Risk In:Review #33 - 15 October 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
Welcome back! I paused Risk In:Review for a couple of weeks to spend some much-needed time with my family. However, while I was away, the worlds of risk and technology barely paused for breath. Over the past fortnight there have been numerous headlines ranging from regulatory development of CBCDs to the Sam Bankman-Fried trial. Media spectacles aside, my pick of the top news stories from the last two weeks are as follows:
Firstly, the Finance Ministers of the G20 have called for swift and coordinated implementation of the G20 roadmap to deal with the issues related to crypto assets. The G20 Roadmap on Crypto Assets adopted by the G20 Finance Ministers was spelt out in a Synthesis Paper prepared jointly by the International Monetary Fund (IMF) and Financial Stability Board (FSB). This roadmap has significant implications for investors, governments, businesses, and regulators. The IMF-FSB paper champions detailed oversight of cryptocurrencies, as opposed to an outright ban, and among its high-level propositions, it underscores the importance of transnational cooperation, stringent governance for crypto enterprises, and transparent data sharing between companies and regulatory bodies. While the G20’s efforts may lead towards improved market stability and mainstream adoption of crypto assets, it is unclear how quickly the roadmap can be delivered and whether it will be welcomed by those in the crypto domain.
The second notable headline relates to the European Union laying down measures to safeguard its "economic security", by outlining sensitive technologies that may present risks if they are acquired by competitors, chiefly China. The identified areas were chosen based on their transformative potential, military utility, and risk of human rights violations. The EU's strategy, which mirrors measures implemented by the US, aims to minimise dependencies on external sources. Though the European Commission did not explicitly reference China, the move aligns with the bloc's strategy of "de-risking" ties with Beijing.
It is useful to note the comparison between governments and regulators pulling together to coordinate efforts around an external threat - cryptocurrency - versus the increasing polarisation around access to the foundational components of computing. The ramifications of this divergence are yet to be seen, but could be profound, especially given the importance of semiconductors and similar equipment to quantum computing and advanced AI.
Lastly, the crypto domain continues to grapple with the menace of 'rug pulls'. These are scams where developers entice investments by hyping a cryptocurrency or a NFT initiative, only to vanish, pocketing substantial investor assets. While the magnitude of recent incidents might not mirror the scale of OneCoin (USD 4 billion) or Thodex (USD 2 billion), their constant presence in global headlines underscores the challenge of shielding investors, especially in markets like India and China.
This Week In:Review
Australia
China
Hong Kong
India
Singapore
Best of the Rest
Australia In:Review
Mastercard, in collaboration with Australian payment tech provider Cuscal and NFT-as-a-Service provider Mintable, is exploring the tokenisation of Australia's central bank digital currency (CBDC) across various blockchains. Their innovative solution ensures that the pilot CBDC can only be accessed by authorised, KYC-verified entities. In a live test, Mastercard showcased a transaction where a pilot CBDC holder could buy an NFT on the Ethereum blockchain. The process involved securing the needed pilot CBDC amount on the Reserve Bank of Australia's (RBA) platform and generating a corresponding amount of wrapped pilot CBDC tokens on Ethereum. This transaction was successful due to strict controls and ‘allow-listing’ measures on the platform. Richard Wormald, Australasia's division president at Mastercard, highlighted the growing consumer desire for cross-blockchain commerce. Mastercard's Multi Token Network, launched in June 2023, bolsters this initiative by fostering efficient payment via blockchain. Zach Burks, Mintable's CEO, sees this as a leap in linking NFTs and digital currencies, foreseeing reduced fraud and heightened commerce possibilities. Nathan Churchward from Cuscal celebrated the partnership's potential to reshape Australian banking. The RBA's CBDC pilot project with the Digital Finance CRC demonstrated the CBDC's potential in innovating payment services for Australians.
The Reserve Bank of Australia (RBA) is set to acquire extended oversight powers over digital wallets, buy-now-pay-later (BNPL) companies, and crypto assets, according to reforms proposed for national payments systems legislation. Treasurer Jim Chalmers emphasised the need for these changes, stating they would tackle risks from new, currently unregulated, digital payment services, thus safeguarding consumers, encouraging competition, and boosting innovation. The Payments Systems (Regulation) Act 1998's prospective amendments would broaden its definitions, encompassing emerging technologies. The Treasurer would also gain authority to categorise payment platforms in the nation's interest. These reforms aim to ensure financial system stability, uphold consumer data privacy, and boost competition, aligning with a 2021 review's recommendations. This review highlighted that increasing adoption could render digital wallets, such as Apple Pay and Google Pay, vitally significant for the economy. Despite this, they aren't recognised as a payment system, lacking mandated accessibility standards. The review further noted digital wallets' data-rich nature, suggesting proper data handling protocols. Integrating these wallets within RBA's framework would enable it to mediate disputes and set standards. Apple, in a previous submission, downplayed its significance in the payment realm. Feedback on the proposed reforms is invited until 1 November 2023.
In the past two decades, Australians have seen a major shift in payment methods. Cheques are on the brink of extinction, set to be phased out by the end of the decade. Currently, 95% of all in-person card payments are contactless, reflecting a 10% rise in three years. Debit card usage has surged, and credit card use has witnessed a gradual climb. This change in consumer behaviour coincides with merchants’ shift towards advanced point-of-sale systems that synchronise with inventory, accounting, and online sales. The Australian Payments Network (AusPayNet), pivotal to Australia’s payment infrastructure, is reviewing potential changes, including tighter security measures. AusPayNet’s CEO, Andy White, warns of emerging risks such as cybercrime and stresses the need for licensing all Payment Service Providers.
The evolving payment landscape has posed challenges for banks which traditionally relied on physical and paper-based transactions. Mark Nagy, CEO of DataMesh, indicates the banks’ struggle to meet evolving merchant demands for an efficient payment experience. New entrants in the payments sector pose a threat to traditional banks, but often come at steeper transaction costs. DataMesh aids banks by integrating with their existing systems. The significance of an efficient in-store experience remains, with Australians showing preference for physical stores post-pandemic. For merchants, streamlining payment processes and leveraging data analytics is vital, implying that banks must evolve in tandem with merchant needs.
Meta, the parent company of Facebook, has issued a summons for billionaire Andrew Forrest to produce sensitive documents amidst an ongoing legal dispute concerning an alleged cryptocurrency advertisement scam. The tech behemoth has requested 20 categories of documents, including some of Forrest's personal emails. The conflict arises from accusations that Meta negligently allowed fraudulent cryptocurrency advertisements, using Forrest's likeness, to feature on its platform. Despite Forrest’s claims that he notified Facebook to remove the misleading adverts back in 2019, Meta's legal representative, Paul Yovich SC, expressed concerns over incomplete evidence disclosure. Forrest's legal counsel, Rachael Young SC, contested the summons, deeming it both irrelevant and an abuse of process. She urged for the cancellation of the summons and highlighted the 18 folders of documents already provided. The case, unusual in its nature as it involves a private individual pressing criminal charges against a corporation, was initiated by Forrest in early 2022, with the approval of Australia’s then-attorney general. The matter will resume in a WA court on 20 November, with magistrate Melita Medcalf anticipated to pronounce her judgment.
China In:Review
A recent verdict from the Nanchang People’s Court declared that crypto lending falls outside the purview of China's legal framework. In April 2021, Mr. Ming loaned 80,000 Tether USDT, worth USD 1.00 each, to Mr. Gang for stablecoin trading. The loan was defaulted, leading Mr. Ming to pursue legal action. The court stated that, for the lawsuit to be considered, Mr. Ming had to prove Tether was a legally issued fiat currency. Unable to provide such proof, the court deemed the lawsuit unfit for civil litigation. An appeal was also dismissed, with the presiding judge commenting on the legal risks of virtual currency investment. The decision reflects China’s stance on cryptocurrencies, which were banned in late 2021 due to environmental issues and surveillance concerns. In a similar ruling in August, the Changzhou Zhonglu People’s Court annulled a USD 10 million Bitcoin lending agreement, stating that, due to the national prohibition of crypto, the lender could not seek judicial relief following the borrower's default.
The Chinese crypto initiative, Lucky Star Currency, executed an exit scam, stealing over USD 1 million from its smart contracts, reports blockchain security company, Certik. Lucky Star Currency, which provided astrology-themed non-fungible token (NFT) services, including a marketplace and award centre, suddenly emptied all Binance Smart Chain funds on 9 October. Approximately 1.6 million LSC tokens were extracted from the AwardCenter contract, and an additional 1.4 million LSC from the NFTMerge contract. These stolen tokens were promptly converted into over USD 1 million of Binance USD (BUSD) stablecoin. This stolen BUSD was then moved to an account which had been gathering funds from assorted sources over several months, suggesting a scam involving several projects. Certik verified that these compromised contracts had been advocated as official Lucky Star Currency platforms on platforms such as Telegram and Twitter. Following the scam, Lucky Star Currency's digital presence vanished. Due to the anonymous character of blockchain technologies, the affected parties have limited avenues for recourse. The scam took place during a heightened interest in NFTs and cryptocurrency in China. Recent times have seen China grappling with significant crypto scams, such as the USD 100 million hack of Multichain in June, affecting over 340 initiatives.
领英推荐
China's prominent artificial intelligence company, SenseTime, which is listed in Hong Kong, has revealed that a former employee from its intellectual property (IP) unit is under investigation by mainland Chinese police. The company provided a statement noting the ex-employee's suspected involvement in a commercial-related case, affirming its strict stance against corruption and illicit activities. While the identity of the individual was not disclosed, they were reportedly an executive director of IP rights being examined for financial discrepancies.
SenseTime, founded in 2014, is renowned for its AI solutions, spanning from autonomous driving to medical imaging and is a major provider of facial recognition tech in China. However, post its Hong Kong IPO in December 2021, the firm has faced challenges. The US barred American investments in SenseTime in February, alleging its tech played a part in human rights violations in China’s Xinjiang region, an accusation the company refutes. Following a significant surge after its IPO, SenseTime's shares have plunged by about 75% due to multiple net losses.
In August, the company received approval to unveil its ChatGPT-like generative AI services. However, Beijing has been tightening AI regulations and enhancing its IP rights legal framework. Last year, Chinese market regulators tackled around 44,000 trademark and IP violation cases, amounting to CNY 1.62 billion.
In a move to safeguard its "economic security", the European Commission has outlined sensitive technologies requiring close examination due to the risks they may present if acquired by competitors, chiefly China, according to experts. These technologies include advanced semiconductors, artificial intelligence, quantum computing, and biotechnology. The identified areas were chosen based on their transformative potential, military utility, and risk of human rights violations. The EU's strategy, which mirrors measures implemented by the US, aims to minimise dependencies on external sources. Though the European Commission did not explicitly reference China, the move aligns with the bloc's strategy of "de-risking" ties with Beijing. The next phase involves consultations with EU member states to determine future steps, which may range from export controls to investment increases within the EU. Analyst Agathe Demarais highlighted the dual-use nature of semiconductors for both civilian and military applications, AI's impact on civil liberties, quantum computing's military implications, and the potential civil liberties concerns surrounding biotechnology. Achieving consensus among EU nations will be challenging, with economic ties, like Germany's strong trade relationship with China, influencing member state perspectives.
China has integrated its digital yuan pilot with Hong Kong's Fast Payment System (FPS), enhancing the speed of cross-border digital yuan transactions and fostering interoperability with global payment systems. Initiated by the Hong Kong Monetary Authority, the FPS functions as an inter-bank tool, facilitating person-to-person transfers, e-wallet top-ups, and online shopping, simplifying and accelerating payments. The integration, a collaboration between the authority and the Digital Currency Research division of the People's Bank of China (PBoC), enables Hong Kong residents to refill their digital yuan accounts from the Mainland during travels. The service is available to those using major banks such as ICBC (Asia), Bank of China (Hong Kong), Hang Seng Bank, and HSBC with HK dollar and yuan accounts. Launched ahead of the Asian Games, Hong Kong athletes have already begun using the system. The e-CNY-FPS solution shortens transaction links and minimises costs. Athletes have praised the digital RMB wallets for their ease of use, topping up directly via the FPS. This development comes after the PBoC's recent update allowing overseas cardholders to use its app for digital yuan top-ups when visiting China.
Hong Kong In:Review
Hong Kong police and the Securities and Futures Commission (SFC) have formed a joint task force to oversee crypto exchanges and prevent suspicious operations. Established after a 28 September meeting between the authorities, the task force will focus on Virtual Asset Trading Platforms (VATPs) to detect illegal activities. Comprising members from the police's Commercial Crime, Cyber Security Financial Intelligence, and Investigations divisions, alongside SFC’s Enforcement and Intermediaries divisions, the group aims to share intelligence on dubious exchange actions, appraise risks, and collaborate on investigations. This initiative follows the JPEX incident, where a Dubai-based, unlicensed crypto exchange is suspected of defrauding victims of HKD 1.43 billion, marking it as one of Hong Kong's most significant financial fraud cases. On 25 September, the SFC introduced measures to boost cryptocurrency transparency and security, including publishing a list of licensed and application-pending VATPs. Chainalysis reports that, despite only housing 0.5% of China's population, recent cryptocurrency inflows to Hong Kong rival those to mainland China, potentially prompting China to reconsider its stringent stance on cryptocurrencies, given its 2021 crackdown on crypto activities.
In the first half of 2023, Hong Kong experienced the highest rate of suspected digital fraud attempts globally, as highlighted in a recent TransUnion report. Globally, the suspected digital fraud rate was 5.3%, an 18% rise compared to H1 2022, with fraud attempts up 27%. However, Hong Kong's suspected rate was a staggering 18.3%, reflecting a 57% surge in attempts from H1 2022. Analysing sectors, travel and leisure, alongside online communities like dating sites and forums, were most targeted, with fraud rates of 8.1% and 4.8% respectively. Financial services and telecoms each faced a 3.9% fraud rate, followed by insurance at 2.8% and logistics at 1.4%. Digital transactions in travel and leisure grew 243% year-on-year, while logistics and telecoms saw declines of 36.6% and 34.5% respectively. Jerry Ying of TransUnion Asia Pacific emphasised that understanding fraud's impact requires broader industry insights. Another TransUnion survey showed 32% of Hong Kong's populace was targeted by fraud but evaded victimisation, with 6% falling prey. Among these, vishing was the most common scheme (34%), trailed by phishing (31%) and smishing (29%). As digital service adoption rises, businesses must bolster their defences against fraud, Ying noted.
Last Halloween, Sam Bankman-Fried's virtual appearance at Hong Kong's FinTech Week had him discussing the potential for Hong Kong to reclaim its position as a "global crypto hub." A year later, Bankman-Fried faces embezzlement charges in the US, his companies bankrupted. Several exchanges connected to Hong Kong have also struggled, notably with the JPEX scandal involving missing HKD 1.5 billion (USD 192 million) and 28 arrests. Despite these setbacks, including Hong Kong's drop to No. 47 in the Chainalysis crypto adoption index, there remains optimism about the city's crypto future. Securing a virtual asset trading platform (VATP) licence in Hong Kong is costly, reaching approximately HKD 60 million, with added expenses for necessary specialist staff. Yet, as the city gears up for its upcoming FinTech Week, there's hope that, with the right regulations and oversight, Hong Kong could see a revival in the crypto space. Past locations, like El Salvador and Malta, have had their challenges with cryptocurrency. However, local industry players in Hong Kong believe proactive regulations will bolster the city's position in the crypto market, anticipating a bullish trend by 2024-2025.
Hong Kong police have issued a warning about a new phishing scam targeting Binance users. Fraudsters, impersonating Binance, sent text messages to users urging them to click on a link to verify their identities or risk account deactivation. After clicking the link and providing their details, the victims' Binance accounts were accessed, and all assets within were stolen. In the past two weeks, 11 victims in Hong Kong have reported combined losses of USD 446,000 (HKD 3.5 million) due to this scam. Authorities have advised residents to report suspicious messages on the official website's "fraud prevention" section. To aid users, the police shared a link to a list of verified virtual asset trading platforms endorsed by the Hong Kong Securities and Futures Commission (SFC). At present, only HashKey and OSL are licensed for retail investment in Hong Kong. Amidst these issues, Hong Kong's crypto community has been reeling from the JPEX crypto exchange scandal, resulting in USD 180 million in losses. JPEX, which was unlicensed, is believed to have entrapped residents with enticing adverts and high-return promises. Following this scandal, the SFC plans to release a list of licensed and "suspicious" crypto platforms.
Hong Kong's digital asset ecosystem requires stronger safeguards and increased public education to ensure investor protection, warns Eddie Yue Wai-man, CEO of the Hong Kong Monetary Authority (HKMA). This comes after a cryptocurrency exchange failure suspected of costing 2,305 investors a total loss of HKD 1.43 billion. Highlighting the significance of these safety measures, Yue pointed to the recent JPEX debacle and its detrimental effect on public trust in virtual asset trading. The HKMA had already initiated a consumer protection charter against fraud in June, advocating for merchants to refrain from sending hyperlinks to customers. Yue emphasised the importance of investing only in regulated exchange platforms and noted the rise of cryptocurrency-related crimes in the city. Hong Kong aims to be a global leader in the Web 3 sphere and has rolled out policies and regulations to encourage virtual asset trading. Beyond cryptocurrencies, Yue envisions Hong Kong's digital asset landscape encompassing areas like stable coins and central bank digital currencies. Only two platforms are currently licensed for retail trading following the Securities and Futures Commission's (SFC) new virtual asset regulations, and Yue stressed that the SFC should serve as the regulatory guardrail. Deloitte's Hong Kong digital asset leader, Robert Lui, also highlighted the need for better investor education and transparent dispute resolution mechanisms.
India In:Review
At their concluding meeting in Marrakesh, the G20 Finance Ministers and Central Bank Governors endorsed a comprehensive framework for the regulation of crypto assets. This roadmap, based on the IMF-FSB's Synthesis Paper, aims to address macroeconomic and financial stability concerns linked to cryptocurrencies. It stresses international collaboration, applying FATF anti-money laundering and counter-terrorism funding standards, and considers the effects on Emerging Markets and Developing Economies. The framework seeks to harmonise differing global regulatory approaches. The G20 leaders have called for the roadmap's coordinated deployment, advocating global oversight of stablecoins and championing responsible fintech innovation. It also permits domestic legal strategies. The blueprint will likely inform India's impending regulations for the unpredictable digital assets sector, set to be finalised by the end of the year. Following the G20's approval, Bitcoin's price stabilised below USD 27,000. The decision was publicised by India's Ministry of Finance on Twitter.
In Himachal Pradesh, a northern state in India, fraudsters have allegedly deceived multiple cryptocurrency investors out of over USD 24 million since 2018, capitalising on the growing interest in cryptocurrencies. Thought to be part of a criminal network, the suspects enticed investors with promises of high returns from KRO and DGT coins, using a Ponzi scheme to encourage them to bring in more participants. The scam came to public attention via independent legislator Hoshyar Singh in the Vidhan Sabha. While the exact amount defrauded is still under investigation, five individuals have been arrested, although the mastermind remains at large. The fraudsters used misinformation, deception, and threats, manipulating coin prices to maintain their scheme. They introduced the "Korvio Coin" or KRO coins, demanding an activation fee and promising high returns. Over five years, they used several cryptocurrencies. Ponzi schemes involve using new investors' funds to pay prior participants. The fraudsters in Himachal not only encouraged recruitment of new members but also created fake websites to list and control their coin pricing. Director General of Police Sanjay Kundu stated that they are close to capturing the main culprits. He cautioned the public against falling for such scams, referencing similar frauds like the 2021 Squid coin hoax.
Singapore In:Review
Singaporean banks are exhibiting increased vigilance in performing due diligence on clients, leading to longer wait times and even account closures in some instances. This enhanced scrutiny follows Singapore's largest money laundering scandal, which saw the seizure of assets valued at USD 2 billion. Notable banks, including the Oversea-Chinese Banking Corp Ltd (OCBC), Citigroup Inc, and United Overseas Bank (UOB), now sometimes demand additional documentation to verify clients' wealth sources. Wait times for affluent clients to open accounts have also escalated, surpassing the previous average of one to three months. Responding to the developments, the Monetary Authority of Singapore reiterated the importance of verifying customer identities and monitoring higher-risk clients' transactions. This heightened level of due diligence was triggered after an August crackdown saw 10 Chinese nationals arrested in a significant money laundering operation. Assets, ranging from luxury properties to cryptocurrencies, gold, and high-end products, were seized from banks, including Credit Suisse and Julius Baer. In light of the scandal and amid a surge in asset inflows, particularly from China and Hong Kong, some banks have opted to terminate client relationships. This event underscores Singapore's need to ensure its reputation as a trusted financial centre remains untarnished.
Financial institutions in Singapore expended USD 5.7 billion (SGD 7.8 billion) in the last year on crime deterrence and regulatory compliance, marking a substantial rise from previous years, according to a study by LexisNexis Risk Solutions. Globally, the financial sector's spending reached an astounding USD 206 billion in the same period. Compliance screening, which encompasses customer validation and risk assessment, witnessed a global surge in expenses. Costs in Europe, the Middle East, and Africa topped at USD 85 billion, while Latin America spent the least at USD 15 billion. Financial establishments across different regions cited varying challenges, from customer acquisition in North America and Latin America to risk profiling in Europe and regulatory reporting in Asia-Pacific. The study highlighted an increasing intricacy in global regulations, leading to tensions between customer satisfaction and regulatory conformity. This heightened scrutiny, especially after a massive money laundering episode in Singapore, indicates banking experiences may become less seamless. A notable finding was the rise in digitally facilitated crimes using cryptocurrencies and artificial intelligence. Financial institutions are now prioritising enriched payment data, advanced analytics, and artificial intelligence to combat financial crime more efficiently. The shift towards digital operations has escalated technology-related compliance costs, especially in North America.
Best of the Rest In:Review
Taiwanese lawmakers are set to draft a dedicated cryptocurrency law by November 2023 to address concerns over offshore exchanges and regulatory loopholes. Yung-Chang Chiang, a member of Taiwan’s Legislative Yuan, convened a public hearing on 6 October, bringing together virtual asset service providers, legal specialists, and academics. The proposed law mandates permits for all crypto platforms operating in Taiwan, empowering regulators to impose administrative penalties on non-compliant operators. Chiang highlighted the distinctiveness of cryptocurrencies from conventional financial instruments, underlining the necessity for separate regulations. Although the Financial Supervisory Commission (FSC) might present its own special crypto law draft, enactment is anticipated post-mid-2024. Taiwan has been crafting a crypto regulatory structure for some time. In 2020, the FSC's Fintech and Innovation Office, responsible for supervising the crypto sector, was established. Despite releasing new crypto guidelines in September this year, the FSC faced challenges due to their lack of legal force. A key concern remains the regulation of offshore crypto exchanges, which can bypass domestic regulations, leading to potential consumer and money laundering risks. Taiwan's move towards legislating crypto confirms governments' recognition of its significance and the need for protective, innovative regulations.
Israel has moved to freeze crypto accounts associated with militant groups such as Hamas and the Palestinian Islamic Jihad (PIJ), aiming to block a key fundraising route. Between August 2021 and June, wallets linked to these groups accumulated approximately USD 135 million, as revealed by blockchain analytics firms Elliptic and BitOK. Historically, digital assets have been widely used for terror-financing, but advancements in transaction tracing by analytics firms have diminished its anonymity. The Israeli government's ability to pinpoint Hamas-linked wallets indicates decreased efficacy of crypto for discreet fundraising. Earlier this year, after significant wallet freezes, Hamas announced it would stop accepting crypto donations. Concurrently, crypto donations to the PIJ also saw a notable decline. Despite these actions, criminal entities continue to exploit crypto for various purposes, including laundering through crypto mixers and token swaps. Elliptic's recent tracing showed a hacker attempting to mask their activity after exploiting a crypto exchange. The crypto industry's association with illicit activities and fraud, such as the accusations against Sam Bankman-Fried, co-founder of FTX, of defrauding investors, further taints its reputation. Ex-CEO of Alameda Research, Caroline Ellison, testifying in Bankman-Fried's trial, spoke of fraudulent behaviours she alleges were at his instruction. Bankman-Fried denies all charges.
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