Risk In:Review #25 - 23 July 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
The risk technology landscape has been considerably quieter this week, compared to last week’s flurry of activity surrounding the Securities and Exchange Commission (SEC) and Ripple XRP case. However, several developments, primarily from the US, UK, and Australia, merit scrutiny.
In the US, a bipartisan assembly of senators introduced the Crypto-Asset National Security Enhancement and Enforcement Act (CANSEE). This bill, aimed at enforcing Anti-Money Laundering (AML) restrictions on crypto blockchains, intends to stymie illicit transfers. It would mandate decentralised finance (DeFi) services to conform to existing AML and economic sanctions regulations, mirroring those followed by conventional financial firms. The peculiar nature of DeFi services, with their absence of a central authority or distinct lines of accountability, may however pose significant challenges to the application of such regulations. DeFi platforms' propensity to be permissionless and borderless could further complicate these regulatory initiatives.
Turning attention to the UK, the government has been urged to confront the malicious exploitation of AI in its refreshed counter-terrorism strategy. This call to action comes from shadow home secretary, Yvette Cooper, who proposed to criminalise the training of chatbots for propagating terrorist content. Cooper also underscored the need to collaborate with the intelligence and law enforcement agencies to arrest the radicalisation of chatbots.
Closer to home, the Australian Securities and Investments Commission (ASIC) rescinded the Australian Financial Services (AFS) licence of FTX Australia, a prominent local crypto platform with around 30,000 clients. This development does not come as a surprise, given ASIC's previous expression of concern regarding FTX Australia's operations in March 2022, leading to 'surveillance activity'.
Meanwhile, the issue of cryptocurrencies serving as conduits for the transfer of illicit funds, particularly in relation to scams, remains a significant concern in the Australian market. National Australia Bank (NAB), one of Australia's major banks, plans to prohibit certain payments to 'high-risk' cryptocurrency exchanges to mitigate scams. This strategy involves implementing blocks on crypto exchanges most frequently associated with scams, reflecting a similar decision by the Commonwealth Bank, another of Australia's 'big four' banks.
This Week In:Review
Australia
China
Hong Kong
India
Singapore
Best of the Rest
Australia In:Review
Between March and July, the National Australia Bank (NAB) intervened in AUD 270 million worth of customer payments due to scam concerns. To enhance customer protection, NAB implemented several measures, including payment prompts, anti-spoofing actions, and blocking links in unexpected text messages. The bank is now also curbing payments to certain high-risk cryptocurrency platforms, where scams are increasingly prevalent. The NAB app's data reveals that approximately 12% of payments were abandoned after customers received in-app payment prompts. A daily average of AUD 290k worth of payments are abandoned, indicating customers are thinking before proceeding with transactions. Simultaneously, research indicates that 40% of Australians would tolerate slower payments for better protection against scammers. This comes as scams linked to cryptocurrency, the fastest-growing security threat, resulted in losses exceeding AUD 221 million for Australians in the previous year. To counteract this, NAB is collaborating with other entities through the Australian Financial Crimes Exchange, an initiative dedicated to combating financial and cyber crime. The bank's spoofing measures have led to a 29% reduction in NAB-branded spoofing scam reports.
The Australian Securities and Investments Commission (ASIC) revoked the Australian Financial Services (AFS) licence of FTX Australia, a major local crypto platform servicing around 30,000 clients, on 14 July. The cancellation does not impact FTX Australia's obligations to compensate its retail customers nor its membership with the Australian Financial Complaints Authority. The exchange can still provide limited services to terminate existing derivatives with clients until 12 July 2024. Concerns about FTX Australia's operations were raised by the ASIC as early as March 2022, resulting in 'surveillance activity'. Two firms related to the now bankrupt exchange reportedly hold AUD 42 million in customer funds. This development is part of Australia's increasing regulation efforts in the crypto industry. Actions have also been taken against Binance, while Australian banks such as Westpac and National Australian Bank (NAB) are restricting payments to crypto exchanges, addressing the fast-growing security threat of crypto scams.
National Australia Bank (NAB), one of the largest banks in Australia, has decided to block certain payments to "high-risk" cryptocurrency exchanges as part of a new effort to curb scams. The bank plans to introduce blocks on cryptocurrency exchanges where scams are most common. This move follows a similar decision by Commonwealth Bank, another of Australia's "big four" banks, to block payments to certain crypto exchanges as part of its anti-scam measures.
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China In:Review
China's digital yuan transactions have surged to CNY 1.8 trillion as of June, an exponential increase from over CNY 100 billion in August of the previous year. These figures affirm China's pioneering position among nations developing their own central bank digital currencies (CBDC). The e-CNY, China's digital currency, has predominantly been employed for domestic retail payments. Yi Gang, the country's central bank governor, revealed at a Monetary Authority of Singapore lecture that e-CNY in circulation was CNY 16.5 billion, with 950 million transactions completed and 120 million wallets opened. However, e-CNY in circulation represents just 0.16% of China's M0 money supply, or cash in circulation, denoting that the balance remains relatively small, yet the efficiency is high due to transaction velocity.
Chinese authorities have arrested 21 individuals allegedly involved in a money laundering scheme worth USD 54 million using Tether's USDT, a stablecoin pegged to the US dollar. Operating across four provinces since October 2021, the suspects allegedly bought discounted USDT via over-the-counter crypto trading services and then sold them at higher prices on social media and money laundering platforms. The accused are believed to have facilitated the conversion of Chinese yuan to USDT for cybercriminals. The police seized over CNY 1 million in USDT and more than CNY 200k in cash during the arrests. Chinese national broadcaster CCTV reported that all suspects confessed to the charges, but the investigation is ongoing. Despite China's ban on cryptocurrency issuance in 2017 and transactions in 2021, citizens can access cryptocurrencies via decentralised finance (DeFi) platforms and proxy internet servers.
Hong Kong In:Review
Cryptocurrencies have seen significant growth globally, but Hong Kong banks remain cautious, with only a few considering offering crypto-related services due to regulatory uncertainty, security risks, and operational challenges. The Hong Kong Monetary Authority (HKMA) has not received any applications from banks to operate as virtual asset service providers (VASPs), entities that facilitate cryptocurrency transactions. HKMA's regulatory approach adheres to Financial Action Task Force (FATF) standards, requiring VASPs to be licenced and follow anti-money laundering, counter-terrorist financing, and other conduct requirements. However, industry experts criticise the HKMA's framework as restrictive and vague, arguing that the lack of clarity on treating different types of cryptocurrencies, lengthy and costly licencing process, and operational challenges deter banks. Despite this, some, like Standard Chartered Bank, are exploring crypto potential and partnering with digital asset platforms to offer custody services for cryptocurrencies. As the crypto space evolves, banks in Hong Kong must evaluate the risks and potential benefits of engaging with this emerging asset class.
The Anti-Deception Coordination Centre, established by Hong Kong police in 2017, has prevented over HKD 11.79 billion from reaching fraudsters over the past six years. The Centre has handled over 160,000 calls, thwarting 2,000 cases of fraud. Types of deception have included email scams, investment fraud, online romance scams, and telephone deception. In the first five months of 2023 alone, the Centre intercepted HKD 571 million. However, scammed money intercepted by anti-fraud officers fell from HKD 3.07 billion in 2020 to HKD 1.3 billion in 2023, potentially due to the rise of cryptocurrency-related scams. Cryptocurrency scam losses doubled to over HKD 1.7 billion last year. To combat fraud, the Centre, which also responds to stop-payment requests from Interpol, runs a 24/7 hotline, works with financial institutions and law enforcement agencies, and provides a scam detection search engine. Over 70% of the deception cases in the last year were internet-related, leading to a collective loss of HKD 3.2 billion.
India In:Review
India's growing adoption of Virtual Digital Assets (VDAs), including cryptocurrencies, has prompted the government to regulate these assets under the Prevention of Money Laundering Act and introduce crypto taxation laws. Cryptocurrencies are increasingly considered an alternative asset class, offering benefits such as decentralisation, low transaction costs, and potential for high returns. However, they also carry risks, including high volatility and complex tax implications.
In its 2022 Union Budget, the Government of India outlined a legal framework for VDA transactions, including a 30% tax on gains from VDA transfers between individuals. Transfers between one person's wallets or exchanges are not taxable, and a withholding tax applies to transactions over certain values. Crypto exchanges must deduct this tax when making payments to sellers.
Digital crypto taxation platforms are simplifying compliance with these new rules by automatically calculating taxable income and other relevant taxes. These platforms can guide users in selecting the appropriate income tax return forms and accurately reporting their investments. They also assist exchanges with invoicing and managing goods and services tax (GST) and withholding tax on crypto transactions.
Policymakers recognise the benefits of cryptocurrency technology and are striving to balance innovation with consumer protection. They are enacting laws that facilitate the crypto industry's growth and its potential to boost the economy while protecting investors.
Singapore In:Review
Singapore's latest guidelines on how banks should handle clients linked to digital assets are a positive step towards developing the country's Web3 ecosystem, according to market players and observers. However, there's doubt about their ability to significantly impact the digital asset sector. Banks generally avoid taking on digital asset firms due to money-laundering, terrorism financing, and sanctions risks, which hinder these firms' access to comprehensive banking services. Despite these guidelines, it still may take up to a year for firms to clear due diligence checks. The president of the Singapore Fintech Association, Mr Shadab Taiyabi, emphasised that addressing the issue would require greater understanding and interaction among banks, regulators, and Web3 companies. The Monetary Authority of Singapore (MAS) recommended banks request information documenting a customer’s crypto exposure and the intended account usage, as well as using blockchain screening tools. Industry players like Mr Daniel Lee, head of Web3 at European payments bank Banking Circle, believe these guidelines could encourage banks to become more receptive to digital asset firms.
Best of the Rest In:Review
A bipartisan group of US senators has introduced a bill aimed at applying Anti-Money Laundering (AML) restrictions to crypto blockchains to prevent illicit transfers. Senators Jack Reed, Mike Rounds, Mark Warner, and Mitt Romney proposed the Crypto-Asset National Security Enhancement and Enforcement Act (CANSEE), which requires decentralised finance (DeFi) services to comply with the same AML and economic sanctions regulations as traditional financial companies. This involves maintaining AML programmes, conducting due diligence on customers, and reporting suspicious transactions to the Financial Crimes Enforcement Network (FinCEN). Any investor who puts more than USD 25 million into developing a blockchain would be accountable for these obligations. The legislation was motivated partly by North Korean cybercrime group Lazarus, suspected of stealing over USD 2 billion in crypto, as well as by other illicit actors exploiting DeFi services to launder their ill-gotten proceeds.
Under a Labour government, training AI to incite violence or radicalise vulnerable individuals would become a criminal offence, according to shadow home secretary, Yvette Cooper. In a speech at the Royal United Services Institute, Cooper pointed to emerging cyber threats, including a recent case where a man was influenced by his AI chatbot to attempt an assassination. Cooper called on the government to address the deliberate misuse of AI in its updated counter-terrorism strategy. She suggested Labour would criminalise those training chatbots to promote terrorist content, and work with intelligence and law enforcement communities to stop the radicalisation of chatbots. Additionally, she proposed new legislation to ban state-sponsored organisations like Wagner and Islamic State, addressing threats from hostile states such as China and Russia. Cooper also highlighted the necessity for new cross-government partnerships to enhance leadership and collaboration, and a new taskforce to handle economic threats and strengthen enforcement against economic crime. Earlier this year, the government opted against creating a new AI regulator, leaving legal grey areas around AI's role in promoting violence. The Home Office has yet to comment.
Despite international digital exchanges leaving Japan, industry stakeholders argue that the nation is leading the way in regulating its digital currency ecosystem. Japan demonstrated this by launching a stablecoin pegged to the yen, ahead of the central bank digital currency (CBDC) trend. It also set stringent standards for digital currency service providers seeking licences, requiring clear separation of clients' funds, regular audits, and a large portion of assets in cold storage. This rigorous approach safeguarded Japanese investors during the FTX implosion in November 2022. The government, having initially been reactive following the Mt. Gox exchange collapse, has since proactively supported other areas of Web3 technology, including metaverse and non-fungible tokens (NFTs), alongside enforcing stricter anti-money laundering rules. However, exits of key players like Coinbase and Kraken, citing challenging market conditions, have cast a shadow over Japan's ambitions in the digital currency industry.
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