Global Digital Assets Digest February 2023

1. ESMA: Q&As on a pilot regime for market infrastructures based on distributed ledger technology

On 3 February 2023, ESMA updated its Q&As in relation to EU DLT Pilot Regime Regulation. The purpose of the Q&As is to promote common supervisory approaches and practices in the application of the DLT Pilot Regime in relation to regulatory data reporting, trading and settlement topics. New topics discussed in this edition of the Q&As are:

• reporting by DLT MTFs/ DLT TSS on behalf of natural persons that are not subject to article 26 of MiFIR; and
• the identification code that should be provided by trading venues, investment firms and approved publication arrangements in the reporting fields for the purpose of the post-trade transparency obligations under RTS 1 and RTS 2 in the context of DLT instruments.

2. ISDA: Whitepaper on digital asset markets netting and collateral enforceability

On 26 January 2023, ISDA issued a white paper on netting and collateral enforceability in relation to digital assets derivatives. The focus of the paper is the provision of collateral by by a transfer of a digital asset to the direct control of the recipient that is reflected on the distributed ledger. The second publication in the series will look at issues concerning intermediated holdings of digital assets, including posting of collateral to a custodian to hold in a segregated collateral account. ISDA is hoping that the publications will enhance certainty and reduce risk by setting out the legal and documentation questions that need to be considered to ascertain ownership of digital assets, the posting of those assets as collateral and the enforceability of netting, which will enhance certainty and reduce risk. It states that recent defaults of digital asset exchanges, market participants and platforms have underscored the importance of robust documentation to manage risks. ISDA has also published the ISDA Digital Asset Derivatives Definitions, and these cover initially non-deliverable forwards and options on Bitcoin and Ether.

3. European Commission: Speech: Opening remarks by Commissioner McGuinness at the Structured Dialogue with the European Parliament's ECON Committee

On 24 January 2023, opening remarks by Commissioner McGuinness at the Structured Dialogue with the European Parliament's ECON Committee was published. In the speech, Ms McGuinness provides an overview of the European Commission's plans for the future in relation to financial regulation, including the following: a regulation on key principles of a Digital euro; and an Open finance framework together with the Payment Services Directive review.

4. European Parliament (ECON): Economic and Monetary Affairs Committee vote on EU Banking Package

On 24 January 2023, the European Commission announced that the Economic and Monetary Affairs Committee of the European Parliament had voted on the 2021 Banking Package introduced by the European Commission. Notable updates to the original text include provisions encouraging banks to disclose their exposure to cryptoassets and crypto assets services, as well as a description of their risk management policies related to cryptoassets.

5. FSB: Speech by Klaas Knot, Chair of the Financial Stability Board: Daring to know in times of uncertainty and structural shifts

On 24 January 2023, the FSB issued a speech by Klaas Knot, Chair of the Financial Stability Board, setting out vulnerabilities that may threaten global financial stability priority areas for the FSB. In the speech, Mr Knot discusses the digitalisation of finance, arguing that cryptoasset markets and activities bring a number of risks and vulnerabilities, with many vulnerabilities similar to those found in traditional finance: liquidity mismatches, hidden leverage, and counterparty credit risk. Mr Knot states that finalising the FSB's proposed global framework for the effective regulation of cryptoasset activities recommendations, first issued in October 2022, and monitoring their effective implementation across all jurisdictions will be a priority for the FSB in 2023.

6. ECB: Speech by Fabio Panetta: Digital euro: our money, wherever and wheneven

On 23 January 2023, the ECB published a speech by Fabio Panetta, member of the ECB board, in relation to the digital euro. The speech looked at accessibility and usability in relation to digital euro, including plans by the Eurosystem for a new digital euro app. Mr Panetta concluded by providing an overview of the work agenda for 2023, noting that in Autumn 2023, the investigation phase of the digital euro would come to an end and that the ECB Governing Council would then decide whether to move to the realisation. Any possible decision by the Governing Council to issue a digital euro would be taken at a later stage and only after the European Parliament and the Council of the EU have adopted the legislative act.

7. EBA: Communication on the application of strong customer authentication requirements to digital wallets

On 23 January 2023, the EBA issued communication in relation to the application of strong customer authentication (SCA) to digital wallets under PSD2.

Notable points

• The enrolment of a payment card to a digital wallet results in the creation of a token/digitised version of the payment card and requires the application of strong customer authentication under Article 97(1)(c) of PSD2 (because it is an action that may imply the risk of fraud or other abuse).
• Issuers may outsource the provision and verification of the elements of SCA to a third party (e.g. by concluding contractual arrangements with the third party), such as a digital wallet provider, in compliance with the general requirements on outsourcing, but the issuers remain fully responsible for the compliance with the requirements in PSD2 and the Regulatory Technical Standards (RTS) on SCA&CSC.
• The issuance of a new token, replacing a previously existing one and binding it to a device/user, also requires the application of SCA.

8. Council of the EU: Eurogroup statement on the digital euro project

On 16 January 2023, the Eurogroup published a statement providing an overview of progress made since the October 2021 launch of the investigation into the digital euro. The Eurogroup had held a meeting in January 2023 and discussed key issues in relation to the digital euro since February 2022, as well as the general objectives and political dimensions of a digital euro.

Issues discussed by the group include the following:

• a digital euro should complement and not replace cash;
• the digital euro could be a building block of the future architecture for state-of-the-art payment solutions and cannot be a programmable money (digital euro should at all times and throughout the euro area be convertible at par with other forms of the euro, such as banknotes and commercial bank deposits); and

• the digital euro should focus, as a priority, on the needs and specificities of the euro area, and interoperability with other CBDCs should be an important feature of the digital euro (including for cross-currency transaction).

The statement notes that the ECB Governing Council will review the outcome of the investigation phase in autumn 2023.

9. ECB: Publication: Digital euro market research

On 13 January 2023, the ECB published market research in relation to the digital euro. The Eurosystem is currently carrying out the investigation phase of its digital euro project under which a project plan for implementing a digital euro is to be prepared. This is intended to inform the decision of the ECB’s Governing Council later in 2023 on the potential launch of a realisation phase. The market research exercise aims to obtain feedback from relevant interested parties, with a view to gaining non-binding information on potential technical solutions.

10. UNIDROIT: Consultation on UNIDROIT Principles on Digital Assets and Private Law

On 11 January 2023, the International Institute for the Unification of Private Law (UNIDROIT) launched a public consultation on Draft Principles and Commentary on Digital Assets and Private Law. The Principles were prepared by the Working Group on Digital Assets and Private Law between 2020-2022. The Principles are divided into 7 sections: scope and definitions; private international law; control; custody; secured transactions; procedural law including enforcement; and Insolvency.

UNIDROIT is seeking views on whether the Principles sufficiently address the private law issues that occur in transactions related to digital assets, and to entities providing services related to digital assets. UNIDROIT wants to ensure that the Principles can apply in different contexts, including both civil law and common law jurisdictions as well as developing economies, emerging markets, and developed economies.

The deadline for comments is 20 February 2023.

Please see Ashurst briefing here.

11. Basel Committee - Final standard on the prudential treatment of banks' cryptoassets

The Basel Committee on Banking Supervision (the Committee) has now published its finalised standard (the Standard) on the prudential treatment of banks' exposures to cryptoassets, taking into account stakeholder feedback to its initial proposals in the June 2021 consultation (see Ashurst briefing here), and the second public consultation in June 2022 (see the Ashurst briefing here).

The Standard has been endorsed by the Committee's oversight body, the Group of Governors and Heads of Supervision, and is to be implemented by 1 January 2025. It will be incorporated into the Basel Framework as a new chapter, titled 'SCO60: Cryptoasset exposures'.

For more information, see our briefing here.

12. HM Treasury: Consultation on a digital pound

On 7 February 2023, the Bank of England and HM Treasury issued a consultation and a working paper on a digital pound. This follows earlier publications on this area (see our briefing here). In March 2020, the bank of England issued a discussion paper on a CBDC, as well as a June 2021 discussion paper on new forms of money.

Notable points

• It is likely that the digital pound will be needed in the future and that preparatory work is justified.
• A digital pound would be a retail CBDC.
• Under the framework, the Bank would provide the digital pound and the central infrastructure, including the "core ledger". Private sector companies would be able to integrate into the central digital pound infrastructure and provide the interface between the Bank and users.
• The decision about whether to introduce a digital pound will be informed by the payments landscape, including developments in relation to privately issued digital money, as well as international CBDCs.
• The Bank and HM Treasury’s priority is to make the necessary preparations to have appropriate infrastructure and technical capability in place should a digital pound be introduced in the future.
• The next stage of work will involve working with the private sector to explore potential technology solutions and carry out experiments to inform any future implementation.

Please look out for forthcoming Ashurst article examining key aspects of this paper in depth.

13. FCA: Statement on cryptoasset firms marketing to UK consumers

On 6 February 2023, the FCA issued a statement in relation to marketing of cryptoassets following a number of regulatory developments, including the Government's February 2023 policy statement on its approach to cryptoasset financial promotions regulation. This confirms that there will be four routes to communicating cryptoasset promotions to UK customers: the promotion is communicated by an FCA authorised person; the promotion is made by an unauthorised person, but approved by an FCA authorised person (in future via a regulatory gaetway); the promotion is communicated by a cryptoasset business registered under the MLRs with the FCA; or the promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.

The statement notes that the FCA will be given supervision and enforcement powers in relation to the new exemption and that the FCA will take robust action where firms are found to be promoting cryptoassets to UK consumers in breach of financial promotion requirements.
In the statement, the FCA also summarises its expectations in relation to cryptoasset businesses applying for registration under the Money Laundering Regulations 2017.

14. HM Treasury: Call for evidence and consultation on the regulation of cryptoassets

On 1 February 2023, HM Treasury published the long-awaited consultation and call for evidence containing far-reaching proposals for anyone offering or thinking about offering crypto in or to customers in the UK. Separately, the Government also confirmed via a policy statement that cryptoasset businesses registered with the FCA for anti-money laundering purposes will be allowed to issue their own promotions.

The UK is confirming that it is planning a phased approach to the regulation of cryptoassets, with this paper constituting the second phase in a regulatory process. The UK's proposed approach will introduce a regulated activities regime in relation to cryptoassets inspired by the pre-existing regulated activities regime in UK legislation (covering activities such as issuance, intermediary activities, safeguarding and lending).

For more information, please see our briefing here.

15. FCA: Statement on good and poor-quality registration applications made by cryptoasset businesses

On 25 January 2023, the FCA published feedback in relation to good and poor quality registration applications made by cryptoasset businesses under the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692). The FCA outlines expectations of applicants during the application process in relation to: business plans; products and services; risk assessment and management; and policies, systems and controls.

On 26 January 2023, the Treasury Committee published correspondence between the FCA and Harriett Baldwin MP, Chair of Treasury Select Committee, in response to questions raised during an oral evidence session with senior individuals from the FCA, as part of the Committee’s inquiry into the cryptoasset industry. During the evidence session, the FCA had indicated that a significant proportion of crypto firm applications were of a poor standard.

16. HM Treasury: Consultation: Payment Services Regulations Review and Call for Evidence

On 13 January 2023, HM Treasury issued a consultation paper in respect of Payment Services Regulation. This follows the publication of the landmark report, the Payments Landscape Review. The Payment Services Regulations require the Government to carry out a review of the Payment Services Regulations and publish a report setting out its conclusions. Part of the areas that the Government is seeking views on as part of the call for evidence are: whether the definitions and scope of the regime are future-proofed for the rapidly changing payments and data landscape, including ensuring that the definitions are enabled for cryptoassets (including initially fiat referenced stablecoin) where relevant.

The call for evidence closes for comments on 7 April 2023.

17. House of Commons: Financial Services and Markets Bill Letter from Andrew Griffith MP to Emma Hardy regarding FMI Sandbox

On 12 January 2023, a letter from Andrew Griffiths addressed to Emma Hardy MP was published in respect of the Financial Services and Markets Bill 2022-23 (see our briefing here). Ms Hardy had raised queries during the Committee stage of the Financial Services and Markets Bill in relation to clauses 13 and 17 and Schedule 4 of the Bill, which enables HM Treasury to set up a Financial Market Infrastructure (FMI) Sandbox and the issue of economic crime and Mr Griffiths responds to some of the points.

Key points

• The FMI Sandbox is about temporarily relaxing legislation to allow for the testing and adoption of new technology and practices. It will not lead to lowering of standards in relation to prevention and taking action in relation to economic crime.
• Whether or not economic crime is covered specifically in the report to Parliament on a Sandbox will depend on legislative modifications being made in that Sandbox and whether they relate to economic crime in a substantive way. Economic crime will be addressed in the report if it is deemed important.

18. House of Commons (Treasury Committee): Oral evidence: The cryptoasset industry

On 10 January 2023, the House of Commons Treasury Committee published the transcript of oral evidence given in respect of its cryptoaset industry inquiry. Witnesses called included Andrew Griffith MP, Economic Secretary to the Treasury; Laura Mountford, Deputy Director, Payments and Fintech, HM Treasury; Daniel Rusbridge, Deputy Director, Financial Services Strategy, HM Treasury. Issues discussed include the Edinburgh Reforms, the Financial Market Infrastructure Sandbox, and the general regulatory approach to cryptoassets and sovereign CBDC.

19. FCA Innovation Hub: Market insights

On 10 January 2023, the FCA published a webpage "Innovation Hub: Market insights". The page outlines the latest data on firms supported by the FCA Regulatory Sandbox and Innovation Pathway services. The data is intended to provide an overview of firms supported between 2014 and 2022. It confirms that. until the end of 2022, the FCA supported 867 firms, including 168 firms and products accepted for testing in the Regulatory Sandbox. Recent use cases of the Regulatory Sandbox include the use of blockchain to encourage more efficient low-cost cross-border payments

20. UK Finance: Joint policy statement: Five associations form industry alliance to guide the UK’s digital currency future

In January 2023, it was announced that UK Finance, the City of London Corporation, the Digital Pound Foundation, the Payments Association, theCityUK had formed new alliance – the UK Forum for Digital Currencies (UK FDC).

The UK FDC aims to develop better policies, practice and regulation in relation to cryptocurrencies. This includes the potential for a CBDC, as well as the regulatory approach to stablecoins and other cryptoassets. Some of FDC aims include: promoting a diverse, effective and competitive ecosystem for publicly and privately issued digital currencies in the UK; supporting UK government plans for the UK to become a global cryptoasset technology hub; and supporting the process and approach set up by HM Treasury and the Bank of England regarding retail CBDC and their commitment to partner with the private sector. The FDC confirms plans to: develop a common terminology which embraces existing definitions used in the sector into a single lexicon; recommend high-level domestic standards and policies that can both influence and work in conjunction with the emerging international ones; and work to reduce barriers between the UK existing financial services and crypto industry.

21. PRA: UK Deposit Takers Supervision: 2023 priorities

In January 2023, the PRA issued Dear CEO letter it had sent to UK Deposit Takers in relation to the approach it was setting concerning supervision, as well as emerging risks and priorities for banks. The letter contains an overview on credit risk, operational risk and resilience, model risk, data, financial risk. In the section on operational resilience, the PRA notes that increasing popularity of digital assets posing challenges in relation to risk management. The PRA confirms that it will continue to monitor firms' use of new technologies, and advancements in asset tokenisation. Firms are expected to have fully understood the impact on operational resilience of offering crypto products, and to have met PRA's supervisory expectations, as set out in SS1/2,1 before embarking in any material way in this area.

22. British Embassy: UK and the SEC Thailand sign new MoU on financial services

On 9 January 2023, it was announced that the UK and the Securities and Exchange Commission of Thailand (SEC Thailand) had signed a new MoU on financial services. The MoU builds on existing MoU between the UK and the SEC Thailand. The new MOU will focus on supporting Thailand to further develop the regulatory environment for the FinTech sector. The cooperation will be funded by the UK’s ASEAN Economic Reform Programme and the UK’s Partnering for Accelerated Climate Transitions Programme.

23. House of Lords: Answer to a written question: Insolvency of cryptoexchange (HL4363)

On 4 January 2023, the House of Lords published an answer to a written question put forward by Baroness Kennedy of Cradley in relation to what assessment the UK Government has made of the risks to investors following the collapse of the cryptocurrency exchange. The response summarises key steps taken by the Government including the January 2022 paper on regulating financial promotions of cryptoassets and confirms a Government consultation in the near future on its approach to regulating wider cryptoasset activities.

24. Germany: Deutsche Bundesbank: Speech by Burkhard Balz: The "Digital Euro" Project

On 25 January 2023, a speech given by Burkhard Balz, member of the Executive Board of Deutsche Bundesbank, was published. It covers the reasons for the introduction of a digital euro and gives insights into how the project could be implemented. It is emphasized that the digital euro should not replace existing payment solutions, but rather be seen as an additional European alternative. The digital euro would ensure access to public money and thus trust and stability in it as an official currency. By autumn 2023, the assessment is to be completed and the Governing Council of the ECB will decide whether the digital euro project will proceed to realisation.

25. French National Assembly: adoption of the so called 2022-2023 DDADUE bill

As a reminder, on 23 November 2022 the French Minister for the Economy presented to the Council of Ministers a bill on various provisions for adapting French law to European Union law in the fields of the economy, health, labour, transport and agriculture (so called 2022-2023 DDADUE bill) including provisions regarding digital asset services providers ("DASP") and adaptation of French law to the EU Pilot Regime regulation (the "Bill") (see here for Ashurst briefing on EU Pilot Regime regulation).

On 24 January 2023, the French National Assembly adopted the Bill with some amendments. In particular, the French National Assembly refused the amendment from the French Senate which provided that of 1 October 2023, persons wishing to carry out the activity of a digital asset services provider ("DASP") who are not registered with the French financial market authority (the "AMF") (i.e. pursuant to the current mandatory regime) would have to apply to be licensed with the AMF (i.e. pursuant to the current optional regime).

The Bill as adopted by the French National Assembly nevertheless provides for a strengthening of the requirements applicable to registered DASPs (in particular: implementation of an appropriate security and internal control system, a system for managing conflicts of interest, segregation of client assets etc.) that would be applicable as of 1 January 2024.

Debates around this Bill continue and a joint committee (commission mixte paritaire) is due to meet soon to decide on certain points of this text and try to finalise it.

26. Banque de France: Speech of the First Deputy Governor on the opportunities and challenges of the tokenization of finance.

On 17 January 2023, the First Deputy Governor of the French Central Bank (Banque de France), gave a speech at the European and American Chamber of Commerce event in New York. On this occasion, he stated that the tokenisation of finance is of prime interest because it is part of the significant transformation drivers of the financial landscape, but also because of the two-sided impact it might have on the functioning of the financial system, both in terms of efficiency and stability.

In addition to supporting the adoption of a European regulatory framework that fosters trust, Mr Beau emphasized the role of the Banque de France in the large-scale wholesale CBDC experimentation program and its contribution to the ongoing reflection on the possibility of a retail CBDC; Eurosystem central banks are currently involved in this project, under the ECB aegis, with the ongoing investigation phase for a digital euro.

The speech is available here in English.

27. Banque de France : paper of the First Deputy Governor on cryptoassets

On 17 January 2023, the First Deputy Governor of the French Central Bank (Banque de France), gave a speech at the European and American Chamber of Commerce event in New York. On this occasion, he stated that the tokenisation of finance is of prime interest because it is part of the significant transformation drivers of our financial landscape, but also because of the two-sided impact it might have on the functioning of our financial system, both in terms of efficiency and stability.

In addition to supporting the adoption of a European regulatory framework that fosters trust, Mr Beau emphasized the role of the Banque de France in the large-scale wholesale CBDC experimentation program and its contribution to the ongoing reflection on the possibility of a retail CBDC; Eurosystem central banks are currently involved in this project, under the ECB aegis, with the ongoing investigation phase for a digital euro.

The speech is available here in English.

28. Germany: BaFin warning on malware "Godfather"

On 9 January 2023, BaFin issued a public warning regarding the malware "Godfather" which currently records user entries (such as log-in data) to banking and crypto apps and transmits falsified push notifications to obtain two-factor-authentication data.

29. France: AMF : Speech by Marie-Anne Barbat-Layani – Chair of the AMF

On 9 January 2023, the Chair of the AMF, Marie-Anne Barbat-Layani discussed the roadmap and the priorities of action of the AMF for 2023.
Ms. Barbat-Layani notably confirmed that the AMF is a regulator open to innovation, and called, after referring to high profile collapses, for regulation of the crypto universe in order to protect investors, in particular by supporting an acceleration of the transition to mandatory license for DASP that are not currently registered (see above on the amendment from the French Senate to the Bill). She also welcomed the initiative of the French Ministry for the Economy to look into the role of influencers, and affirmed the AMF's intention to increase roughness and oversight of the FinTech field.

The speech is available here in English.

30. France: Banque de France: Paper of the First Deputy Governor on cryptoassets

On 6 January 2023, the First Deputy Governor of the Banque de France, Denis Beau, gave a 2022 update on the crypto and decentralized finance sector in a French newspaper. On this occasion, he reiterated the position of the Banque de France and French Banking Authority (Autorité de contrôle prudentiel et de résolution - ACPR) on their willingness to put in place an appropriate regulatory framework that would be vector of trust. In this perspective, he gave the support of both the Banque de France and the ACPR for the amendment of the French Senate to the Bill regarding the mandatory license for DASP before the entry into force of MICA regulation (see above).

31. HKMA: Conclusion of Discussion paper on cryptoassets and stablecoins

On 31 January 2023, the Hong Kong Monetary Authority (HKMA) released the Consultation Conclusion in relation to its November 2022 discussion paper on cryptoassets and stablecoins. In the discussion paper, the HKMA had set out plans to prioritise a regulatory framework for “payment-related stablecoins”, i.e. stablecoins. In the Consultation Conclusion, the HKMA proposes to bring certain activities relating to stablecoins into the regulatory perimeter. It also sets out the expected regulatory scope and key regulatory requirements. Activities that are to be in-scope include: establishment and maintenance of the rules governing an in-scope stablecoin arrangement; issuing, creation or destroying of an in-scope stablecoin; and wallets.

HKMA confirms a more detailed consultation in the future and also confirms that it will continue its ongoing discussion with other stakeholders in the Hong Kong SAR Government and financial regulators.

32. Treasury: Token mapping consultation paper

On 3 February 2023, the Treasury released a consultation paper outlining the Government's proposed "token mapping" exercise. Token mapping involves identifying the key functions of products in the crypto ecosystem and mapping them against specific aspects of the financial services regulatory framework to determine where there may be regulatory gaps. The paper relevantly considers how the crypto ecosystem can interact with Australia's existing regulatory frameworks and provides recommendations on future policy development in the crypto asset sector. The token mapping process is designed to serve as a foundational step for developing appropriate regulatory settings for the crypto ecosystem in Australia. Treasury has proposed a high-level taxonomy of four product types that can be grouped under two kinds of token systems: Intermediated token systems: crypto asset services and intermediated crypto assets; and Public token systems: network tokens and public smart contracts.

For more information, please see our briefing here.

33. ASIC commences civil proceedings for 'unlicensed' crypto products

The Australian Securities and Investments Commission (ASIC) is seeking declarations, injunctions and pecuniary penalties against fintech company, alleging that it has provided unlicensed crypto-asset based products and financial services to retail customers. ASIC's primary claim is that the company's fixed-yield earning products based on cryptoassets were a managed investment scheme which thus required the company to have an Australian Financial Services licence. The date for the first case management hearing before the Federal Court is currently pending. The official media release by ASIC is available here.

In a separate media release, ASIC announced that it has commenced civil proceedings

against Finder Wallet Pty Ltd, a registered cryptocurrency exchange and a subsidiary of comparison website Finder.com. ASIC alleges that the company breached product disclosure requirements and failed to comply with design and distribution obligations under Pt 7.8 of the Corporations Act in relation to its Finder Earn product, which allowed customers to invest in stablecoins for a regular and fixed return on investment. ASIC also claims that Finder Wallet required an Australian Financial Services licence to offer their Finder Earn product.

These proceedings are the latest to join the recent wave of litigation commenced by ASIC as the regulator attempts to crackdown on misconduct amongst businesses dealing in cryptoassets. This flows from ASIC's recent action, which is the first time where the Court has been asked to make a determination as to whether a combination of digital assets can be categorised as part of a financial product ecosystem requiring a licence under the Corporations Act. The matter has been listed for a further case management hearing in February 2023, with the trial to be held in July 2023.

34. ASIC-RBA releases regulatory response to the ASX CHESS Replacement Program

Following from the announcement by the Australian Stock Exchange (ASX) that they will not be progressing with their planned blockchain-based replacement of the 25-year-old CHESS settlement technology after a four-year delay, ASIC and the RBA have released a joint statement of expectations in response. In particular, ASIC and the RBA expect that the solution design of the blockchain software is completed and the CHESS Replacement Program is completed before the current CHESS ceases to meet ASX's functional and non-functional requirements, including those under the Corporations Act. They have also issued notices requesting ASX to produce a special report detailing the maintenance of their current CHESS program, which is available here.

35. White House: Administration's roadmap to mitigate cryptocurrencies' risks

On 31 January 2023, the White House published a blog outlining a roadmap to mitigate the risk of cryptocurrencies. The roadmap notes ongoing challenges in the sector and states that the focus of the administration will be on preventing cryptocurrencies from undermining financial stability, as well as protecting investors. It notes that the ongoing turmoil has not spread to the wider financial ecosystem, owing to the limited exposure of financial institutions to cryptocurrencies.

The roadmap calls for Congress to expand regulators’ powers to prevent misuses of customers’ assets and to mitigate conflicts of interest. It calls for Congress to strengthen transparency and disclosure requirements for cryptocurrency companies. The roadmap also argues that Congress could limit risks posed to the financial system caused by cryptocurrencies by following the steps outlined in the Financial Stability Oversight Council report on digital assets (summary here).

CFTC Remarks by Commissioner Kristin N. Johnson before the Digital Assets at Duke conference

On 26 January 2023, the CFTC published a speech by Commissioner Kristin N Johnson in relation to cryptossets and introducing an appropriate regulatory framework.

In the speech, Ms Johnson calls for the CFTC to introduce a regulatory framework that aligns with the Core Principles in certain retail markets that may be vulnerable to crises. Ms Johnson argues that such an approach will ensure parallel customer protections, enhance market integrity and market stability, and mitigate crises in crypto-commodity derivatives markets.

Other notable points

• Interconnectedness among crypto-firms fuelled by fragile/non-existent risk management, corporate governance failures, and conflicts of interests at individual firms increases the likelihood of crises.
• Customer protection is a foundational and core principle of the CFTC's market regulatory framework and several aspects of the Commodity Exchange Act direct the CFTC to adopt regulation to this effect.
• Lessons learnt in relation to governance, disclosure, and risk management from crises in other markets (OTC and exchange traded derivative) can be used in the cryptoassets sector.

36. NYDFS: Guidance on crypto disclosure, assets segregation

On 23 January 2023, the New York State Department of Financial Services issued guidance on its cryptoassets regulation. The guidance is not binding and includes a summary of policies and standards that virtual currency entities should adopt: segregation of and separate accounting for customer virtual currency; VCE custodian's limited interest in and use of customer virtual currency; sub-custody arrangements; and customer disclosure.

37. CFTC: Keynote Address by Commissioner Christy Goldsmith Romero at the Wharton School and the University of Pennsylvania Carey Law School

On 18 January 2023, the keynote address from Christy Goldmsith Romero was published. The speech provides an overview of recent turmoil in the cryptoassets sector and the future impact and implications. In the speech, Ms Romero argues that the crypto industry is in a crisis of trust and expresses support for Congress enacting a comprehensive statutory framework.

Ms Romero argues that the crisis offers the following lessons:

• financial markets are heavily dependent on public trust. Despite crypto’s origin as a trustless system, investors and customers have come to trust centralized exchanges for access to crypto markets.

• some exchanges have sought public trust by presenting themselves as trustworthy and celebrity endorsements and social media added to retail customers’ trust;

• the digitization of financial services and products, which accelerated during the pandemic, brought convenience but also a presumed trust in crypto exchanges with name recognition;
• good corporate governance, starting with tone-at-the-top, is necessary to establish and keep trust;
• gatekeepers failed customers in the unregulated crypto market;
• a trust deficit also exists with institutional investors who owe fiduciary duties to their clients to conduct due diligence; and
• sound custody practices and strong cybersecurity are necessary to restore trust and protect customers.
• The speech outlines seven proactive steps for the digital asset industry to take in order to begin regaining trust: establish good corporate governance: independent check on management and audited financial statements; increase the roles of gatekeepers; banning commingling of customer assets with company assets; resolving conflicts of interest between affiliates; better, clear disclosures to inform customers about their rights and risks; and strengthening cybersecurity.

38. Cryptolender: Chapter 11 bankruptcy

In January 2023, it was announced that Genesis Global Holdco LLC, the holding company of lender Genesis Global Capital, and two of its lending subsidiaries, Genesis Global Capital, LLC and Genesis Asia Pacific had filed voluntarily petitions under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. Genesis’s other subsidiaries involved in the derivatives and spot trading and custody businesses and Genesis Global Trading are not included in the filing.

39. SEC: Gemini and Genesis charged for unregistered offer

On 12 January 2023, the SEC announced that it had filed in the U.S. District Court for the Southern District of New York in relation to the violations of Sections 5(a) and 5(c) of the Securities Act of 1933. These relate to the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program. The SEC states that the unregistered offering raised billions of dollars' worth of cryptoassets from investors. It confirms that investigations into other securities law violations and misconduct are ongoing.

40. Statement of Commissioner on CFTC action against market manipulation scheme in the digital assets markets

On 9 January 2023, the CFTC announced that it had filed a complaint in the U.S. District Court for the Southern District of New York against a market manipulation scheme. It is alleged that the scheme involved the manipulation of the Mango token (MNGO) in order to benefit swaps positions opened on Mango Markets, a decentralized digital asset exchange.

41. VARA: Regulatory framework for virtual asset service providers published

The Virtual Assets Regulatory Authority (VARA), the competent entity in relation to virtual assets and virtual asset activities in all zones across the Emirate of Dubai, has published its Virtual Assets and Related Activities Regulations 2023. These aim to provide a comprehensive virtual asset framework for the provision of virtual asset service providers (VASPs). VASPs fulfilling VARA's licensing requirements will be required to comply with four compulsory rulebooks (Company, Compliance & Risk Management, Technology & Information, and Market Conduct). VARA has also developed seven activity-specific rulebooks in relation to the provision of each virtual asset activity (Advisory, Broker-Dealer, Custody, Exchange, Lending & Borrowing, Payments & Remittances, and Management & Investment). VARA has also established rules for the issuance of all virtual assets, as well as virtual asset marketing activities.

42. DFSA: Business plan

In January 2023, the DFSA issued its Business Plan for the period 2023 to 2024, covering core activities as well as strategic and regulatory priorities over the next two years. The Business Plan is based on four pillars: delivery; engagement; innovation; and sustainability. The Business Plan explains that the innovation theme will involve the use of technology to tackle regulatory obligations and challenges. This will involve Innovation hub and use of the Innovation testing License. The plan confirms further development of the crypto regime (as announced in 2022) which will involve "embedding operational and risks management elements" into how the DFSA supervises.

43. FT: Crypto industry welcomes regulation plans

This FT article refers to plans announced by the UK Government in February 2023 to regulate a wider range of cryptoasssets and activities linked to cryptoassets. The article notes that stakeholders have welcomed the move arguing that regulators have had difficulties in balancing the risk in the sector

44. FT: Cryptominers seek financial lifeline with intense battle for bitcoins

This FT article reports on increased activity of cryptocurrency miners following turmoil in 2022. It states that the average hashrate (the computing power directed towards mining bitcoin) has risen to 280 exahash. The article also states that there is increasing regulatory scrutiny in relation to cryptocurrency mining, citing examples in Canada, Kazakhstan and Paraguay.