BlockReg Monthly: August 2024

BlockReg Advisors' team presents a monthly wrap-up of the key news concerning digital assets in the prominent business press and governmental information services.

Regulatory News

European Union (EU)

European Banking Authority (EBA) and European Central Bank Release Joint Report on Payment Fraud - On August 1, 2024, the European Banking Authority (EBA) and the European Central Bank (ECB) have published a joint report on payment fraud data within the European Economic Area (EEA). The report reveals that payment fraud amounted to €4.3 billion in 2022 and €2.0 billion in the first half of 2023, highlighting the effectiveness of Strong Customer Authentication (SCA) in reducing fraud rates. The analysis covers various payment instruments and notes that fraud is significantly higher in non-SCA transactions, particularly in card payments outside the EEA. The EBA and ECB will continue monitoring and publishing annual fraud data to track trends and improve security measures.

European Securities and Markets Authority (ESMA) Releases Working Paper on Decentralised Finance (DeFi) - On August 1, 2024, the European Securities and Markets Authority (ESMA) has published a Working Paper on Decentralised Finance (DeFi), focusing on the categorization of smart contracts within the blockchain ecosystem. The paper outlines the role of smart contracts, highlighting the risks they pose to users and financial stability. ESMA emphasises that smart contracts operate based on the underlying code, which is accepted by the community, yet this can lead to the emergence of illicit contracts due to the pseudonymity and lack of accountability of developers. Given DeFi's rapid growth and its connections to traditional finance, ESMA stresses the importance of assessing associated risks.

European Securities and Markets Authority (ESMA) Warns of Risks from Global Crypto Firms Using Non-EU Venues - On July 31, 2024, ?the European Securities and Markets Authority (ESMA) issued an opinion highlighting risks from global crypto firms seeking MiCA authorization in the EU while conducting key activities outside MiCA's scope. Addressed to national competent authorities (NCAs), the opinion warns of regulatory arbitrage where firms may use MiCA for EU brokerage services but operate trading platforms in non-EU jurisdictions with less stringent regulations. ESMA emphasises the need for NCAs to scrutinise these setups, particularly to prevent firms from using MiCA as a legal cover for third-country operations and to address conflicts of interest when combining EU brokerage with non-EU execution venues.

United Kingdom (UK)

Financial Conduct Authority Assesses Compliance with Crypto Asset Financial Promotions Rules - On August 7, 2024, the Financial Conduct Authority (FCA) released a report evaluating firms' compliance with the "back end" rules for promoting qualifying crypto assets to retail clients. These rules, introduced in October 2023, include a 24-hour cooling-off period, personalised risk warnings, and client categorization. The FCA found both good and poor practices among firms, noting that while some met the standards, others failed to provide adequate consumer protection. The report emphasises the importance of these rules in ensuring consumers understand the risks involved in crypto investments and urges firms to improve their compliance efforts. Firms are encouraged to review the FCA's findings and make necessary adjustments to meet regulatory expectations.

Bank of England and Bank for International Settlements – BIS Unveil Project Pyxtrial for Stablecoin Monitoring - The Bank of England and the Bank for International Settlements (BIS) have announced the results of Project Pyxtrial, a technological initiative aimed at monitoring the reserves of asset-backed stablecoins and tokenized assets. The project has developed a prototype data analytics pipeline that supports regulators by enabling near real-time tracking of liabilities and assets. While the project has demonstrated potential in aiding the development of policy frameworks, challenges remain in its global implementation due to varying regulatory setups and the need for internal business adaptation to fully utilise the technology.

Law Commission Proposes New Property Category for Crypto Assets in the UK - The Law Commission of England and Wales has proposed that the UK government introduce a new category of personal property specifically for crypto assets. In a draft Bill and supplementary report, the Commission argues that existing property definitions, such as tangible and intangible assets, do not adequately cover digital assets like crypto tokens. The proposal suggests creating a third category to better recognize and protect these assets. This recommendation follows consultations held in 2023 and 2024 and aims to ensure UK law can accommodate the unique features of digital assets, fostering innovation in the sector. The draft bill will now be reviewed by the government.

Bank of England Releases Discussion Paper on Innovation in Money and Payments - The Bank of England (BoE) has published a Discussion Paper seeking input on advancing the UK's payments landscape. The paper outlines the BoE's approach to innovation in money and payments, emphasising the need to maintain financial stability by preserving central bank money's role as a confidence anchor. It highlights innovations in wholesale central bank money, such as extending Real-Time Gross Settlement (RTGS) service hours and integrating RTGS with programmable platforms. The BoE is also soliciting views on the potential benefits and risks of Distributed Ledger Technology (DLT) in payments and settlement. Additionally, the paper discusses the current role of stablecoins, noting they do not yet meet the BoE's standards for broader payment use. The BoE invites feedback on the paper by October 31, 2024, to guide future developments in the UK's payment systems.

LATAM

Brazil Proposes Major Reforms for Virtual Asset Regulation - The Substitute for Bill No. 4,932 of 2023 introduces significant regulatory changes for virtual asset services in Brazil, aiming to enhance user security and transparency. Key measures include mandatory individualised payment accounts, segregation of user assets from providers, and a ban on offering derivatives without Securities and Exchange Commission (CVM) approval. The bill also strengthens CVM’s oversight of crypto assets as securities and updates Law No. 14,478 of 2022 with new operational requirements for service providers, including stringent AML/CTF practices. These reforms seek to fortify Brazil’s virtual asset market and align it with international standards.

MENA

ADGM Proposes New Regulations for Fiat-Referenced Tokens - On August 20, 2024,? the Financial Services Regulatory Authority of Ontario (FSRA) of Abu Dhabi Global Market (ADGM) has released Consultation Paper No. 7 of 2024, seeking public feedback on proposed regulations for the issuance of Fiat-Referenced Tokens (FRTs). This proposal is part of the FSRA's evolving digital assets framework, aiming to distinguish FRTs from other digital assets like Virtual Assets. Key highlights include defining FRTs as fiat-backed digital assets with redemption rights, introducing a new regulated activity for their issuance, and setting strict reserve asset requirements to ensure issuers can meet redemption demands. Additional safeguards include annual stress testing, compliance with existing regulations, and restrictions on marketing FRTs as investment products. The consultation is open until October 3, 2024, inviting input to shape the future regulatory landscape for stablecoins in the ADGM.

Dubai Financial Services Authority (DFSA) Issues Consultation Paper on Updates to Client Assets Regime - On August 6, 2024, the Dubai Financial Services Authority (DFSA) released Consultation Paper No. 160, proposing significant updates to the Client Assets Regime. The updates aim to improve clarity and compliance for firms managing client assets or providing custody services. Key proposed changes include expanding the definition of control over client assets, exempting certain fund managers from client asset rules, and requiring firms to maintain crisis preparedness packs for quick asset identification and return. Additionally, the paper suggests clearer guidance for client asset auditors, stricter criteria for selecting third-party agents, enhanced client money disclosures, and more frequent asset reconciliations and reporting. Stakeholders are invited to submit comments on these proposals by October 20, 2024, before the final rule amendments are made.

UAE Court Ruling Expands Crypto Integration in Employment Contracts - A recent UAE court ruling has advanced the integration of cryptocurrency into the nation's economic framework by mandating that an employer compensate an employee with digital EcoWatt tokens as part of an employment benefits package. This decision marks a significant step towards broader crypto adoption in the UAE, particularly in legal and financial contexts. However, full salary payments in cryptocurrencies remain restricted, as the UAE's Wage Protection System (WPS) still requires salaries to be registered in dirhams. The ruling aligns with existing UAE labour laws, which allow for salary payments in currencies other than dirhams if agreed upon by both parties. The decision also suggests potential for expanded crypto use in sectors like real estate and retail, though it highlights ongoing concerns about the volatility of cryptocurrencies and the need for regulatory safeguards.?

Global News

International Monetary Fund Highlights Growing Emissions from Crypto and AI, Proposes Targeted Taxes - The International Monetary Fund (IMF) reports that crypto mining and AI data centres contributed 2% of global electricity use in 2022, with this figure expected to rise to 3.5% by 2027. To mitigate their environmental impact, the IMF suggests targeted taxes on electricity usage for these sectors, which could reduce emissions and generate substantial government revenue. Currently, many crypto miners and data centres enjoy tax exemptions, but the IMF argues that stricter policies are needed to address their growing carbon footprint.

Industry News?

European Union (EU)

DECTA and Next Generation to Launch Euro-Pegged Stablecoin in Compliance with MiCAR - On August 5, 2024, DECTA Limited, an Irish electronic money institution, and Next Generation, a fintech company based in France, announced their plans to explore the issuance of a Euro-pegged stablecoin (EURT) in compliance with the Markets in Crypto Assets Regulation (MiCAR). The stablecoin, classified as an electronic money token (EMT) under MiCAR, would be issued by DECTA Limited, subject to approval by the Central Bank of Ireland. Next Generation would manage key technological aspects of the project. This collaboration aims to leverage the regulatory framework established by MiCAR to enhance the stability and security of digital assets in the EU.

LATAM

Bybit Gains VASP and Card Operator Registration in Argentina - Cryptocurrency exchange Bybit has been officially registered as a Virtual Asset Service Provider (VASP) and card operator by Argentina’s Financial Information Unit (FIU). This registration follows new legislation passed in July 2024 aimed at aligning Argentina with the Financial Action Task Force (FATF) standards on Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). Bybit, which began operating in Argentina in June 2022, views this registration as a significant step in expanding its compliant digital asset services globally. The move comes as Argentina intensifies its regulation of the crypto market, responding to increased crypto adoption amid economic instability.

Abcripto to Launch Self-Regulation Code for Tokenization in Brazil - The Brazilian Association of Crypto Economy (Abcripto) will introduce a self-regulation code in September to address the expanding tokenization market in Brazil. This code will establish standards for token issuance and trading, involving tokenization platforms, exchanges, and crowdfunding platforms. Prominent financial institutions, including Itaú, Bradesco, and BTG, are already active in this market. The code aims to enhance transparency and trust by setting rules for issuer identification, rights descriptions, price stability, and investor support. A Conduct Supervision Committee will monitor compliance, further strengthening the market’s structure. This initiative marks a significant step in the maturation and organisation of Brazil's crypto economy.

MENA

GCC Emerges as a Leader in Sustainable Bitcoin Mining - The Gulf Cooperation Council (GCC) region is rapidly becoming a key player in the global bitcoin mining industry, with a strong focus on sustainability and technological innovation. Over the past year, the GCC has seen a significant rise in mining operations, driven by substantial government investments and a supportive business environment. Notably, Oman has invested over $800 million in crypto-mining, and the UAE contributes around 4% of the global bitcoin mining hashrate. This growth is underpinned by a strategic shift towards renewable energy, with over 55% of global bitcoin mining now powered by renewables. Additionally, the adoption of advanced cooling technologies is enhancing efficiency, positioning the GCC as a leader in the sustainable evolution of crypto mining.

Gold Trader in Dubai Secures Licence to Trade and Store Cryptocurrencies - Dubai-based Regal RA DMCC has obtained the first cryptocurrency trading licence in the Middle East from the Dubai Multi Commodities Centre (DMCC). This licence permits Regal RA to trade and securely store cryptocurrencies like Bitcoin and Ethereum in a vault at DMCC headquarters. The vault employs deep cold storage with no online connections, ensuring high security against theft and cyber threats. The move reflects Dubai's strategic push to integrate blockchain technology and enhance investor confidence in digital assets. The licence also specifies that the company cannot conduct initial coin offerings or establish a cryptocurrency exchange.?