Risk In:Review #19 - 04 June 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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Perspectives
In this week’s round-up, the spotlight is on Hong Kong. The Hong Kong Securities and Futures Commission (SFC) unveiled a rigorous framework for virtual asset exchanges, reflecting its commitment to investor protection over minimising business expenses. For those willing to bear the costs, the potential upside is not limited to the local market, but the vast Chinese wealth that funnels through the city. Investors have speculated that China may lift its mainland crypto ban, thereby allowing citizens to trade via Hong Kong. This would certainly supercharge the Hong Kong market, but whether such a regulatory decision will be taken is far from clear.
At the same time, Hong Kong is forging connections globally. The Hong Kong Monetary Authority (HKMA) held a meeting with the Central Bank of the United Arab Emirates (CBUAE) in Abu Dhabi. They explored ways to strengthen collaboration between their financial sectors, with a particular focus on crypto regulation and fintech. The impacts of this cooperation, be it mutual growth or regional competition, will undoubtedly shape the future financial landscape.
Outside Hong Kong, noteworthy regulatory guidance emerged from the Monetary Authority of Singapore (MAS). It published fresh guidelines for financial institutions, emphasising the need to review their measures against the financing of terrorism (CFT). Red flags include the use of crowdfunding, fintech platforms, and virtual assets to finance individuals or entities associated with violent extremism.
However, the highlight of the week is arguably the unique partnership between Quantinuum and HSBC. The world's largest quantum computing company, Quantinuum, and the multinational banking giant, HSBC, are working together to explore quantum computing's potential. While often overlooked in favour of AI and virtual currencies, quantum computing's potential to disrupt and amplify other trends, like narrative AI, is enormous. The partners are keen to leverage quantum computing to bolster cyber defences and mitigate fraud risk, signifying a pioneering step in financial technology.
This Week In:Review
Australia
China
Hong Kong
Korea
Singapore
Best of the Rest
Australia In:Review
Australian Industry Minister Ed Husic has released two reports focusing on the responsible and secure use of artificial intelligence (AI), opening an eight-week consultation process to assess public sentiment and expert opinion on AI risks. Husic acknowledged the significant potential of AI but stressed the importance of safeguards against misuse. The minister's comments follow a warning issued by the Centre for AI Safety, supported by hundreds of tech experts, that unregulated AI could pose a threat on par with pandemics or nuclear wars. The consultation aims to gauge whether current regulations suffice and if AI use, particularly facial recognition, surpasses community norms. The goal is to ensure a legal and regulatory framework that works for the benefit of communities and builds public trust in AI technologies.
Binance, the world's largest cryptocurrency exchange based in Dubai, is facing a crisis in Australia as it loses banking partners due to fraud concerns. The situation has led to a rush of Australian customers seeking to liquidate their Bitcoin holdings, even at a significant loss, creating downward price pressure. Binance will stop Australian dollar withdrawals, converting any remaining AUD on the platform into the USDT cryptocurrency. It has also had its Australian derivatives license cancelled following investigations by local regulators. The platform is trying to find an alternative provider for Australian dollar deposits and withdrawals. These events have not affected operations at Swyftx, a Brisbane-based crypto broker that uses Binance's international services.
China In:Review
Chinese officials, including President Xi Jinping, have expressed concern about the rapid progress in artificial intelligence (AI) development and its implications for national security. They emphasised the necessity of enhancing security governance for internet data and AI and being prepared for potential worst-case scenarios. The Chinese president noted that the nation's security issues have significantly increased and advocated for a new developmental approach accompanied by a new security architecture. These comments echo previous actions by Chinese authorities, who in April required all new generative AI services to be reviewed prior to public release. Despite restrictions from US sanctions, Chinese developers continue to pursue AI advancements. This focus on AI development and its potential risks is not unique to China, as US officials have also been considering the impact of AI, particularly AI-driven surveillance, and calling for appropriate safeguards.
Blockchain analytics firms Chainalysis and Elliptic have shed light on the role cryptocurrencies play in financing the global illicit fentanyl trade. Fentanyl, a synthetic opioid with effects 80 times stronger than morphine, is often paid for with cryptocurrencies due to their perceived anonymity and ease of remote transactions. However, as blockchains are public, they can be scrutinised, revealing transaction patterns and participants. Chainalysis identified cryptocurrency addresses linked to fentanyl precursor sellers based in China, a hub for global distribution. The firm discovered that Chinese suppliers have received more than $37.8 million in crypto payments since 2018. This information, combined with law enforcement efforts, could be key in exposing the fentanyl supply chain. The supposed anonymity of cryptocurrencies is often overstated. In reality, transactions can be traced, potentially compromising illegal operations. Greater monitoring of cryptocurrency transactions could help curb illicit trafficking, if governments are willing to introduce such measures. Recent sanctions by the US Treasury against two Chinese chemical laboratories highlight this potential.
领英推荐
The issuer of the CNHC stablecoin, Trust Reserve, has reportedly had its team detained by Chinese authorities. Investigations revealed the company's Shanghai office sealed with a judicial seizure notice dated 29 May 2023. Trust Reserve is known for issuing the CNHC, a stablecoin pegged to the offshore Chinese renminbi, and the HKDC, pegged to the Hong Kong dollar. Despite being involved in cross-border payment initiatives, the company kept a low profile. Recently, it raised $10 million in an investment round featuring KuCoin Ventures, Circle, and IDG Capital. The implications for the CNHC's stability and the broader cryptocurrency sector are currently unclear, as are the potential connections with the rumored detainment of the Multichain core team in China.
China's yuan (CNY) depreciated by 2.7% against the U.S. dollar (USD) this month, marking its worst performance since September and triggering speculation that the People's Bank of China (PBOC) might intervene to control volatility. Historically, yuan devaluation has been bullish for alternative assets like bitcoin and gold, but a stronger dollar might tighten global monetary conditions and create headwinds for risk assets, including cryptocurrencies. The PBOC maintains a managed-float system, allowing the yuan to fluctuate 2% on either side of a daily fix, managed via active buying and selling. If the USD/CNY threatens to rally beyond the 2% limit, the PBOC sells the dollar and buys yuan, simultaneously buying the dollar against other currencies to stabilise reserves. This may increase the dollar index, causing global financial tightening and risk aversion.
Hong Kong In:Review
Hong Kong has implemented a rigorous regulatory framework for cryptocurrencies, focusing on investor protection and possibly discouraging businesses due to the associated costs. The framework includes regulations on permissible tokens, risk profiling, insurance, and asset custody. Despite this, there's a potential opportunity due to Chinese wealth flowing through the city and the slim possibility of China lifting its mainland crypto ban. However, substantial investment setting up operations have yet to materialise. Digital asset platforms such as Huobi, OKX, and Amber Group plan to apply for licenses under the new regime, although they face challenges such as opening necessary bank accounts. The city's ability to fulfill its digital asset ambitions is uncertain, given competitive efforts from jurisdictions like Dubai.
On 01 June, Hong Kong implemented new regulations for Virtual Asset Trading Platform Operators, enabling licensed exchanges to sell highly liquid cryptocurrencies to retail investors. These regulations could suggest China's softening stance towards digital currencies. Angelina Kwan, CEO of Stratford Finance and former SFC's Supervision of Markets division director, lauds these guidelines as the market's reflection of consultation rules. The rules require exchanges to ensure customer understanding of risks, conduct due diligence for offered tokens, and maintain proper asset custody. The allowance for retail trade of cryptocurrencies is a significant step, but the burden to ensure risk comprehension falls on the exchanges. There are still some gaps to fill, particularly regarding the outsourced custodians' legislation and the trade of stablecoins. Approximately ten exchanges are expected to apply for the licenses, with the first licenses predicted to appear within six to eight months.
Sixteen banks and payment companies, including HSBC, Standard Chartered Bank, and Bank of China (Hong Kong), are testing e-HKD, a central bank digital currency (CBDC), under the guidance of the Hong Kong Monetary Authority (HKMA). The trial aims to assess the CBDC's potential for use in online and offline payments, tokenised deposits and asset settlement, government payouts, and Web3 trading and clearing. e-HKD is expected to provide increased protection to customers, especially during prepayments, by creating programmable payments and ringfencing customer's stored value from merchants' working capital. Other benefits include lower transaction fees, enhanced fraud prevention for merchants, and the potential for customers to earn interest on their balances. Despite some challenges, such as integration with existing payment systems and regulatory complexities, the trial signifies a significant step in the global CBDC development.
Hong Kong's Securities and Futures Commission (SFC) has lifted its ban on retail cryptocurrency trading starting from 01 June, following consultations with industry stakeholders. So far, only two crypto exchanges, OSL Exchange and HashKey Pro, have been registered by the SFC. While Huobi and OKX are moving to offer services in Hong Kong, Binance has yet to announce similar intentions.
The Hong Kong Monetary Authority (HKMA) and the Central Bank of the United Arab Emirates (CBUAE) have announced a partnership to strengthen cooperation on cryptocurrency regulations and financial technology development. Both parties have agreed to collaborate on virtual asset regulations, joint fintech initiatives, and financial infrastructure and market connectivity between the two jurisdictions. Following a meeting, they hosted a seminar for senior banking executives from both regions, discussing improvements to cross-border trade settlement and how UAE corporations can leverage Hong Kong's financial infrastructure to access Asian markets. This collaboration coincides with HKMA allowing virtual asset service providers to cater to retail investors. Hong Kong's treasury chief, Christopher Hui, affirmed that virtual assets are "going to stay," highlighting the importance of regulation for harnessing their value.
Korea In:Review
The Anti-Corruption & Civil Rights Commission (ACRC) of Korea plans to investigate the crypto assets of all lawmakers, after independent Rep. Kim Nam-kuk faced scrutiny over questionable cryptocurrency transactions. ACRC Chairperson Jeon Hyun-heui appealed to lawmakers to disclose personal information related to their crypto assets to aid the inspection. This comes after the National Assembly approved a motion requesting the ACRC to scrutinise virtual assets held by lawmakers and top government officials. Former Democratic Party of Korea lawmaker, Kim Nam-kuk, was discovered to own a significant amount of coins, igniting public outrage and raising questions about the origin of these funds. Despite support for the investigation, some ACRC members expressed doubt over the feasibility of the plan due to the anonymity of virtual assets and the nearing end of Jeon's term.
Singapore In:Review
The Monetary Authority of Singapore (MAS) has completed a survey and thematic reviews assessing financial institutions' (FIs) understanding of terrorism financing (TF) risks and the effectiveness of their counter financing of terrorism (CFT) controls. Following this, MAS issued guidance detailing its findings and expectations for FI control measures. FIs should have compliance and control frameworks that align with the Terrorism (Suppression of Financing) Act, the Corruption, Drug Trafficking and Other Serious Crimes Act, and MAS' rules. Understanding external risk environments and implementing adequate controls to mitigate TF risks is also crucial. Moreover, FIs are expected to stay updated on changes in the list of UN-designated individuals and entities subject to Singaporean law sanctions. FIs are also encouraged to remain aware of key TF threats and vulnerabilities in the Singaporean context, and MAS has pointed out areas where improvements in CFT controls can be made.
Best of the Rest In:Review
Quantinuum, the world's largest quantum computing company, and HSBC are collaborating on several exploratory projects that leverage quantum computing's benefits for banking. Initial efforts focus on using quantum computing-hardened cryptographic keys, combined with post-quantum cryptographic algorithms, to strengthen defenses against advanced cyber threats. The Quantum Origin platform, deployed on existing cybersecurity infrastructure, will generate provably unpredictable cryptographic keys to enhance HSBC's data protection. In another aspect of the collaboration, the partners will investigate the potential advantages of quantum machine learning (QML) and quantum natural language processing (QNLP) for HSBC's operations. Using Quantinuum’s architecture-independent software development platform, TKET, they will probe advanced QML techniques to bolster fraud detection. In addition, QNLP, an innovative language-based AI, will be examined for applicability in regulated markets dealing with customer data. The partnership aims to pioneer the development and application of quantum-based banking solutions.
Japanese crypto exchange, bitFlyer, has implemented stringent anti-money laundering measures compliant with the Financial Action Task Force's (FATF) "Travel Rule". The measures restrict transfers from bitFlyer to platforms not adhering to Travel Rule Universal Solution Technology (TRUST). The system, initiated by Coinbase, ensures compliance with FATF's mandates. bitFlyer has outlined notification requirements for crypto transfers to TRUST-compliant platforms in 21 countries including Japan, Hong Kong, and Switzerland. Moreover, transfers to these platforms are restricted to TRUST-compatible crypto assets like Bitcoin and Ether. Transfers can be made to and from countries not on this list, or to private wallets, using any crypto asset available on bitFlyer. BitFlyer can domestically transfer only Bitcoin to and from Coincheck, the other TRUST-compatible platform in Japan. This move aligns with Japan's recent commitment to implement FATF's travel rule to curb money laundering through digital assets.
The Bank of Japan (BOJ) has announced the successful completion of its second phase of central bank digital currency (CBDC) proof-of-concept (PoC) tests and the subsequent launch of its CBDC pilot project. This second PoC phase, which ran from April 2022 to March 2023, investigated features to enhance basic ledger functions assessed in the first phase. Notably, it explored the implementation of caps on CBDC holdings to maintain financial system stability amid potential shifts from bank accounts to the CBDC. User payment initiation and scheduling were also scrutinised. The backend tests involved database language, ledger design, and a flexible-value token model. Following these successful PoCs, the BOJ's pilot project will focus on end-to-end process flow and additional external system integrations. The final decision on the issuance of a CBDC by the BOJ is expected by 2026.
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