Risk In:Review #10 - 02 Apr 2023
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
Welcome to Risk In:Review, your weekly newsletter curating the best of the week’s news stories from the crossroads between risk management and technology in Asia Pacific.
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This Week In:Review
Australia
China
Hong Kong
Best of the Rest
Australia In:Review
Financial Services Minister Stephen Jones has rejected the idea of forcing Australia's largest banks to compensate customers for scam activity, which now costs the economy an estimated $4 billion annually. Instead of implementing a "blanket rule" for banks to fund scam recovery, Jones emphasised the need for banks to be held to a high standard in protecting consumers against scams. He acknowledged the increasing efforts of banks, insurers, super funds, fintechs, payment providers, and digital platforms to combat scams and fraud. Jones also suggested that social media platforms and telecommunications companies have an equal role to play in fighting scams. Although the Australian banking sector is resilient, it is not immune to global market volatility. Jones assured that the government and regulators are closely monitoring market developments, noting that Australia's banks are well-regulated, well-capitalised, and have strong liquidity coverage. The government plans to outline its approach to regulating the buy now, pay later sector after the federal budget in May.
The Commodity Futures Trading Commission (CFTC) has sued Binance and its founder, Zhao Changpeng, alleging multiple breaches of US trading laws and accusing the exchange of violating anti-money laundering and counter-terrorism regulations. Binance, the world's largest cryptocurrency exchange, has over 30 million registered users and generated over $20 billion in revenue in 2022. However, the company has faced scrutiny from regulators in multiple countries. The recent CFTC action resulted in a $2 billion run as customers rushed to withdraw funds.
Internal chats between Binance executives allegedly show a disregard for regulatory requirements. Former Binance Australia CEO, Jeff Yew, expressed concerns about the company's approach to compliance. Binance has been under surveillance by the Australian Securities and Investments Commission (ASIC) for the past three years, and the regulator is currently reviewing the company for misclassifying retail clients as wholesale investors.
Binance has faced regulatory issues in Australia, including a $2 million fine for spam emails and a halt to selling complex derivative products. The company acquired an Australian Financial Services Licence in 2022 for $4 million. Despite these challenges, Yew believes that the legal actions against Binance won't have an immediate impact on the broader crypto ecosystem. He anticipates more regulation in the Australian cryptocurrency industry, with the government planning to reform licensing and custody of crypto assets.
The Australian Securities and Investments Commission (ASIC) has launched an investigation into the Australian Securities Exchange (ASX) regarding the failed replacement of its aging clearing and settlement system. ASIC will examine whether ASX and two of its subsidiaries breached their obligations under various laws between October 28, 2020, and March 28, 2022. The unsuccessful overhaul of the Clearing House Electronic Subregister System (CHESS) with ASX's blockchain technology led to a charge of up to AUD 255 million ($169 million). Accenture was hired to review the 18-month delay of the CHESS replacement, resulting in a report highlighting the project's issues. ASX apologised for the failure at a parliamentary hearing in December but denied misleading the market or regulators.
ANZ, one of Australia's "Big Four" banks, plans to stop facilitating withdrawals and deposits at some branches, encouraging customers to use ATMs and deposit machines instead. The decision has faced criticism for potentially impacting older people who are less capable of going digital and making fiat users more vulnerable to technical issues. This move has also raised concerns about the elimination of cash and its potential replacement with central bank digital currencies (CBDCs).
An ANZ spokesperson stated that affected branches are metropolitan branches with nearby ATMs and deposit machines. They also noted a decrease in in-branch transactions by over 50% in the past four years. Australia is gradually transitioning to a cashless society, with cash retail payments dropping from 59% in 2007 to 27% in 2019. The Reserve Bank of Australia (RBA) attributes the COVID-19 pandemic as a factor in accelerating this trend, with businesses also contributing to the shift.
ATMs and bank branches have seen a decline in numbers, with bank branches down by 30% since 2017 and ATMs by 25% since 2016. The potential replacement of cash with CBDCs raises concerns about individual freedom and privacy. A CBDC pilot program is underway in Australia, with updates expected in mid-2023. NAB, another Big Four bank, confirmed they still handle cash at branches and have no plans to change, while Westpac also expressed no plans to reduce cash access through its branches. However, CBA's response was less clear.
The International Organization of Securities Commissions (IOSCO) has published a report urging increased international collaboration to tackle cross-border scams, greenwashing, misconduct, and fraud. ASIC Chair Joe Longo emphasised the need for global cooperation and data sharing to address cross-border misconduct. The report offers a global perspective on the evolving retail trading environment and suggests measures for regulators, including enhancing cooperation frameworks, addressing fraud in crypto asset trading, identifying compliance with climate disclosure standards, and monitoring the impact of social media on retail decisions. The analysis will inform ASIC's strategic priorities on retail investor harms related to crypto-assets, sustainable finance, scams, and Australia's design and distribution obligation laws. The report's recommendations highlight the importance of participation in multilateral forums such as IOSCO for effective regulatory action.
Australia's National Australia Bank (NAB) has introduced a new defense mechanism to help protect its customers from scammers. With Australians losing almost $100m to scams in just the first 59 days of the year, NAB has implemented real-time personalised messages that will appear on customers' phones during out-of-character transactions on the bank's online platform and smartphone app. These prompts aim to make customers pause and review the payment. NAB also uses BioCatch software to identify changes in users' typical behavioral cues, such as swiping or tapping patterns, which may indicate coercion or identity theft. The bank sends messages based on risk levels to avoid overwhelming customers with alerts. NAB's fraud team is currently receiving 2,580 calls per day about scams and fraud. This new measure is one of 64 ongoing projects within the bank to combat scammers. Additionally, the Australian Communications and Media Authority (ACMA) is working on a national SMS registry to make it more difficult for criminals to impersonate and spoof mobile numbers.
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China In:Review
Senior officials from China's central bank have criticised the US banking system for its struggles with cryptocurrencies and called for stronger digital finance regulation. At the Boao Forum for Asia Annual Conference 2023, Xuan Changneng, deputy governor of the People's Bank of China, emphasised the need for better regulatory mechanisms for the digital economy. He pointed out that the cryptocurrency field lacks effective supervision, leading to market manipulation, abuse of market transactions, and misappropriation of customer assets. Zhou Xiaochuan, former governor of the People's Bank of China, urged regulators to upgrade their philosophy, technology, and capability to ensure financial innovation without sacrificing financial stability. Liao Min, a vice finance minister, emphasised the importance of international cooperation and coordination in standard-making for digital financial infrastructure.
US prosecutors have accused Sam Bankman-Fried, founder of the now-bankrupt FTX cryptocurrency exchange, of conspiring to bribe Chinese government officials with $40m worth of payments. The indictment claims that Bankman-Fried directed the payment to unfreeze Alameda Research's accounts, which held over $1bn in cryptocurrency. The accounts were allegedly unfrozen after the bribe payment was transferred to a private cryptocurrency wallet in November 2021. Afterward, Bankman-Fried authorised the transfer of tens of millions of dollars of additional cryptocurrency to complete the bribe, according to prosecutors. The new charge increases pressure on the 31-year-old former billionaire, who previously pleaded not guilty to eight counts regarding the collapse of FTX. Prosecutors claim Bankman-Fried stole billions in customer funds to cover Alameda's losses. The new count accuses Bankman-Fried of conspiring to violate the Foreign Corrupt Practices Act, which prohibits US citizens from bribing foreign government officials for business purposes.
Hong Kong In:Review
Cryptocurrency companies are flocking to Hong Kong, anticipating the city's push to become a digital asset hub will help them tap into demand from mainland China. Hong Kong is considered more crypto-friendly than Singapore, which tightened regulations on the sector last year. The city is developing a new regulatory framework for exchanges and plans to legalise crypto trading for retail investors. Companies expanding in Hong Kong aim to capitalise on the increasing demand for digital coins from mainland China, the world's fourth-largest crypto market, despite Beijing's 2021 ban on the sector. Crypto exchanges such as KuCoin, Gate.io, Huobi, and Binance are among those planning to establish or expand their presence in Hong Kong. The growth of crypto companies in the city reflects their optimism that Hong Kong will provide a legal pathway to access the Chinese market with regulatory approval from a top-tier financial hub.
Chinese state-owned banks have been reaching out to crypto businesses in Hong Kong, signaling Beijing's backing of the city's push to become a digital asset center. Bank of Communications, Bank of China, and Shanghai Pudong Development Bank have either started offering banking services to local crypto firms or have made inquiries to the field. This comes at a time when the sector has faced difficulties in securing traditional banking services and after the failures of US tech banks Silicon Valley Bank, Silvergate Capital, and Signature Bank.
The move by Chinese banks is groundbreaking, as the anonymous nature of crypto has been a major concern for traditional banks where know-your-client procedures are standard for compliance. Hong Kong's banking regulator issued guidelines in January 2022, asking banks to conduct appropriate risk assessments for money laundering and terrorist financing when establishing banking relationships with virtual asset service providers.
Hong Kong banks are well-positioned to capitalise on capital inflows following banking failures in the US, but geopolitical concerns may deter non-Asian projects from banking with Chinese banks.
Cryptocurrency and derivatives exchange OKX is preparing to launch in Hong Kong after a year of planning. The world's second-largest crypto exchange by trading volume will apply for a virtual asset service provider (VASP) license under Hong Kong's upcoming anti-money laundering and counter-terrorist financing law, set to take effect on June 1, 2023. OKX will also apply for type 1 and 7 licenses under Hong Kong's Securities and Futures Ordinance regulation. The company has focused on meeting regulatory requirements across organization, product, security, and compliance. OKX sees "immense potential" in Hong Kong and aims to help build the local ecosystem. The firm views regulation and licensing as crucial for the future success of the crypto and Web3 sectors.
Best of the Rest In:Review
The European Union has proposed limiting anonymous crypto transfers to €1,000 to combat money laundering and terrorist financing. The new limit would apply to transactions where a customer cannot be identified, while cash transactions would be capped at €7,000. The proposal is part of the Anti-Money Laundering and Countering the Financing of Terrorism package and is expected to be confirmed in a plenary session in April. The European Anti-Money Laundering Authority (AMLA) will enforce the new regulations. AMLA's co-rapporteur, Emil Radev, called for close cooperation between AMLA and national supervisors and direct supervision of high-risk crypto service providers and cross-border financial companies. The EU aims to increase transparency and accountability in the financial sector, particularly the crypto sector, which has been seen as a haven for illicit activities. Despite concerns about privacy and enforcement practicalities, the EU is committed to combating money laundering and terrorist financing through these new regulations, which are part of a broader push for financial regulation in the region.
Fasset, a cryptocurrency exchange that raised $22 million in Series A funding last year, expects to receive a license to operate in Indonesia within the next month. The company has chosen Indonesia for expansion due to its large Muslim-majority population and high technology adoption rate. Currently, around 17 million people in the country have access to crypto assets through 28 different crypto exchanges. With approximately 52% of Indonesia's population lacking access to bank accounts and financial services, there is significant growth potential for cryptocurrencies and blockchain technology providers. Indonesia is exploring blockchain technology for various applications, including its payment system and supply chain management. A central bank digital currency (CBDC) is expected to bring opportunities, especially as adoption levels remain low. The Indonesian government is working to establish a national crypto exchange by June 2023, delayed due to technological challenges and infrastructure development.
Montenegro's Justice Minister, Marko Kovac, announced that a judge will decide whether Terraform Labs CEO Do Kwon will be extradited to the US or South Korea. Both countries have requested Kwon's extradition, while Singapore has not yet submitted an official request. Kwon and Terraform's CFO, Han Chang-joon, may have to serve time in Montenegro if convicted there. Kwon, co-founder and CEO of Singapore-based Terraform Labs, faces charges related to the crashed stablecoin TerraUSD and cryptocurrency Luna. The collapse of the Terra ecosystem allegedly drained at least $40 billion from investors. Kwon is charged with multiple counts of fraud in New York, while the Securities and Exchange Commission has accused Terraform Labs and Kwon of defrauding US investors. In South Korea, Kwon is charged with violating the Capital Markets Act and committing fraud. Montenegro prosecutors plan to charge Kwon and his aide for falsifying official documents.
A Japanese government panel of experts is set to meet in April to discuss a framework for a digital yen, aligning with the start of a central bank digital currency (CBDC) pilot program after two years of proofs of concept (PoC). The Bank of Japan, financial institutions, and private sector participants will conduct simulated transactions in a test environment, without including actual consumer and retailer transactions. Moreover, Tokyo Kiraboshi Financial Group, The Shikoku Bank, and Minna no Bank will launch a stablecoin experiment following Japan's overturn of a ban on fiat-pegged cryptocurrencies. The revised Payment Services Act, if approved, would permit Japanese exchanges to list and trade popular stablecoins like Tether (USDT) and USD Coin (USDC). The law regulates crypto tokens pegged to fiat currencies, and licenses to issue stablecoins will be granted to highly credible businesses responsible for their issuance, management, and circulation.
Korea's Financial Intelligence Unit (FIU) has fined and issued disciplinary warnings to five cryptocurrency exchanges - Bithumb Korea, Coinone, Dunamu, Korbit, and Streami - for neglecting their duty to monitor irregular crypto trading practices. The exchanges have been instructed to implement improvements within the next three months. Under current law, crypto exchanges are required to report irregular trading to prevent illegal activities like money laundering. The FIU discovered instances of irregular trading, including the use of borrowed-name bank accounts and insufficient internal controls. Fines of up to 490 million won were imposed, and the exchanges have been asked to rectify suspicious transactions within three months. If the measures are insufficient, the FIU may order additional improvements.
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