Risk In:Review #22 - 02 July 2023
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
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Perspectives
This week the focus is on the ongoing debate around provision of traditional banking services to the cryptocurrency and fintech sectors. Financial institutions continue to find themselves caught between balancing commercial interest with the potential financial crime risks associated with handling crypto transactions. In Hong Kong, Standard Chartered and HSBC are eyeing the emerging narrative of the US Securities and Exchange Commission, which underscores the risks in banking cryptocurrency providers, while balancing the demands of the Hong Kong Monetary Authority, which is advocating for the provision of basic services to cryptocurrency firms.
Similar challenges exist in Australia, where the Treasury has announced its collaboration with the Australian Prudential Regulation Authority to develop a voluntary data collection system for tracking de-banking activities. However, the practicality of requiring banks to explain reasons for de-banking clients is unclear, particularly in light of Australia's stringent anti-tipping off provisions. The need here is for coherence domestically and cross-border in regulatory positions among Law Enforcement, Financial Intelligence Units (FIUs), and Regulatory Bodies, with clear liability boundaries in place for financial institutions where clients are not on-boarded or are exited due to financial crime concerns.
The inconsistencies in regulatory approaches are further exemplified by the varying stances towards technologies within the crypto and fintech sectors. For instance, the Monetary Authority of Singapore (MAS) has recently embarked on Project Guardian. This project, in collaboration with the Bank for International Settlements (BIS) and various financial institutions, aims to establish an open and interoperable network for tokenised digital assets. This involves 11 institutions conducting pilot studies across multiple financial asset classes such as wealth management, fixed income, and foreign exchange.
In contrast, the Reserve Bank of India (RBI) has expressed concerns over the potential risks of stablecoins to emerging markets and developing economies (EMDEs). In its latest Financial Stability Report, the RBI identified six key risks posed by stablecoins and highlighted the need for a globally coordinated approach to address these challenges.
These disparate regulatory responses underscore the complexity and dynamic nature of the crypto and fintech spaces. What is clear is that a calibrated approach is necessary - one that facilitates innovation and economic growth, while ensuring that adequate safeguards are in place to mitigate financial crime risks. It is imperative for regulators and financial institutions to collaboratively develop robust, flexible, and globally harmonised frameworks. This will not only address the regulatory challenges posed by the crypto and fintech industries but also create an environment conducive to innovation and financial stability.?
This Week In:Review
Australia
China
Hong Kong
India
Korea
Singapore
Best of the Rest
Australia In:Review
The Australian Treasury, in collaboration with prudential and financial crimes regulators, is taking steps to combat the practice of “de-banking” by banks, which involves closing the accounts of corporate clients in the cryptocurrency and fintech sectors that are perceived as high risk. This move is in response to concerns over anti-competitive behaviours and calls for increased transparency. The Treasury announced plans to work with the Australian Prudential Regulation Authority to develop a voluntary data collection system, which will enable regulators to track de-banking activities. Additionally, the Treasury will collaborate with AUSTRAC to enhance transparency and fairness in banking practices.
Treasurer Jim Chalmers stated that these actions reflect the government's commitment to address de-banking while recognising banks' necessity to manage risks.
Furthermore, banks may be required to document the reasons for de-banking clients, provide clients with explanations, ensure access to dispute resolution procedures, and give at least 30 days’ notice before account closure.
However, Liberal Senator Andrew Bragg criticised these measures as inadequate, asserting that digital innovation is hindered by the lack of action in regulating digital assets. Bragg believes that new regulations are essential to effectively address de-banking.
This initiative follows Senate committee hearings where several companies, including global payment company Nium and London-based Wise, raised concerns about Australian banks' de-banking practices. AUSTRAC also expressed concerns that de-banking could hinder the monitoring of financial transactions and increase the difficulty of detecting financial crimes.
Simon Callaghan, the new CEO of Blockchain Australia, has called for collaboration between Australia's banks, government, and the cryptocurrency industry to tackle the escalating issue of cryptocurrency scams. During the Australian Blockchain Week in Melbourne, Callaghan declared that Blockchain Australia would prioritise aiding in the prevention of scams involving cryptocurrencies. He stressed the importance of safeguarding consumers and indicated that scams typically originate through social media or telecommunication channels, with cryptocurrency often being a secondary component in the scam's lifecycle. Callaghan expressed optimism that Australia could lead the way in efficient cooperation against cryptocurrency scams, setting a precedent globally. Callaghan's comments come just as the Australian Competition and Consumer Commission (ACCC) opens the National Anti-Scam Centre on 01 July. The Centre aims to pool expertise and resources to impede scammers from contacting Australians and to educate consumers on evading scams. The Australian Treasury has also emphasised the significance of addressing cryptocurrency-related scams.
The Australian Federal Government has issued a discussion paper addressing the secure and responsible employment of AI technologies. This initiative aims to create a well-balanced regulatory and governance structure that mitigates potential risks and fosters technological innovation. The paper emphasises transparency, as AI tools, such as Large Language Models (LLMs) like ChatGPT, are often inscrutable due to reliance on their training datasets. The government is considering mandates for companies to reveal their AI tools' training datasets and decision-making processes, and to provide consumers affected by AI-driven decisions with explanations. Additionally, the paper underscores the importance of supervision and monitoring, particularly in AI applications with lasting impacts on individuals. It suggests recurrent internal audits and staff training. These efforts align with earlier proposals from the Attorney-General, and parallel stipulations set by the GDPR in Europe.
China In:Review
US officials are contemplating tightening export control regulations aimed at restricting the export of artificial intelligence (AI) chips to China by reducing the permitted computing power of these chips. The Biden administration had, in October, introduced a set of regulations to stall China's semiconductor industry growth while allocating billions of dollars in subsidies to the US chip industry. These regulations limited the sale of chips in China that possess the computing power necessary for creating AI technologies comparable to ChatGPT, impacting companies like Nvidia and Advanced Micro Devices (AMD).
Nvidia's CFO, Colette Kress, expressed concerns that long-term restrictions on exporting data center GPUs to China could lead to lost opportunities for the US industry in one of the largest global markets, and subsequently affect their business and financial results.
Nvidia has developed a special chip, the H800, for the Chinese market that adheres to the current restrictions, but questions have been raised regarding the efficacy of these restrictions in impeding the development of AI systems by Chinese companies. The present rule consists of two limitations: one on the speed at which chips can communicate, which is crucial for AI systems; and another on the computing power of the chips.
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Hong Kong In:Review
HSBC Hong Kong, part of the Hong Kong and Shanghai Banking Corporation, has become the first bank in Hong Kong to offer cryptocurrency-related products to its customers. According to a report on 26 June, the bank is permitting customers to buy and sell exchange-traded funds (ETFs) based on Bitcoin and Ethereum. The cryptocurrency ETFs are listed on the Hong Kong Exchange (HKEX) and include CSOP Bitcoin Futures ETF, CSOP Ethereum Futures ETF, and Samsung Bitcoin Futures Active ETF.
Additionally, HSBC has established the Virtual Asset Investor Education Center, aimed at educating and protecting investors about the risks involved with cryptocurrencies. The centre is accessible through HSBC HK Easy Invest app, HSBC HK Mobile Banking app, and its online banking platform. Customers must acknowledge educational materials and risk disclosures before they can start investing.
This development comes as the Hong Kong Monetary Authority (HKMA) is encouraging banks to accept cryptocurrency exchanges as clients, aiming to foster a more inclusive environment for the crypto sector. The regulator has questioned banks, including HSBC and Standard Chartered, about their hesitancy to engage with cryptocurrency exchanges and has urged them to facilitate access to banking services for cryptocurrency firms, termed “virtual asset service providers”. This represents a notable divergence from the regulatory stances in other jurisdictions.
HSBC and Standard Chartered, with past money-laundering lapses, are reluctant to offer banking services to crypto exchanges in Hong Kong. Their hesitance is due to potential risks associated with handling crypto transactions, as highlighted by the US Securities and Exchange Commission's (SEC) lawsuits against Binance and Coinbase. However, Hong Kong is eager to establish itself as a global crypto hub and has been pressuring banks to support crypto businesses. The Hong Kong Monetary Authority (HKMA) has called upon banks, including HSBC and Standard Chartered, to provide basic services to crypto firms, even those without licences, particularly if they are in the process of applying.
Some speculate that Hong Kong's keenness to attract crypto businesses is driven by Beijing’s intention to use it as a testing ground for mainland China or to counteract Hong Kong's declining financial centrality due to Singapore’s emergence as a rival. Banks are caught in a dilemma. On one hand, they face pressure from Hong Kong authorities to accommodate crypto businesses, while on the other, they fear international repercussions, particularly from US law enforcement, for potentially handling the proceeds of crime. HSBC is currently attending meetings with regulators, but with caution. This situation reflects a broader challenge for banks like HSBC in reconciling demands from different jurisdictions amid geopolitical tensions.
India In:Review
Ratan Tata, the Indian industrialist and Chairman Emeritus of Tata Group, has refuted claims linking him to cryptocurrency investments. On Twitter, he alerted the public to be cautious of scams using his name to entice investors. This follows a similar incident in 2015 when a Bitcoin startup, Abra, declared it had received investments from Ratan Tata, but the investment has not been confirmed since. Anand Mahindra, Chairman of Mahindra Group, also denied claims of cryptocurrency investments in November 2021.
The Indian cryptocurrency market is largely unregulated, and scams are prevalent due to the influx of novice traders. The Enforcement Directorate is probing crypto-related fraud involving money laundering by some exchanges. As of 31 January 2023, INR 936.89 million had been seized as crime proceeds, with five arrests made. Additionally, INR 289.28 million had been confiscated under the Foreign Exchange Management Act.
Globally, crypto scams reached a record high in 2022, totaling USD 2.57 billion, which is 37% higher than the previous year, and around 2 million people fell victim to various scams. Despite this, India continues to witness substantial digital asset adoption and has recently collaborated with the UAE for cross-border transactions using CBDCs.
The Reserve Bank of India (RBI) has highlighted the potential risks of stablecoins to emerging markets and developing economies (EMDEs) in its latest Financial Stability Report. The RBI has been critical of cryptocurrencies and in this report, it identified six key risks posed by stablecoins:
The RBI emphasised the necessity for a globally coordinated approach to address these risks and underlined India’s priority to create a framework for global regulation of crypto-assets, stablecoins, and DeFi under its G20 presidency. Additionally, the RBI has shown interest in central bank digital currency (CBDC), launching pilot projects for a digital rupee and exploring a CBDC bridge with the UAE’s central bank.
The Directorate General of GST Intelligence's (DGGI) Jaipur Zonal Unit has exposed a large-scale racket involving fake companies in India. The syndicate operated 569 fraudulent firms, generating a false Input Tax Credit (ITC) of INR 1.047 billion. The scheme was orchestrated by a 30-year-old Delhi resident, Rishabh Jain, who employed 10 individuals to manage these counterfeit companies. Jain was apprehended and will be held in judicial custody until 07 July 2023. The syndicate had a complex network with brokers who specialised in registering companies under the identities of vulnerable individuals. These firms were then sold to the syndicate for issuing fake invoices. During the fiscal year 2022-23, 142 cases involving fake ITCs totalling INR 1.327 billion led to 9 arrests. In the current fiscal year, 5 cases amounting to INR 1.531 billion have been filed, with 5 masterminds arrested. Recently, two further masterminds were arrested for operating a fake ITC racket valued at INR 320 million.
Korea In:Review
Swiss authorities have frozen approximately USD 26 million in cryptocurrencies belonging to Terraform Labs, its CEO Kwon Do-hyeong, former CFO Han Chang-joon, former head of research Nicholas Platias, and others. The digital assets were held at Sygnum, a Swiss-based digital asset bank. The freeze came after the US federal prosecutors in New York and the Securities and Exchange Commission requested Swiss authorities for action. This aligns with news in April that South Korean prosecutors claimed to have identified a substantial sum of “criminal proceeds” associated with Terraform Labs in a Swiss bank, and sought international cooperation to freeze the assets.
Terraform Labs' Terra-Luna crypto project experienced a dramatic collapse in May 2022, erasing over USD 40 billion in market capitalisation. Kwon is now wanted in both the US and South Korea on accusations of fraud, securities law violations, and other charges connected to the collapse. Although Kwon has consistently denied all allegations, he has acknowledged that there were errors in the Terra-Luna project but contends that there was no intention to deceive investors. Furthermore, a court in Montenegro recently sentenced Kwon and Han to four months in prison for falsifying travel documents after their arrest in March at a Montenegrin airport.
South Korean prosecutors have imposed travel restrictions on executives from Haru Investment following allegations of fraudulent activities. The restrictions affect several unnamed individuals from Haru Invest, Delio’s CEO Chung Sang-ho, and a B&S Holdings shareholder known as Bang. The action was taken after Haru Invest suspended withdrawals for users, citing misinformation from an unnamed consignment operator, which later turned out to be renewable energy company B&S Holdings. Investors grew concerned when Haru Invest closed its Seoul office and deleted its social media profiles, leading to speculation of fraud. Delio’s CEO initially denied involvement but later admitted depositing crypto assets in Haru Investment. South Korean authorities are reportedly investigating Delio for embezzlement and breach of duty. Haru Investment’s co-founder, Eunkwang Joo, defended the company on Twitter, stating that the issues were internal and not indicative of fraud. However, he acknowledged that closing social media accounts without official communication could worry investors. Since suspending withdrawal and deposit activities, Haru Investment has terminated over 100 employees.
Singapore In:Review
The Monetary Authority of Singapore (MAS) has launched Project Guardian, a framework for designing open and interoperable networks for tokenised digital assets. Developed in conjunction with the Bank for International Settlements (BIS) and other financial institutions, the project involves 11 institutions conducting pilot studies on asset tokenisation across various financial asset classes, including wealth management, fixed income, and foreign exchange. Notable banking giants participating in the project include HSBC, Standard Chartered, DBS, and Citi. For example, Standard Chartered is developing a platform for initial token offerings, issuing asset-backed security tokens listed on the Singapore Exchange, in collaboration with payments platform Linklogis. Kai Fehr, Standard Chartered’s Global Head of Trade and Working Capital, remarked on the viability and potential opportunities of asset-backed tokenisation for financing real-world economic activities. Despite its scepticism towards the cryptocurrency ecosystem, MAS has expressed its commitment to harnessing the industry’s technologies for enhancing traditional financial systems. MAS' Deputy Managing Director of Markets and Development, Leong Sing Chiong, stated that while the central bank discourages speculation in cryptocurrencies, it recognises the potential for value creation and efficiency gains within the digital asset ecosystem.
Best of the Rest In:Review
The Auckland High Court has mandated Tiger Brokers (NZ) Limited, a subsidiary of a Singaporean retail trading broker, to pay NZD 900k for breaches of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act. The Financial Markets Authority (FMA) initiated the proceedings against the company. Tiger Brokers conceded to four violations including inadequate customer due diligence, failure to terminate business relationships when unable to conduct customer due diligence, failure to report suspicious activities, and failure to maintain necessary records.
Between April 2019 and January 2020, approximately NZD 60.8 million was transacted through the New Zealand financial system without the proper checks, impacting around 3,768 customers. The FMA investigation commenced after a formal warning was issued to Tiger Brokers in April 2020.
Margot Gatland, the Head of Enforcement at FMA, stressed the importance of compliance with the AML/CFT Act in ensuring the integrity of New Zealand’s financial markets. Justice Gault also highlighted the Act's role in detecting and deterring money laundering and terrorism financing, enhancing New Zealand’s international reputation, and contributing to public confidence in the financial system.
The FMA’s case concerned Tiger Brokers’ AML/CFT policies and obligations, but did not allege that Tiger Brokers facilitated money laundering or terrorism financing.
Token issuers in Japan are now exempt from paying corporate taxes on unrealised gains from cryptocurrencies, following a law revision by the National Tax Agency. The tax exemption, which is part of a broader tax reform, commenced nearly half a year after the Japanese government sanctioned a proposal absolving crypto businesses from taxes on notional gains on tokens they dispensed and retained. Under the fresh regulations, Japanese firms that issue tokens are relieved from the previously imposed 30% corporate tax rate on holdings, which encompassed unrealised profits. The ruling Liberal Democratic Party anticipates that this move will facilitate diverse companies to comfortably engage in businesses involving token issuance. Besides this tax reform, Japan has recently been enforcing stringent Anti-Money Laundering (AML) protocols to conform to global crypto regulations. In June of the previous year, the government passed a law that restricts the issuance of stablecoins to licensed banks, registered money transfer agents, and trust companies. Japan, as one of the earliest adopters of cryptocurrencies, has some of the strictest crypto regulations worldwide, which were tightened following high-profile cyberattacks on crypto exchanges.
Israel's Defense Ministry has successfully seized millions of dollars in cryptocurrency suspected to be meant for terrorist activities, in a collaborative operation involving intelligence agencies such as Mossad, the IDF, police, and the Justice Ministry’s special division. Cryptocurrencies have gained popularity among terrorist groups due to their decentralised nature, which offers anonymity and evades banking regulations. The United Nations Financial Action Task Force (FATF) has been advocating for the implementation of the "travel rule", requiring identification and verification of parties in cryptocurrency transactions, to counter money laundering and terrorism financing. However, many member states have not yet adopted this rule, leaving substantial gaps for exploitation by illicit actors. Israel’s recent operation highlights the pressing need for global collaboration and swift action in adapting regulations to combat criminal activity within the cryptocurrency domain.
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