Risk In:Review #26 - 30 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
Three news headlines stand out this week as having significant implications for the future of risk management and technology.
Firstly, Australia has witnessed a breakthrough in Central Bank Digital Currency (CBDC) trading. Westpac and Commonwealth Bank, two of Australia's largest financial institutions, executed a trade for certificates of deposit using a digital Australian dollar backed by the Reserve Bank of Australia (RBA). Facilitated by Imperium Markets, this transaction marked the first involving regulated banks, showcasing the benefits of CBDCs in the interbank market. While the benefits include enhanced liquidity and efficiency in payments, reconciliation, and clearing processes, the significant advantage of CBDCs is the elimination of settlement risk, which could reduce capital holdings against settlement failures in banks and clearinghouses.
Secondly, Russia has joined the CBDC race, with President Vladimir Putin signing the digital ruble bill into law. Set to come into effect on 1 August 2023, the law paves the way for the Russian central bank to pilot the first CBDC with consumers. The digital ruble, intended as a payment and money transfer method rather than an investment, is not anticipated to gain wide adoption before 2025 or 2027. Risk managers, particularly those concerned about sanctions, might worry about potential linkages between CBDC and crypto. However, the relatively small size of the crypto economy compared to Russia's would suggest limited impact in facilitating sanctions busting.
Together, these developments show the positives and risks evolving from CBDC technologies. 12-18 months ago the role of CBDCs was unclear, with only China truly pushing the boundary of the technology. The question then was whether CBDCs were viable, but as the number of CBCD pilots expands, the questions now are about the broader application of CBDCs. Will they be confined to facilitating transactions between central banks and commercial banks? Or will they be used for government-citizen interactions, or even become a mainstream challenger to cryptocurrency?
Lastly, a landmark ruling in Singapore affirmed that cryptocurrency is a legal form of property that can be held in trust. The High Court ruling involved a case of fraudulent transfer by a contractor, Ho Kai Xin, working with ByBit, a cryptocurrency exchange. The court ordered Ho to return USD 4.2 million in assets, a decision grounded in the Monetary Authority of Singapore's public consultation response.
The ruling solidifies a legal precedent in Singapore, treating cryptocurrency as a "thing in action", a property right enforceable in court. Progressive case law such as this is helps to firm the foundations under the crypto ecosystem, which will in turn give investors greater comfort about handling crypto in one of Asia’s leading crypto hubs.
This Week In:Review
Australia
Hong Kong
India
Korea
Singapore
Best of the Rest
Australia In:Review
Westpac and Commonwealth Bank have successfully traded and paid for certificates of deposit using a digital Australian dollar, a Central Bank Digital Currency (CBDC), backed by the Reserve Bank of Australia (RBA). The deal, facilitated by Imperium Markets, marks the first of its kind involving mainstream, regulated banks, highlighting the potential benefits of CBDCs in interbank markets. The trials suggest that blockchain-based trading systems could enhance liquidity and efficiency in payments, reconciliation, and clearing processes, which currently rely heavily on manual procedures. This move could also increase the efficiency of bond markets, currently dependent on manual processes. One significant advantage of CBDCs is the elimination of settlement risk, allowing simultaneous payment and transfer of a security's title, potentially reducing the capital that banks and clearing houses need to hold against settlement failures. These developments, although promising, also require careful consideration of new regulatory frameworks and technological risks. This significant progress places Australia among the most progressive jurisdictions exploring this new form of money.
Block Earner, a top Australian fintech firm, is offering early access to its Crypto Asset Vault. The vault, which boasts superior security features, is backed by an unprecedented insurance coverage of up to USD 320 million. Block Earner's research in collaboration with YouGov unveils that 26% of surveyed Australian crypto owners favour private wallets over exchanges for storing digital assets, demonstrating a growing preference for personal control and security. The Crypto Vault, a cold storage wallet for private keys, offers an added security layer by storing keys offline. Block Earner's co-founders, Charlie Karaboga and Jordan Momtazi, express their commitment to meeting the need for more secure, private digital asset storage solutions. Customers can transfer funds from any exchange to Block Earner's cold storage without setup fees or minimum requirements. Block Earner, working alongside global cybersecurity leader Trend Micro, also offers protective measures against scams and fraud. The Crypto Asset Vault is powered by Coinbase Prime's custody services and audited by Deloitte and Touche.
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Hong Kong In:Review
Hong Kong and Saudi Arabia are strengthening their financial cooperation with a focus on tokenisation and payment infrastructure. The Saudi Central Bank (SAMA) and the Hong Kong Monetary Authority (HKMA) have recently held a bilateral meeting discussing initiatives around financial infrastructure development, open market operations, market connectivity, and sustainable development. A Memorandum of Understanding (MoU) was signed to promote collaborative discussions on financial innovation. Both nations shared their expertise in tokenisation, payment infrastructure, and supervisory technologies. While Hong Kong has recently permitted retail investors to trade cryptocurrencies, it remains unclear whether the cooperation will extend to digital currencies like Bitcoin. In a recent development, the Bank of China's subsidiary BOCI issued a tokenised security worth HKD 28 million in Hong Kong, utilising the Ethereum blockchain and Goldman Sachs' tokenisation protocol.
The Hong Kong Monetary Authority (HKMA) has chosen 16 firms from various sectors, including financial, payment, and technology, for the first trial of the electronic Hong Kong dollar (e-HKD). The pilot will involve 14 projects spread across six potential e-HKD usage categories. These include full payments, programmable payments, offline payments, tokenised deposits, settlement of Web3 transactions, and tokenised-asset settlements. Noteworthy participants in the trial include the Hongkong and Shanghai Banking Corporation (HSBC), which will work on two projects, and Bank of China (Hong Kong), which will also participate in two projects. HSBC will work on the development of an e-HKD prototype and corresponding wallet for use by students and staff at the Hong Kong University of Science and Technology. The trial seeks to test hypotheses around transaction cost reduction, fraud prevention, and targeted spending offers. However, concerns persist around the practicality and potential uptake of the e-HKD, as well as the necessity of legislative changes to make e-HKD legal tender. The outcome of the pilot program will shape the future of e-HKD's implementation.
India In:Review
The Supreme Court (SC) of India has requested the Union government to declare whether it plans to establish a federal agency to investigate criminal cases involving cryptocurrencies. The SC expressed concern over the lack of regulation for digital currencies and the absence of an expert agency to scrutinise such matters. The bench of justices asked the Centre to identify a national specialist agency and stressed the need for a legal framework to manage cases involving cryptocurrencies. Many innocent investors are being deceived in complex transactions with no national body able to resolve such cases. The justices argued that without a mechanism in place, the investigation and prosecution of such individuals become challenging, leading to the siphoning off of the country's money. The case being heard pertained to Ganesh Shivkumar Sagar, a Delhi resident linked to cryptocurrency fraud cases in Maharashtra, Gujarat, and Jharkhand. He requested that all cases against him be entrusted to a central agency for investigation.
Juice jacking is a growing cyber threat that targets individuals using public charging stations for their devices. Fraudsters exploit these stations by transferring malware onto the connected devices, gaining access to sensitive data such as emails, passwords, and banking details. This stolen information can be used to gain unauthorised access to financial accounts, potentially causing significant financial losses. Fraudsters often set traps by installing malicious software or hardware onto public charging stations, even masquerading as 'free charging' to entice users. To guard against juice jacking, avoid using public charging ports and cables. Instead, use your own charger and outlet or carry a portable power bank. Additional precautions include maintaining activated security features like passcodes and biometrics, being cautious when using public Wi-Fi networks, updating your devices' operating systems regularly, and using antivirus software. By being aware of such threats and taking necessary precautions, individuals can avoid becoming victims of juice jacking and subsequent financial loss.
The Kozhikode cyber police have broadened their inquiry into an alleged Artificial Intelligence (AI) based deepfake WhatsApp fraud, believed to be India's first such case. A man, claiming to be a former colleague, contacted PS Radhakrishnan of Chalapuram in Kozhikode, requesting a loan of INR 40k for his sister's medical expenses. Convinced by the visual and audio resemblance to his friend, Radhakrishnan transferred the funds. However, after a subsequent request for an additional INR 35k, he grew suspicious, confirmed the scam, and alerted the authorities. The money was initially transferred to Gujarat before being forwarded to a trading company in Goa's capital, Panaji. Although the initial account has been frozen, the funds had already been transferred. The police have assured Radhakrishnan that the funds will be returned after formalities are completed. Investigators have contacted WhatsApp to confirm if deepfake technology was used. The police will also investigate in Gujarat pending WhatsApp's response. This potentially marks the first case in the country where AI has been utilised for fraudulent activities.
Cyber criminals are exploiting the dual psychological tools of fear and greed to defraud unsuspecting victims, as shown by a recent investment scam exposed by Indian police. In this scheme, over INR 700 million was transferred to China through Dubai using cryptocurrency. The fraudsters enticed victims with promises of quick profits for small investments and simple tasks. The Hyderabad police found a large-scale fraud operation involving Chinese handlers had defrauded at least 15,000 Indians of over INR 700 million within a year. The fraudsters used 113 Indian bank accounts, with some money even reaching accounts operated by the Lebanon-based terror group, Hezbollah. In another instance, the Central Bureau of Investigation (CBI) arrested two men who tricked Canadians into transferring cryptocurrency assets to their wallets, under the pretense of being a Canadian government official. The overarching message is that vigilance, scepticism, and key strategies are essential to protect one's hard-earned money from such investment scams.
SonicWall, a leader in cyberattack intelligence, recently released its 2023 Mid-Year Cyber Threat Report, revealing evolving behaviours of digital threat actors. The report indicates an overall increase in intrusion attempts, with a record year for global cryptojacking, as cybercriminals shift away from traditional ransomware attacks. This shift has been attributed to increased law enforcement activity, significant sanctions, and a refusal by victims to pay ransom demands. Despite a 41% global decline in ransomware attempts, other types of attacks have surged, including cryptojacking by 399%, IoT malware by 37%, and encrypted threats by 22%. The report also highlights the diversification of cybercriminal tactics, with bad actors shifting their focus to less risky methods with potentially high returns. The rise in cybercrime levels in regions like Latin America and Asia is linked to hackers seeking the weakest entry points with minimal repercussions. Additionally, the report provides insights into malware, ransomware, IoT malware, and encrypted threats. SonicWall's patented Real-Time Deep Memory Inspection (RTDMI) technology identified 172,146 never-before-seen malware variants in the first half of 2023.
Korea In:Review
South Korea is combating a rise in cryptocurrency-linked criminal activities by launching a specialised investigation unit, the Joint Investigation Centre for Crypto Crimes. Operating from the Seoul Southern District Prosecutors’ Office, the unit comprises 30 investigators from various government agencies. The move comes in response to the daily trading of KRW 3 trillion in virtual assets by over 6 million participants, while laws and systems for their regulation remain incomplete. The unit aims to safeguard investor interests and expedite investigation processes for crypto-related criminal cases. Key focus areas include volatile cryptocurrencies, market manipulation, insider trading, tax evasion, unauthorised foreign exchange transfers, and money laundering. Highlighting the rising risks, the Prosecutors' Office reported a 1,263% increase in suspected crime-related transactions on local cryptocurrency exchanges over the past 18 months.
Singapore In:Review
In a landmark ruling, a Singaporean High Court has determined that cryptocurrency can be classified as property that can be held in trust, and thus is subject to legal proceedings. The ruling was made in a case involving ByBit, a cryptocurrency exchange founded by Ben Zhou in 2018, and a contractor, Ho Kai Xin, who was accused of fraudulently transferring over USD 4.2 million in cryptocurrency and fiat currency. Judge Philip Jeyaretnam ordered Ho to return the assets to ByBit, basing his decision on the Monetary Authority of Singapore's public consultation response. The ruling confirms the common law view of cryptocurrency as a "thing in action," or a right to recover money or property. Ho blamed her cousin, Jason Teo, for the theft, claiming she was unaware of the illicit activity. The ruling establishes a significant legal precedent for future cryptocurrency cases in Singapore.
Best of the Rest In:Review
Worldcoin, co-founded by Sam Altman, CEO of OpenAI, is a novel digital identity platform aiming to authenticate human identity in a world where AI can sometimes be indistinguishable. The platform, incorporating a digital passport termed 'proof of personhood', uses a user's iris scan to generate secure identification codes that are stored on a decentralised blockchain, making the creation of false identities or fraud difficult. Worldcoin also provides a cryptocurrency token (WLD) and crypto wallet app, forming a three-part system of identification, tokenisation, and secure storage. Over two million users engaged in Worldcoin's beta testing, and the company plans to introduce scanning facilities in cities across 20 countries. Despite the platform's intentions, it has faced criticism for alleged excessive data collection and misleading marketing practices. Critics also express concerns about the exploitation of users in developing countries, and the company's association with controversial figures like Sam Bankman-Fried, founder of the failed FTX crypto exchange. At its launch, there were 143 million WLD tokens in circulation, with a total of 10 billion WLD planned to be issued over 15 years.
The digital ruble bill has been signed into law by Russian President Vladimir Putin, officially set to take effect from 1 August 2023. The law allows the Russian central bank to initiate the first central bank digital currency (CBDC) pilot with consumers in August. The digital ruble, controlled by Russia's central bank, will function as a payment and money transfer method, not intended for investment purposes. Its use will be voluntary and is expected to become a third form of money alongside cash and non-cash rubles. However, deputy governor of Bank of Russia, Olga Skorobogatova, does not foresee widespread adoption of the digital ruble before 2025 or 2027. Despite progress with CBDC legislation, Russian lawmakers have repeatedly delayed introducing cryptocurrency regulation, despite promises made in May to pass several bills related to cryptocurrency.
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