Risk In:Review #35 - 29 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
It has been a relatively quiet week for technology and risk management in Asia Pacific. After last week’s flush of crypto-regulatory announcements in Australia, and the emergent issue of cryptocurrency being used to support terrorist financing in the Middle East, this week two lower-key news headlines have caught my attention.
The first relates to Taiwan’s Virtual Asset Management Ordinance (VAMO). The VAMO was prompted by the collapse of FTX last November and has passed its first reading in the Legislative Yuan (Taiwan Parliament). What is interesting about the VAMO is it provides for a softer way of regulating virtual assets compared to the regimes in Hong Kong and Japan.
Unlike Hong Kong’s regime, the VAMO does not take a strong position on derivatives or stablecoins, although it hints at the potential for crypto derivative-focused rules in the future. However, like the Hong Kong regime, the VAMO does not limit virtual asset trading exclusively to professional investors.
This relaxed approach towards investors is interesting given many of the protections of the Hong Kong and Japanese regimes are not currently present in the VAMO. For example, Japan requires that customers' fiat money balances must be entrusted to a third-party Japanese institution, and both Japan and Hong Kong mandate a percentage of customer funds that must be maintained in cold storage (95% and 98% respectively).
Taiwan has so far only opted to require segregation customer assets from operational finances, but given the failures in the FTX case, it is not clear that this control alone provides sufficient investor protection. There is still time for the VAMO to be amended, but as currently drafted the Taiwan regime would potentially expose domestic investors to a wider set of risks than similar regimes.
The second headline is work underway in India to develop a comprehensive global database of cryptocurrency exchanges. This initiative aims to equip law and tax enforcement agencies with a comprehensive view of crypto transactions worldwide. The database is intended to include wallet balances, peer-to-peer transactions, and even Know Your Customer (KYC) data.
I have covered this item in previous reviews, but the Indian effort is worth calling out again given the similarities to the recently announced Project Atlas, a prototype Bitcoin monitoring system developed by the Bank for International Settlements. Project Atlas intends to combine on- and off-chain information, creating a layered approach to data vetting and tailoring statistics for central banks.
What is clear is that as the demand for regulation in the virtual currency space increases, regulators and law enforcement agencies are increasingly looking for ways to capture and interpret the financial data flows to support oversight, reduce investor risk, and enhance their ability to apply AML and CFT controls. I do not doubt that we will see several of these initiatives establish cooperation protocols in the near future.
This Week In:Review
Australia
China
Hong Kong
India
Singapore
Best of the Rest
Australia In:Review
A police inquiry into the opening of a Chinese currency remitter, Changjiang Currency Exchange, in Sydney during the pandemic has reportedly uncovered Australia's largest money-laundering ring, with connections to cybercrime, drug trafficking, cryptocurrency, and violent crime. The Australian Federal Police (AFP) coordinated a substantial operation, arresting seven individuals in Melbourne, who are allegedly involved in laundering AUD 229 million through the exchange. In total, over AUD 10 billion has been processed by the exchange in three years, some of which involved lawful transactions.
Gary Hardgrave, a former government minister and Sky News contributor, previously endorsed the exchange but denies any involvement in its day-to-day operations. Those arrested in the operation, named Long River, included four Chinese nationals and three Australian citizens. The US Secret Service has also charged a Chinese national for purportedly laundering AUD 100 million using the syndicate from a global scam associated with forex and cryptocurrencies.
Assets over AUD 50 million have been seized, including luxury cars, watches, and properties. Stephen Dametto, AFP’s assistant commissioner, stated that the syndicate openly operated across the country, blending lawful and illicit funds. The AFP also believes the syndicate instructed its clientele on fabricating business documentation and potentially acquired counterfeit passports. Another operation, Operation Wickham, linked to the case, found a scam defrauding victims of over AUD 160 million worldwide.
The film "Dumb Money", which delves into the 2021 GameStop “short squeeze” saga, will now commence with a cautionary note about the perils of investment hype in screenings across Australia from Thursday. This cinema advertising initiative will be orchestrated by the Australian Securities and Investments Commission (ASIC) to reach its target audience directly. In 2021, the value of GameStop's shares surged approximately 2000%, but most gains evaporated soon after. The media attention, coupled with a wave of young, social-media-influenced investors, sparked market manipulations in smaller Australian firms later that year. Calissa Aldridge, ASIC’s executive director of markets, emphasised that films might romanticise perilous investments. Consequently, investors need to understand the potential for complete financial loss. The campaign "Don’t get burnt by hype" also aligns with this cinema advertising, warning against the illicit “pump and dump” strategy. This scheme involves hyping up a company to boost its share price before the perpetrators sell their shares for a profit, causing losses for others. Furthermore, ASIC is monitoring crypto scams, apps turning share trading into games, and unqualified online "finfluencers". A 2021 ASIC survey found that a third of 18-21-year-olds followed these influencers, and a majority altered their investment approach accordingly.
Commonwealth Bank of Australia (CBA) has initiated an expansion of its anti-scam technologies to address the surge in intricate frauds and scams. The bank's Scam Indicator, a tool created in collaboration with Quantium Telstra to identify potential scam phone calls, has now been launched. Furthermore, CBA plans to extend its renowned NameCheck technology to other institutions that handle payments, enabling customers to verify payment details before transactions. CBA's CEO, Matt Comyn, emphasised the bank's commitment to bolster early scam detection and prevention, acknowledging the challenges as scamming techniques continue to evolve. Collaboration among financial institutions, telcos, the government, and digital platforms is deemed crucial. Scammers often employ phone calls to pressurise victims into making payments; thus, CBA and Telstra have combined their capabilities to safeguard their collective clientele. Recent data indicates that the NameCheck system has prevented over 10,000 scam payments, saving AUD 38 million. Moreover, mistaken payments have been curtailed by over AUD 100 million since March 2023. CBA is committed to a holistic approach in fighting scams, aiming to collaborate across industries to ensure safety in payments.
China In:Review
Pan Gongsheng, the new chief of the People’s Bank of China (PBOC), announced a stringent clampdown on illegal financial undertakings, including cryptocurrency transactions, according to local reports. This statement came as Hong Kong regulators imposed limitations on retail access to certain complex digital asset products. In his speech at a meeting of the Standing Committee of the 14th National People’s Congress, Pan detailed the PBOC's intent to suppress fraudulent gold exchanges, illicit wealth management firms, unauthorised fund-raising, and digital currency dealings. Pan, who took the PBOC helm in July, emphasised consumer risk mitigation, efficient macroeconomic control execution, fortified financial oversight, and bolstered domestic demand. Although the PBOC outlawed crypto activities in September 2021, China continues to dominate global crypto exchanges, with Chinese investors trading USD 90 billion on Binance in May this year. Hong Kong has been carved out as a regulatory experimental ground for digital assets over the past year. Nonetheless, after a USD 180 million fraud at the JPEX crypto exchange, local regulations are becoming stricter, especially given the burgeoning retail enthusiasm in digital assets and potential US approval of Bitcoin ETFs.
Hong Kong In:Review
Hong Kong's securities regulator and central bank have revised Hong Kong's cryptocurrency policy in reaction to the evolving market and industry queries. Initially, Hong Kong's crypto regulation strategy centred on granting market activities only to professional investors. With the expansion of investment products related to virtual assets in recent years, the approach allowed retail investors into crypto trading platforms. Due to industry interest in further broadening retail access and current market trends, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have jointly updated this policy.
Authorities reiterated the risks they identified in 2018, noting that many crypto platforms might not maintain standards comparable to conventional financial service providers, thereby adding extra risks. The regulators labelled virtual asset-related products as "complex products", which may not be readily understood by retail investors. This label means those distributing these products must meet the SFC's criteria for marketing complex products.
To safeguard investors, the SFC and HKMA recommend offering complex virtual asset-related products solely to professional investors. Intermediaries are urged to evaluate retail investors' understanding of virtual assets before executing transactions for them. Furthermore, clients should have adequate net worth to manage potential losses from trading such products.
This revised approach follows a fraud investigation into JPEX, a crypto exchange, leading to enhanced regulatory vigilance over the sector. Additionally, in October, the SFC collaborated with Hong Kong police to establish a unit specifically to oversee cryptocurrency exchanges.
Hong Kong's Commissioner of Customs and Excise, Louise Ho Pui-shan, has advocated for heightened regulatory scrutiny due to escalating money-laundering threats in the cryptocurrency domain. The call is spurred by the HKD 1.5 billion JPEX incident, revealing oversight shortcomings concerning Hong Kong's cryptocurrency exchanges. The JPEX fiasco in October 2023 highlighted the frailties in the city's crypto regulatory structure. Consequently, there is an intensified focus on reviewing the regulations for businesses exchanging cash for cryptocurrencies, known as cash-for-crypto shops. The South China Morning Post highlighted Ho's emphasis on two central regulatory aspects: countering money laundering and thwarting terrorism financing, both exacerbated by crypto's anonymous nature; and prioritising investor protection, especially after some over-the-counter (OTC) exchanges pushed dubious investments during the JPEX crisis. Although there's speculation that the Customs and Excise Department might oversee OTC crypto exchanges, Commissioner Ho refrained from detailing but underscored ongoing discussions among authorities. Concurrently, Hong Kong has seen a spike in crypto-associated money-laundering episodes, underscoring the need for enhanced regulations. The JPEX controversy has dented retail investor confidence, with 41% now shying away from cryptocurrency investments.
India In:Review
India is developing a global database on cryptocurrency exchanges to strengthen oversight and combat illicit use of cryptocurrencies. This initiative, intended for law enforcement agencies like the Enforcement Directorate (ED), the income tax department, and the Central Bureau of Investigation (CBI), aims to monitor crypto assets used in criminal activities, including money laundering. This database will store information on global crypto exchanges, including giants like Binance, Bybit, and Kucoin, providing a comprehensive view of crypto transactions worldwide. Detailed oversight will include recording wallet balances, peer-to-peer transactions, and even Know Your Customer (KYC) data. This comes amid concerns of funds being channeled through cryptocurrencies for illegal activities, including terrorism financing. Consequently, even decentralised wallets such as MetaMask and TrustWallet may be compelled to implement KYC procedures. The Indian government aims to have the system operational by the end of this fiscal year, with stringent penalties for non-compliance. However, international exchanges' cooperation remains uncertain. In a similar vein, the Bank for International Settlements (BIS) has developed Project Atlas, monitoring Bitcoin activities. Both efforts reflect a global shift towards greater regulation and transparency in the cryptocurrency arena, reshaping its future trajectory.
Over 1,000 Indian police officials have been ensnared in a fraudulent cryptocurrency scam, swindling over 250,000 individuals of roughly INR 2,000 crore ($240 million). The fraud, reported by India Today, promised substantial returns on investments in two non-existent cryptocurrencies, Korvio Coin (KRO) and DGT Coin. Fraudulent websites showcasing fake prices for these invented currencies and an emphasis on recruiting others fuelled the scam. Notably, police from Himachal Pradesh's Mandi district not only lost significant sums but some, capitalising on their social standing, even became promoters. Sanjay Kundu, Himachal Pradesh's director general of police, asserted that all culprits would face legal consequences. An extensive search operation by a special investigation team (SIT) across Himachal Pradesh led to the discovery of incriminating evidence and seven arrests. Presently, nine individuals are in custody related to this scam, with two acknowledging liabilities of over INR 400 crore (USD 48 million) due to their involvement.
Singapore In:Review
The Association of Banks in Singapore (ABS) has announced the effectiveness of enhanced security measures implemented by major retail banks in thwarting scams. Since the beginning of 2023, banks in Singapore have prevented and recouped SGD 57.6 million linked to various fraudulent schemes. A significant factor in this success is the banks' new anti-malware tools, which have saved customers from potential losses amounting to at least SGD 18.6 million. While the tools are still being adopted across the sector, their impact is expected to grow. ABS has been actively working with member banks, government agencies, and law enforcement to counter scams. Despite the evolving nature of fraud tactics, banks are swiftly enhancing their anti-scam approaches. ABS is also heightening public awareness about scam techniques, emphasising the risks of malware and advising only downloading from trusted app stores. Additionally, banks are introducing a discretionary goodwill system to assist scam victims, considering the scam's nature and the customer's financial situation. ABS Director Mrs Ong-Ang Ai Boon highlighted the continuous nature of the battle against scams and emphasised community vigilance. Moreover, to bolster its anti-money laundering efforts, Singapore is setting up an inter-ministerial committee to protect its financial frameworks.
The Monetary Authority of Singapore (MAS) has directed DBS Bank and Citibank to probe their recent inability to promptly restore systems following a services outage. MAS guidelines stipulate that crucial bank systems cannot be down for more than four hours in any 12-month span. These systems should have a back-up data centre and undergo regular tests for reliability. On 14 October, both banks faced disruptions when their main Equinix data centre malfunctioned. Although they activated backup centres, they failed to meet the four-hour recovery mandate. To manage the situation, they implemented measures such as extended branch hours and alternative credit card transaction methods. A contractor's error during an upgrade, which led to overheating in parts of the data centre, reportedly caused the outage. This incident also affected services like Facebook, Instagram, and WhatsApp. MAS has now demanded a comprehensive investigation from both banks into the incident, stating it will decide on supervisory actions once facts are ascertained. Emphasising that no IT system is foolproof, MAS advised banks and customers to be prepared for disruptions due to IT failures.
Best of the Rest In:Review
Taiwan has initiated its journey into regulating digital assets by presenting the Virtual Asset Management Ordinance Draft bill to the Legislative Yuan. The proposed bill will categorise virtual assets, establish operational norms for asset handlers, reinforce customer security, and necessitate membership in industry associations alongside obtaining regulatory permissions. Historically, Taiwan's approach to crypto has been relaxed, governed merely by existing anti-money laundering and know-your-customer protocols. The push for more comprehensive regulations became prominent after the collapse of FTX last November, which was popular among Taiwanese due to its appealing USD interest rates.
Contrasting with neighbouring Hong Kong, Taiwan's bill remains neutral on derivatives and stablecoins, but hints at the potential for crypto derivative-focused rules in the future. The legislation does not limit virtual asset trading exclusively to professional investors. Unlike Japan's stringent custodianship rules for its exchanges, Taiwan's draft merely advocates for segregating customer assets from operational finances. Additionally, the bill demands exchange operators to facilitate regular audits and allow bodies like the Financial Supervisory Commission to assess their internal mechanisms. Although the Proof of Reserves is not directly addressed, there are indications of setting industry-consensus-based standards. Wayne Huang, CEO of fintech XREX, has expressed the industry's eagerness for well-defined regulatory supervision.
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