Risk In:Review #27 - 06 August 2023
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
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Perspectives
Cryptocurrency giant Binance emerged as the focus of multiple headlines this week, underscoring the complexities of the cryptocurrency landscape and Binance’s ongoing interplay with regulatory bodies. Amidst ongoing speculation that Binance has been engaging in active operations in China despite the country's crypto prohibition, new data from the Wall Street Journal (WSJ) suggests China remains Binance's largest market, accounting for 20% of the platform's total cryptocurrency volume. The implications for China could be significant, given the potential fraud charges that the US Department of Justice is contemplating against Binance, echoing a similar scenario encountered by FTX in November 2022. Chinese users, who traded a staggering USD 90 billion in cryptocurrency in May 23 alone, may find themselves at risk should such a situation trigger a run on the exchange.
Despite these concerns, Binance announced the launch of its new Japan-based branch, Binance Japan K.K., on 1 August, signalling its commitment to further geographic expansion. This development comes a year after the Japanese Financial Services Agency warned Binance for operating without a license, with Binance's acquisition of Sakura Exchange Bitcoin in November 2022 hinting at its ambitions to re-enter the Japanese market. With the firm now launching spot trading for 34 tokens and planning a global user migration beginning 14 August, Binance is poised to assert its presence within the Japanese cryptocurrency landscape.
However, it's not all smooth sailing. Binance CEO, Changpeng “CZ” Zhao, recently alerted users to a novel scam targeting the cryptocurrency community. This scam involves the creation of fake wallet addresses that mimic a user's original address, with the scammer sending 'dust transactions' that appear within the victim's transaction history. If the victim unknowingly copies and pastes the address from one of these dust transactions, their funds end up with the scammer, not their intended recipient.
Elsewhere in the financial technology landscape, the Monetary Authority of Singapore (MAS) downplayed the risk of 'herding' among its financial institutions, citing their early stage in AI applications for decision-making. This was in response to questions raised about potential conflicts of interest when a trading AI platform considers both the platform's and customers' interests. MAS emphasised its focus on ensuring responsible AI and data analytics usage, and the ongoing development of an evaluative framework for AI systems.
Finally, reflecting an increasingly cautious approach to cryptocurrency in Australia, Bendigo Bank introduced restrictions on 'high-risk crypto payments' to safeguard its customers against potential investment scams. This move makes Bendigo the fourth major Australian bank to impose such restrictions, following the lead of Commonwealth Bank, National Australia Bank, and Westpac. This series of events reflect an emerging trend of wariness towards cryptocurrencies within the Australian banking sector, signalling a potentially turbulent future for crypto platforms in the country.
This Week In:Review
Australia
China
Hong Kong
India
Singapore
Best of the Rest
Australia In:Review
The Australian Securities and Investments Commission (ASIC) has initiated a lawsuit against online trading platform eToro for purported violation of financial regulations concerning cryptocurrency derivative products. The regulatory body claims that from October 2021 to July 2023, eToro breached the Corporations Act 2001's design and distribution obligations, leading to significant losses among contract for difference (CFD) traders. Specifically, ASIC argues that eToro's definition of its CFD target market was overly broad, resulting in significant risks to retail clients. Following these allegations, eToro confirmed the implementation of a revised target market determination for CFDs, ensuring it operates in compliance with applicable rules and regulations in all jurisdictions. The lawsuit primarily addresses eToro's alleged inadequacy in defining retail client types suitable for trading CFDs. ASIC seeks penalties, compliance orders, and costs from eToro in relation to its allegations of eToro's failure to act efficiently, honestly, and fairly, and inadequate target market determination. The proceedings underline the increased scrutiny of cryptocurrency trading platforms and their obligation to ensure investor safeguards.
Cryptocurrency exchanges in Australia, including BTC Markets, Kraken, Swyftx, and Coinbase, have expressed support for regulatory measures aimed at protecting investors and rebuilding trust in the sector following the FTX fiasco last year. The Treasury is set to release a consultation paper in the coming weeks that will propose new rules, including licensing for exchanges and crypto custody regulations. This move aims to prevent future scandals like the FTX one, which led to widespread losses due to fraud and triggered the exchange’s bankruptcy. The introduction of regulatory standards could help legitimise the sector and introduce guidelines around cybersecurity, customer protection, and anti-money laundering. However, there is concern about the loss of digital asset developers due to a lack of certainty around regulation. Furthermore, the Australian Securities and Investments Commission is expected to formulate guidance in response to these laws. The paper will also reveal the government's stance on whether exchanges must hold digital assets with local custodians to safeguard customer funds on exchanges.
Bendigo Bank has introduced restrictions on "high-risk crypto payments" to protect its customers from potential investment scams. This move makes Bendigo the fourth major Australian bank to impose such restrictions, following similar steps taken by Commonwealth Bank, National Australia Bank, and Westpac. Bendigo Bank's new rules, according to its head of fraud Jason Gordon, aim to combat fraudulent payments and enhance protections for the bank's 2.3 million customers, though they may also complicate some legitimate transactions. The bank will block certain high-risk instant crypto transactions without disclosing specifics or affected exchanges. Critics warn that such measures could drive users towards offshore exchanges, creating an environment beyond the jurisdiction of Australian authorities. Instead, they suggest a coordinated approach to addressing scams across banks, regulators, telecommunication providers, and social media platforms. Dr Aaron Lane, of the RMIT Blockchain Innovation Hub, advocates for constructive collaboration with exchanges rather than a generalised debanking stance towards the entire industry.
Former National Australia Bank (NAB) CEO, Cameron Clyne, is advising and investing in start-up, Swarm Dynamics. Swarm develops artificial intelligence (AI)-powered software to aid banks in identifying and resolving cultural problems. This software merges behavioural science, social network analysis, and AI, to analyse bank team dynamics and staff psychology through scanning metadata on internal communications. Currently, Swarm is supplying its system to one major Australian bank and three international banks. The software creates human collaboration networks, which assist banks in understanding cultural risk and proving regulatory compliance. Swarm is now raising USD 5 million in a Series A round to increase its marketing efforts in the US and UK. Clyne's involvement comes after his departure from NAB in 2014, where cultural issues surfaced under his successor, Andrew Thorburn. Clyne had previously chaired another start-up, Whitecoat, and was Chairman of Rugby Australia from 2015 to 2020.
China In:Review
领英推荐
Despite the prohibition of cryptocurrency in China for two years, data from the Wall Street Journal (WSJ) suggests that the country remains Binance’s largest market. In May, Chinese users traded USD 90 billion in cryptocurrency, constituting 20% of Binance’s total crypto volume. Notably, these figures exclude a subset of substantial traders and predominantly consist of future trades. Binance's internal platform, 'Mission Control,' reports approximately 900,000 active Chinese users among its 5.6 million registered users, with around 100,000 identified as "politically exposed persons". Current and former Binance employees have acknowledged China's importance to the firm. The exchange reportedly collaborates with Chinese law enforcement to combat money laundering and other crypto-related offences. However, according to Protos, Binance confirmed that staff members have been instructed to aid users in evading know-your-customer (KYC) and anti-money laundering (AML) regulations. China's central bank maintains that the Binance website is inaccessible to China-based users. Given the vast volume of cryptocurrency transactions processed by Binance globally, retaining its Chinese user base is critical amidst intensifying regulatory scrutiny.
China is planning a pioneering blockchain infrastructure system, slated for completion by 2025. This ambitious endeavour, starting in Shanghai, highlights China's commitment to becoming a global leader in blockchain technology and its integration into the real economy and public service. Beyond technological advancement, the initiative symbolises China's broader vision to be at the forefront of blockchain evolution, with similar projects occurring in other Chinese cities, including Nanjing and Zhengzhou. The move reflects the increasing global competition in technological innovation, particularly between China and the US. With China's strong position in the cryptocurrency market and successful launch of its central bank digital currency, the e-Yuan, it appears to be leading in this domain, while the US faces regulatory uncertainty and fewer global cryptocurrency exchanges. Despite its stern approach towards cryptocurrency exchange operations, China maintains influence over significant trading volumes. The development of the blockchain infrastructure system is more than a technological initiative; it is a geopolitical statement and a challenge to the existing world order, with China keen to lead, shape, and define the future.
Hong Kong In:Review
Crypto firms in Hong Kong are struggling to establish corporate bank accounts, despite the government's efforts to establish the territory as a cryptocurrency hub. A report in the Hong Kong Economic Journal cites a senior figure at Hang Seng Bank, owned by HSBC, stating that licensed crypto companies can open a "simple" bank account, though the report did not specify the services such accounts lack. This difficulty is attributed to inadequate staffing at the Securities and Futures Commission and hesitancy from banks. Nevertheless, the Hong Kong Monetary Authority (HKMA) is urging key banks, including HSBC, Standard Chartered, and Bank of China, to accept crypto exchanges as clients, reiterating there's no prohibition on providing services to crypto businesses. Both HSBC and Standard Chartered have stated they are actively engaged in discussions regarding this emerging industry.
HashKey, a cryptocurrency exchange based in Hong Kong, has announced that it will now offer its services to retail users in the city. This makes it the first licensed crypto trading exchange in Hong Kong to cater to retail users. This development follows a licence update from the Hong Kong Securities and Futures Commission, which expands HashKey's business scope from professional investors to retail users. HashKey had received a licence to operate in Hong Kong last November, alongside its rival, OSL. The move comes as part of the city's ongoing efforts to position itself as a global hub for cryptocurrency, which includes attracting mainland China crypto funds and considering the testing of a digital dollar in its mortgage market. In April, the Hong Kong Monetary Authority (HKMA) had also encouraged lenders in the region to meet the needs of licensed crypto exchanges.
India In:Review
India's finance minister has announced the deployment of custom anti-spoofing software aimed at preventing biometric fraud on the Aadhaar-enabled payment system. The Unique Identity Authority of India (UIDAI) developed the AI code, which carries out finger minutiae and image recording and checks for liveness during Aadhaar authentication. The move comes in response to increasing instances of individuals using artificial fingerprints to illegally drain money from accounts. In May, a facial recognition authentication app for Aadhaar transactions was launched by Airtel Payments Bank and the National Payments Corp. of India (NPCI), using software developed by UIDAI. Meanwhile, Paytm, an Indian payment service firm, is working on an AI tool to facilitate payments through facial recognition. However, technological solutions alone cannot eliminate fraud, particularly when committed by a business correspondent. In the fiscal year 2021-2022, the Indian Home Ministry reported 694,000 financial crimes, a significant increase from the previous year. A risk-based biometric Aadhaar authentication is now required for individuals registering for goods and service tax numbers in Puducherry as part of a pilot scheme.
Singapore In:Review
The Monetary Authority of Singapore (MAS) has stated that the risk of 'herding', or individuals making similar decisions due to similarly trained AI models or similar data, remains low on trading platforms. This is because Singapore's financial institutions (FIs) are still in the early stages of using AI for decision-making. This response comes after a parliamentary question was raised about the potential for conflicts of interest when a trading AI platform has to consider both the platform's and customers' interests. Lawrence Wong, Deputy Prime Minister, Minister for Finance, and Chairman of MAS, stressed that regulated FIs are required to have controls in place to avoid or mitigate such conflicts. The MAS introduced the FEAT Principles (Fairness, Ethics, Accountability, and Transparency) in 2018 to guide FIs' responsible use of AI and data analytics. It continues to monitor and assess AI-related risks in financial markets and works with the industry to develop a framework to evaluate their AI systems.
DBS Bank is extensively leveraging artificial intelligence (AI) and machine learning (ML) in both its internal processes and customer experience. As DBS's chief analytics officer, Sameer Gupta, reveals, the bank has more than 300 AI and ML use cases across the bank, which resulted in a revenue uplift of USD 150 million in 2022. To support these initiatives, the bank has created ADA, an internal data platform, and ALAN, an AI protocol platform integrated with ADA, allowing for quick deployment of compliant AI models. Ethical concerns are addressed by adhering to Singapore's FEAT principles and the bank's own PURE framework. AI's role at DBS is to enhance staff productivity, and to that end, the bank focuses on upskilling its staff and attracting top talent. DBS has nearly 200 data scientists and over 1,000 data professionals and continues to experiment with AI-related technologies to improve operations and customer experience. Gupta stresses the importance of fostering a data-led culture and making AI pervasive throughout the bank.
Best of the Rest In:Review
Binance CEO, Changpeng “CZ” Zhao, has warned users about an innovative scam targeting the crypto community. This fraud involves the creation of fake wallet addresses resembling a user's original address, using the same starting and ending characters. The scammer sends the target dust transactions, which appear in the victim's transaction history. If an address from a dust transaction is copied and pasted, funds will be sent to the scammer instead. An experienced crypto operator nearly lost USD 20 million to this scam, but noticed the error immediately and requested Binance to freeze the Tether before it reached the scammer. To avoid such scams, CZ advises using blockchain domains, which are akin to email addresses, enabling users to identify wallets using regular words. Binance allows users to purchase domains. Users are also advised not to copy and paste addresses from apps to transfer funds and to enable two-factor authentication. Despite this warning, some users have reported losses, with one losing USD 20,000 in a similar scam. Similar security incidents have been reported by Coinbase users.
The US Department of Justice is contemplating fraud charges against cryptocurrency exchange Binance, however, there are concerns that such an action could trigger a run on the exchange, akin to the situation experienced by FTX in November 2022, according to a 2 August Semafor report. As a result, officials are reportedly exploring the possibility of fines or non-prosecution agreements as alternatives to criminal charges to mitigate potential harm to consumers. Binance is already under investigation in the US for allegedly breaching sanctions on Russia. Additionally, the US Securities and Exchange Commission lodged a lawsuit against Binance in June, accusing the company of offering unregistered securities and operating illegally. The Commodity Futures Trading Commission has also targeted Binance and CEO Changpeng Zhao for purportedly violating trading and derivatives regulations. To date, no charges have been filed against Binance or Binance.US. The company recently launched Binance Japan, despite allegations of significant crypto-related business in China and potential closure of Binance.US for self-protection, both of which Binance denies.
The Biden administration is increasing efforts to trace cryptocurrency payments used by Mexican drug cartels to purchase fentanyl ingredients from Chinese chemical companies. Digital currency usage has surged among traffickers, spurring law enforcement to evolve their tactics. Efforts to tackle the fentanyl trade extend to tracking dark-web forums where the drug is sold. Law enforcement agencies such as the Drug Enforcement Agency, Internal Revenue Service, and Department of Homeland Security are investing in crypto-tracing technology and focusing on disrupting money laundering operations. Despite some recent drug busts, officials warn that the impacts of this current surge may not be seen for several months. Mexican cartels, such as Sinaloa and Jalisco New Generation Cartel, use advanced crypto operations to finance their operations. Cryptocurrency has allowed cartels to bypass banks, move vast sums instantly and reduce in-person meetings, making it harder for law enforcement to intervene. However, digital transactions leave a trail for investigators. The fentanyl entering the US is largely produced in China and smuggled in by Mexican cartels, who use cryptocurrency to launder their funds. Despite China banning fentanyl sale in 2019, Chinese companies still produce large quantities of fentanyl ingredients.
Binance, a major cryptocurrency exchange, announced the launch of its Japan-based branch on 1 August, under the name Binance Japan K.K. The firm has reportedly launched spot trading for 34 tokens and plans to migrate its global users starting 14 August. The launch comes after Binance was warned by Japan's Financial Services Agency (FSA) in June 2021 for operating without a licence. To comply with local regulations, Binance acquired Sakura Exchange Bitcoin in November 2022, hinting at its intention to reenter the Japanese cryptocurrency market. The move is aimed at fostering the growth of Japan's digital asset market amidst a growing interest in blockchain. While Japan's Prime Minister, Fumio Kishida, has supported the government's plans to encourage Web3 innovations, other crypto exchanges like Kraken and Coinbase have declared plans to cease operations in Japan due to market conditions. Despite regulatory challenges, Binance’s new branch provides Japanese users with access to a larger number of tradable tokens than any other exchange.
State-supported North Korean hacking group, Lazarus, is suspected of consolidating and laundering stolen cryptocurrency totalling about USD 290 million from multiple blockchain exploits, through decentralised networks. Blockchain investigators linked the crypto taken from the Harmony bridge, Atomic Wallet, CoinsPaid, and Alphapo hacks to Lazarus. The hackers moved around USD 8.5 million across 300 addresses on three different blockchains, splitting 4,600 ETH across 125 new Ethereum addresses, then transferring these funds to Avalanche, and then Bitcoin. It's believed that the laundered funds end up with over-the-counter (OTC) traders on the Tron network. Earlier this year, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned three individuals in China for assisting with Lazarus' money laundering activities. These individuals converted millions of stolen cryptocurrency into fiat on behalf of Lazarus and supported weapons production for the North Korean government.
Marzunisham Omar, the Deputy Governor of Malaysia's central bank, revealed that 250,000 suspicious transaction reports (STRs) were registered in 2022, a 30% increase from the previous year. The primary crimes linked to these reports, contributing to money laundering and terrorist financing (ML/TF), include fraud, corruption, smuggling, drug trafficking, and organised crime. Since October 2022, fraud and corruption have led to MYR 5 billion in losses, with corruption becoming systemic. Omar stressed the need for an effective anti-money laundering and counter-terrorist financing (AML/CFT) framework and outlined three main challenges: anonymity and speed amplified by technology, borderless crimes conflicting with jurisdictional enforcement, and professional enablement of criminal activity. Moving forward, the deputy governor highlighted three focus areas: improving private sector capabilities, leveraging technology for better detection and analysis, and strengthening the supervisory, regulatory, and legal regime. Firms can prepare for upcoming AML/CFT regulation changes by ensuring robust AML/CFT programmes, evaluating current technology supporting AML/CFT processes, and possibly considering artificial intelligence for better risk detection.
In a notable victory against cybercrime, Philippine authorities successfully raided a suspected cyber scam hub in Pasay City. The operation, carried out by the Department of Justice (DOJ), the Presidential Anti-Organized Crime Commission (PAOCC), the Cybercrime Investigation and Coordinating Center (CICC), the National Bureau of Investigation (NBI), and the Philippine National Police (PNP), followed two months of surveillance prompted by an insider informant. Thousands of SIM cards, over 800 computers, approximately 2000 mobile phones, and other electronic devices were seized during the raid, all used to perpetrate diverse online scams, including romance scams, crypto investment scams, and spamming activities. This raid underlines the Philippines' growing issue with cybercrime, the country emerging as a major cybercrime hub due to its large English-speaking population and comparatively low cost of living. Despite this victory, CICC Director Rojun Hosillos urged for continued vigilance in the ongoing battle against cybercrime. To prevent falling victim to scams, CICC recommends ignoring unknown contacts, being wary of easy-money schemes, and using caution with links in messages from unfamiliar sources.
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