monitoring.
In a dissenting statement, Commissioner Kristin Johnson noted that the rules did not address conflicts of interest in emerging technologies, where Ms Johnson argues that the CFTC's oversight is less robust. Ms Johnson also refers to recent cases that have highlighted conflicts of interest issues in relation to some vertically integrated business models.
The CFTC also published a statement by Chairman, Rostin Behnam, in support of the proposed rules.
27. OCC: Remarks by Acting Comptroller of the Currency Michael J. Hsu at the Financial Stability Board’s Crypto Working Group
The OCC has published remarks made by Acting Comptroller of the Currency, Michael J. Hsu, to the Financial Stability Board’s Crypto Working Group during a workshop on implementing the FSB's global regulatory framework for cryptoasset activities. This discussed regulatory approaches to multi-function cryptoasset asset intermediaries; cross-border enforcement challenges; stablecoin implementation experiences; and interlinkages with traditional financial markets.
The speech explored commonalities between the high profile demise of a foreign bank operating in the US in the 1990s and the demise of cryptoasset intermediaries, citing weaknesses in supervisory collaboration and monitoring. Mr Hsu emphasises the importance of sharing information and expresses support for the FSB principle of “same activity, same risk, same regulatory outcome" with regard to the cryptoassets sector.
28. Financial Services Committee: Letter to Treasury Secretary on regulatory gaps in spot market for digital assets that are not securities
In February 2024, it was announced that the Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), Chairman of the House Committee on Agriculture, Glenn “GT” Thompson (PA-15) and others had written a letter to the Chair of the Financial Stability Oversight Council (FSOC). The letter seeks more information on how the FSOC is facilitating coordination and communication between the SEC and CFTC concerning federal oversight of the spot market for digital assets that are not securities.
29. Financial Services Committee: Financial Services Innovation Act reintroduced
On 27 February 2024, it was announced that chairman of the House Financial Services Committee, Patrick McHenry (NC-10) had reintroduced the Financial Services Innovation Act. The legislation would require federal regulators to create Financial Services Innovation Offices (FSIOs) and provides for federal regulatory “sandboxes”. The legislation would establish a FSIO Liaison Committee, which would be responsible for promoting coordination and cooperation amongst agencies.
30. Financial Services Committee: Bill to reverse SEC SAB 121
On 29 February 2024, the House Financial Services Committee provided an update in relation to a joint resolution seeking Congressional disapproval of a the rule submitted by the SEC relating to "Staff Accounting Bulletin No.121". SAB 121, issued in March 2022, sets out the SEC's approach to accounting to safeguarding cryptoassets.
On 14 February 2024, a letter from US banking associations (including the American Bankers Association and Bank Policy Institute) to the Chair of the SEC, Gary Gensler, was published. The letter calls for targeted changes to the rule.
31. Federal Reserve: Speech by Governor Michelle W. Bowman "Advancing Cross-Border Payments and Financial Inclusion"
On 15 February 2024, the Federal Reserve published a speech by Governor Michelle W. Bowman on "Advancing Cross-Border Payments and Financial Inclusion". This refers to the G20 Roadmap for Enhancing Cross-Border Payments. This calls for a nuanced and contextualised approach to addressing frictions in cross-border payments.
Key points
- Public and private sector participants can complement each other in terms advancing financial inclusion and improving efficiencies of cross-border payments and remittances.
- The recent introduction of the new interbank system for instant payment (FedNow® Service) and commitment to ISO 20022 messaging standard for the Federal Reserve's wholesale payment service by March 2024 is evidence of the Federal Reserve's commitment.
- The Federal Reserve future research on innovative technologies will look at their potential role in future payments and financial ecosystem and will consider potential opportunities, risks, and trade-offs for cross-border payments.
Updates and Guidance: Middle East
Press/ Articles
32. Interview with Burkhard Balz and Alexandra Hachmeister on the digital euro
On 28 February 2024, an interview with Burkard Balz, Member of the Executive Board of the German Central Bank (Deutsche Bundesbank) and Alexandra Hachmeister, Director General Digital Euro at the German Central Bank, was published in the German business newspaper, Handelsblatt.
According to Hachmeister, the digital euro will create more competition, which will stimulate business. It is argued that, as parts of the infrastructure will be provided free of charge, the digital euro could make payments cheaper compared to Mastercard and Visa payment methods. Balz emphasized in this context that alongside retailers, consumer protection groups are keen supporters of the digital euro as they want more competition to reduce high fees. It was confirmed that the upper limit for the possession of the digital euro is still under discussion. The limits under consideration range between 500 and 3,000 euros, but Balz has sympathy for a de minimis limit of 150 euros, due to anti-money laundering reasons. Hachmeister argues that the digital euro and the European Payment Initiative (EPI) should be combined, so that the EPI could become a strong competitor to its American rivals.
Contributors: Julien Pipolo, Senior Associate; Ankita Rao, Associate; Oscar Tsoi, Trainee; Angelique Nelis, Associate; Greta Müller, Junior Associate; Cornelius Hille, Associate; Tobias Bauerfeind, Partner
