Risk In:Review #23 - 09 July 2023
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
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Perspectives
Asia’s regulators are in the spotlight this week, as they increasingly push towards regulatory standardisation of consumer protection in the digital asset space.?
The Monetary Authority of Singapore (MAS) announced new regulations designed to insulate Singaporean customers from potential losses should digital asset firms collapse. Expected to take effect later this year, the rules mandate that these firms segregate customer assets from their own and hold them in trust, including storing them on discrete sets of blockchain addresses. In addition, digital payment token (DPT) businesses will need to conduct daily reconciliation of customer assets, maintain robust records, and uphold access to and operational control over their customers' DPTs within the city-state.
Adding to these regulatory changes, MAS also plans to prohibit DPT service providers from facilitating their retail customers in token lending or staking. However, these offerings can continue for institutional and accredited investors, reflecting a nuanced understanding of different risk appetites among diverse investor classes. Such moves parallel Hong Kong's approach to regulating the crypto landscape, revealing a growing trend towards regulatory uniformity.
Meanwhile, South Korea's National Assembly has passed legislation creating a legal framework for cryptocurrency regulation. Resonating with Singapore's approach, the law stipulates the segregation of customer funds from those of digital asset service providers and insurance of customer deposits. In a similar vein, Thailand's Securities and Exchange Commission (SEC) has announced a ban on crypto exchanges offering lending and staking services, aligning its regulations with those of its Singaporean counterpart.
In a particularly innovative move, South Korean crypto exchanges have introduced a volatility monitoring system. This system tracks price movements of various cryptocurrencies across multiple platforms and compares these to global averages. When significant deviations occur, it alerts authorities and halts trading on the platform until resolution, creating a fairer, more transparent trading environment while mitigating the risk of loss associated with extreme volatility.
Collectively, these regulatory changes reflect the pursuit of a common objective among Asian regulators, establishing greater protections for retail consumers. Given the increasing ubiquity and maturation of crypto and fintech sectors, it is both timely and essential for regulatory regimes to build solid frameworks that protect the interests of consumers while fostering an environment conducive to continued innovation and growth.
This Week In:Review
Australia
China
Hong Kong
Korea
Singapore
Best of the Rest
Australia In:Review
In a pioneering move for Australian banking, National Australia Bank (NAB) is phasing out the use of links in unsolicited text messages to customers to mitigate scams and fraud. This is part of NAB's broader anti-fraud effort, which comprises 64 ongoing or completed initiatives aimed at tackling global scams. NAB's measures include a collaboration with telecommunication providers to prevent phone number infiltrations and spoofing scams, resulting in a 29% decrease in reports of NAB-branded spoofing scams. By the end of July, the bank plans to complete the process of removing links from unsolicited texts, having achieved 95% of this task. To replace links, the bank offers guidance directing customers to its website, app, or customer service. CEO Ross McEwan suggests a nationwide approach is essential to combat scams, welcoming the creation of the National Anti-Scam Centre and a new SMS registry. He also advises customers to remain vigilant, avoiding suspicious links, and reporting potential scams to their bank and Scamwatch.
A federal senator has requested an explanation from the Australian Federal Police (AFP) regarding their secret meeting with contentious facial recognition company, Clearview AI. This came after the privacy watchdog in Australia criticised the AFP for using Clearview AI's technology. The American company, founded by Australian Hoan Ton-That, uses facial recognition technology to search its database of billions of unlawfully acquired images from public internet sites. Clearview AI has faced multiple lawsuits and privacy penalties globally. In December 2021, Angelene Falk, the Information and Privacy Commissioner, criticised the AFP for violating privacy rules by using Clearview AI's technology without conducting a privacy impact statement. Emails released through a freedom of information request showed that the AFP and Clearview AI arranged a meeting in May 2022. Both organisations refused to clarify the purpose of their meeting and denied that the AFP is a Clearview AI customer. Greens Senator David Shoebridge has questioned the AFP's reasons for the meeting and is seeking further information about the use of facial recognition technology and artificial intelligence.
The Australian Securities and Investments Commission (ASIC) has imposed a record AUD 4.5 million fine on fintech Openmarkets and banned its former acting head of trading, Virginia Owczarek, from providing financial services for three years due to multiple compliance breaches. Owczarek was found unfit to provide financial services after accepting a client's payment for stock tips and communicating inappropriately with a client. ASIC identified wider compliance issues at the company from 2018 to 2021. The watchdog also revealed several breaches of market integrity rules at Openmarkets after suspicious trading activities by a client were found. The Markets Disciplinary Panel (MDP) concluded Openmarkets failed to prevent unprofessional conduct by senior staff and had inadequate resources for effective trade surveillance. Openmarkets agreed to an enforceable undertaking, requiring them to hire an independent expert to review its systems. Openmarkets claims to have significantly overhauled its business since these breaches occurred.
Binance, the world's largest cryptocurrency exchange, is facing growing regulatory scrutiny worldwide, with Australian Securities and Investments Commission (ASIC) officials reportedly searching the company's Australian offices. The raids were part of an investigation into the company's now-defunct local derivatives business. Increased regulatory pressures from Australia, Europe, and the US have impacted the exchange's operations and led to a decrease in its crypto spot trading market share, which fell to a 10-month low of 42% in June. Binance's founder, Changpeng 'CZ' Zhao, acknowledged that "external pressure" has negatively affected their business. Meanwhile, the ASIC's ongoing review of Binance includes the classification of retail and wholesale clients. The firm's Australian platform lost a crucial local currency withdrawal route after its local payments partner withdrew support. Additionally, in Europe, Paysafe announced it would cease supporting bank transfers to and from Binance via the Single Euro Payments Area network from September 25. The company also faces investigations from French and US authorities. Binance asserts its commitment to meeting regulatory standards in all operating markets.
China In:Review
The People’s Bank of China (PBOC) has fined several fintech companies, including Alipay and Tenpay, marking a shift from intense regulatory crackdowns to "normalised management" of the sector. The Hangzhou-based Ant Group, operator of Alipay and one of the world's biggest fintech companies, was fined CNY 7.123 billion. Alipay and Tencent Holdings' Tenpay received penalties of CNY 3.06 billion and CNY 2.99 billion, respectively. The fines target violations in areas including corporate governance, financial consumer protection, and anti-money-laundering obligations. The PBOC asserts that most problems within the financial business of platform companies have now been rectified. The penalties are less severe than the USD 2.8 billion fine imposed on Alibaba Group Holding in April 2021 for antitrust breaches. Shares in Alibaba, an Ant affiliate, surged 6.4% in response, as the fine could remove uncertainties about the company's future. However, despite optimism about Ant's potential re-listing, experts caution that a tighter regulatory environment may affect the excitement and valuation around the share offering.
Jefferies' global head of equity strategy, Christopher Wood, suggests that investors focusing on Artificial Intelligence (AI) will gain from the ongoing belief in the AI narrative's legitimate beneficiaries. Wood argues that recent US restrictions on AI chip exports to China indicate an economic war, contradicting recent discussions about 'de-risking' rather than 'decoupling'. He notes Nvidia's performance following the restrictions announcement as proof of the AI supply chain's resilience. With late implementation of new restrictions, Chinese companies will utilise the time to amass chips. Nvidia has reportedly been circumventing US restrictions by selling its reconfigured H100 series chips, known as 'work-around chips', to China, with over 20% of Nvidia's revenues coming from China. Wood points out an underground market in Shenzhen for high-end Nvidia chips, suggesting smaller batch transactions can avoid sanctions. Wood recommends investing in AI-related assets while divesting non-AI ones, specifically those bought recently as potential AI beneficiaries. The rising price of AI servers poses a choice for 'hyperscalers' to either boost capital expenditure on AI or cut spending on regular servers, making Nvidia a more favourable choice over Intel or AMD.
The appointment of Pan Gongsheng as the top Communist Party official at the People’s Bank of China (PBOC) has dispelled expectations of China easing its ban on digital-asset trading. Pan's role could position him as a potential candidate for PBOC governor and is seen as a continuation of the policy that declared all crypto-related transactions illegal in 2021. Despite speculation from industry executives, Pan's historic remarks reflect a strong anti-crypto stance. David Qu, a China economist at Bloomberg Economics, dismisses the idea of a PBOC governor supporting Bitcoin and points out that mainland China typically views Hong Kong as an overseas market. Rather than Bitcoin, the Chinese government's focus is on developing the digital yuan. Crypto enthusiasts have remained hopeful about China's stance on digital currencies due to more favourable regimes in Hong Kong, Dubai, and parts of Europe. However, Beijing's concerns about money laundering, the environmental impact of Bitcoin mining, and currency outflows contribute to its tough stance against crypto.
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Hong Kong In:Review
Hong Kong has created a task force focused on promoting and responsibly developing Web3. The team is led by Financial Secretary Paul Chan and includes 15 non-official members from relevant market sectors, as well as key government officials and financial regulators. The non-official members, who will serve a two-year term starting from 1 July, include industry figures such as Yat Siu of Animoca Brands and Xiao Feng of HashKey.
The task force aims to solidify Hong Kong as a leading example of a mature economy that embraces the opportunities offered by Web3, blockchain, virtual assets, and the open metaverse. It is expected to influence global adoption of blockchain technologies in areas like regulation, ecosystem building, industry development, and talent development.
Paul Chan expressed optimism that the application of blockchain technologies could resolve challenges in finance, trade, and business operations. The goal is for Hong Kong to lead and drive innovative exploration and development, attracting top companies and talent to build a vibrant ecosystem. The creation of this task force is part of a broader initiative, announced in the 2023 budget speech, towards the development of virtual assets in Hong Kong.
Ripple Labs is advancing the tokenisation of real estate assets with the help of Hong Kong's Central Bank Digital Currency (CBDC) pilot. Recently, the Hong Kong Monetary Authority (HKMA) has begun preparations for a CBDC launch to keep pace with the rapid digitisation of payments. Ripple Labs was selected to join the pilot, offering its expertise to develop a tokenisation solution for recording electronic Hong Kong dollar (e-HKD) real estate transactions securely.
Ripple's CBDC platform will be designed to respect the sovereignty of central banks by being separate from the public XRP Ledger. Ripple's Managing Director, Brooks Entwistle, highlighted the utility of blockchain technology in CBDCs and acknowledged the future presence of digital currencies.
Real estate tokenisation, the creation of digital tokens representing physical properties, introduces potential benefits to the real estate industry by streamlining transactions, fractionalising real estate tokens for wider investment opportunities, and unlocking new funding avenues. Notable examples of the technology include Parcl, a blockchain-based trading platform, and the Direct Property Africa Token (DPAT), which grants global investors access to major land, property, and infrastructure projects in Africa.
Several years ago, Hong Kong-based digital lender WeLab developed an AI-powered chatbot to handle most of its customer inquiries, a move that significantly improved efficiency, allowing employees to take leave during the Lunar New Year. The chatbot was so successful, it handled up to 90% of calls and processed over 80% of 70 million dialogues in the Chinese mainland market. It's also used in wealth management, providing investment advice and reducing manual labour.
WeLab plans to integrate larger language models like OpenAI's ChatGPT into their chatbot, in pursuit of more natural language responses. McKinsey predicts advanced tech like AI could bring in additional revenues of between USD 200 billion and USD 340 billion annually in the banking sector. However, experts warn that AI doesn't guarantee accurate or contextually appropriate responses and should be used under human supervision to prevent errors or oversights.
There is also a need for clear regulatory frameworks addressing AI usage in financial services, including areas such as data protection, privacy, transparency, and fairness. The rapid development of generative AI tools worldwide requires adaptable, proactive policies to manage potential risks and uphold ethical standards.
Korea In:Review
South Korea's leading cryptocurrency lending firm, Delio, is under investigation by the Financial Services Commission (FSC) over allegations of fraud, embezzlement, and breach of trust. The firm, which manages approximately USD 1 billion in Bitcoin and USD 8.1 billion in alternative cryptocurrencies, created uncertainty amongst its user base when it abruptly halted all deposits and withdrawals on 14 June. This decision followed Delio's sister company, Haru Invest, suspending its own financial operations due to 'consignment operator' issues. Although Delio's CEO, Jung Sang-ho, assured stakeholders that the firm intended to resume suspended services, he failed to provide a specific timeline. By 27 June, Delio had permitted partial withdrawals for certain staking services, with Sang-ho promising to raise enough capital to compensate affected users. The ongoing FSC investigation is anticipated to reveal further information about Delio's operations, whilst heightening user and investor anxiety. The outcome of the case will reveal the extent of Delio's liability and determine the fate of users' assets.
South Korea's prominent cryptocurrency exchanges, including Upbit, Bithumb, Coinone, Korbit, and Gopax, under the umbrella of the Digital Asset Exchange Association (DAXA), have introduced a system alerting users of drastic cryptocurrency price shifts. The system informs users when significant changes occur in daily trading volumes or deposits. This development followed DAXA's ethical standards announcement, specifying that member exchanges must involve an impartial third-party legal expert when listing or delisting cryptocurrencies. In line with strengthening cryptocurrency regulation, the South Korean National Assembly passed legislation to establish a legal framework for cryptocurrency regulation. Provisions under the law stipulate that digital asset service providers must separate customer funds from their own and insure customer deposits. The impending Virtual Asset User Protection Act also mandates that service providers store crypto reserves in cold wallets and maintain all transaction records. This surge in regulation efforts follows a string of fraudulent activities, particularly the collapse of Terraform Labs and its cryptocurrency projects, causing significant investor losses.
How did Do Kwon move USD 18 million in stablecoins to ‘unfreezable’ tokens while in Montenegro jail?
On-chain data analysis indicates that $18 million worth of USD Coin (USDC) was moved from a crypto wallet linked to Kwon Do-hyeong, Terraform Labs CEO who is currently imprisoned, according to Cho Jae-woo, a South Korean university professor. The transferred USDC was converted into cryptocurrencies that authorities may find challenging to seize, including some 'unfreezable' tokens. These transactions coincided with a significant Bitcoin transfer linked to Luna Foundation Guard, a Terraform Labs unit, hinting that Kwon may have external assistance in moving funds beyond authorities' reach. Kwon faces fraud charges in South Korea and the U.S., linked to the $40 billion collapse of the Terra-Luna crypto project. South Korean prosecutors, investigating the Terra-Luna crash, are struggling to assess Kwon's total assets, considered to be mostly criminal proceeds. The swapping of cryptocurrencies linked to Kwon into other tokens complicates the process of tracking his assets, making it challenging to estimate his crypto wealth.
Singapore In:Review
The Monetary Authority of Singapore (MAS) has announced new regulations to protect Singaporean customers' assets from potential losses incurred if cryptocurrency firms collapse. Digital asset companies operating in Singapore must not only keep customer assets separate from their own but must also hold them in trust. This includes storing customer assets on a distinct set of blockchain addresses. These rules, expected to come into effect later this year, also demand that digital payment token (DPT) businesses perform daily reconciliation of customer assets, maintain proper records, and uphold access and operational control over customers’ DPTs in Singapore.
While MAS is not currently mandating the use of independent custodians for customer assets due to their limited number, the firms are obliged to ensure that custody function remains operationally independent from other business units. MAS will also restrict DPT service providers from facilitating retail customers' token lending or staking. The regulator is currently seeking public feedback on these proposed amendments to the Payment Services Regulations. These changes align Singapore's regulatory approach with jurisdictions like Hong Kong, although with greater flexibility in some key areas.
Best of the Rest In:Review
Taiwan's Justice Ministry has warned of the increasing use of cryptocurrencies, including Bitcoin and Ethereum, in bribery cases. The ministry is particularly concerned about these digital assets being used as tools for election bribery, with general elections scheduled for mid-January 2024. Apart from cryptocurrencies, mobile e-payment platforms such as Line Pay, Pi Wallet, Jiekou, and Oufubao are also being used for bribery. The Supreme Prosecutor’s Office revealed that after last year's municipal elections, 1,335 corruption cases were processed, leading to over 700 individuals being trialed on charges related to election-related corruption. To combat this, Taiwan has a reward system in place for individuals who expose bribery cases, yielding millions in rewards over the past twenty years. With the rise in crypto-powered bribery cases, the Justice Ministry has urged law enforcement and prosecutors to counter these emerging forms of corruption to protect the integrity of the democratic process. In a related move, Taiwan Mobile is exploring potential partnerships with local cryptocurrency platforms.
Thailand's Securities and Exchange Commission (SEC) has announced a ban on crypto exchanges providing lending and staking services, making it the second Southeast Asian country to do so in one day. This move aligns with the SEC's investor protection strategy for cryptocurrencies. The prohibition clearly targets "depository services that offer returns to depositors and lenders," thus prohibiting exchanges from offering both lending and staking services. The news comes following a similar announcement from Singapore earlier in the day, indicating a region-wide approach towards stricter regulation of cryptocurrency exchange services.
Kraken, a US-based cryptocurrency exchange, may be required to disclose trading data of clients with transactions exceeding USD 20,000 to the Internal Revenue Service (IRS), following a judge's ruling. Initially, Kraken resisted the IRS's request for user information, leading to the agency seeking court enforcement. The IRS's investigation aims to identify US taxpayers using cryptocurrencies to ensure they comply with internal revenue laws. In response to the ruling, Kraken, which had labelled the IRS inquiry as an "unjustified treasure hunt", must now provide approximately 160 million transaction records and data on 59,351 accounts. This ruling comes amid a broader crackdown on cryptocurrencies in 2023, including enforcement actions against other major exchanges like FTX, Gemini, Genesis, Binance, and Coinbase. To navigate these regulatory pressures, companies like Kraken and Coinbase are expanding internationally, obtaining licenses in Ireland and setting up derivative exchanges in Bermuda and Singapore.
BlackRock, the world's biggest asset manager with almost USD 9 trillion in assets under management, is moving closer to bitcoin, signalling a potential wave of institutional adoption. Its recent application for a spot bitcoin exchange-traded fund (ETF) demonstrates its willingness to provide clients with exposure to the digital currency. BlackRock refiled the application after the Securities and Exchange Commission (SEC) requested more information about the involved exchanges, leading to the inclusion of Coinbase in the filing. BlackRock's CEO, Larry Fink, appeared on Fox Business, characterising bitcoin and cryptocurrencies as a digital form of gold, positioning bitcoin as an inflation hedge and an alternative to traditional currency. Fink reinforced the concept of bitcoin as a store of value, similar to gold's role in investment portfolios, and emphasised bitcoin's global appeal. These comments highlight BlackRock's, and by extension Fink's, confidence in bitcoin's potential, suggesting growing institutional interest and investment in the digital asset. The move towards a Bitcoin ETF and the endorsement of bitcoin as 'digital gold' signifies a change in major financial institutions' attitudes towards bitcoin.
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