Risk In:Review #38 - 19 November 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 and technology news this week is headlined by the Singapore FinTech Festival (SFF) 2023. Similar to the Hong Kong FinTech Week earlier this month, the SFF focused on the adoption and application of AI in financial services, as well as remittance, atomic settlement, programmable money, and tokenised assets.
The Monetary Authority of Singapore (MAS) used the SFF to stress the potential of digital assets and money to revolutionise financial transactions. This included tokenisation of asset classes, piloting the live issuance of wholesale central bank digital currencies (CBDCs) for instant settlement, and the use of stablecoins for cases such as facilitation of escrow arrangement in e-commerce transactions.
MAS also introduced its Global Layer One initiative, which aims to establish a unified digital platform for cross-border transactions that is compliant with regulatory standards.
However, what was most interesting about these announcements was the line MAS drew between the existing digital and crypto infrastructure, and the future of these services.
Ravi Menon, the Managing Director of MAS, critiqued existing cryptocurrencies for their inadequacy as a medium of exchange or store of value, arguing that stablecoins and central bank digital currencies (CBDCs) were better suited to shaping the future financial ecosystem. ?
He also indicated that the digital infrastructure provided by public permissionless blockchains and private permissioned blockchains was insufficient to support compliant and seamless cross-border transactions.
The MAS clearly believes in what Menon is selling. To back these positions, they unveiled several announcements, including:
-????? The Orchid Blueprint, which sets out the technology infrastructure MAS believes is required to facilitate a digital Singapore dollar;
-????? Four new digital money trials with industry (tokenised bank liabilities; wallet interoperability; supplier fainancing; and institutional payment controls); and
-????? A plan to issue a 'live' CBDC for wholesale settlement.
The question that incumbents in the market will be asking is whether the ecosystem as envisaged by MAS can sit alongside, or will be a replacement for, the existing crypto and digital money infrastructure. And indeed whether there will be only one regulated ecosystem. There are after all other contenders for the crown, such as mBridge, the joint venture between the Bank for International Settlements and the central banks of Hong Kong, China, Thailand, and the UAE, focused on testing CBDCs for cross-border trade.
One point is clear – the competition for developing a compliant cross-border digital financial ecosystem is going to be hot going into 2024!
This Week In:Review
Australia
China
Hong Kong
Korea
Singapore
Best of the Rest
Australia In:Review
The Pacific Financial Intelligence Community (PFIC) recently convened for their second in-person plenary in Rarotonga, Cook Islands. This key gathering, co-hosted by AUSTRAC and the Cook Islands Financial Intelligence Unit (CIFIU), aimed to strengthen regional partnerships in combating financial crimes such as money laundering and terrorism financing.
During the conference, Financial Intelligence Units (FIUs) across the Pacific signed a Statement of Intent, demonstrating a unified commitment to enhance collaboration and intelligence sharing. Walter Henry, Head of the Cook Islands FIU, and Dr John Moss, AUSTRAC Deputy CEO, both emphasized the critical importance of such cooperation in ensuring regional stability and security.
A significant development was AUSTRAC's provision of the TAIPAN data analytics system to the Cook Islands FIU, boosting their capacity to detect and investigate financial crimes. This technological advancement, coupled with the collective resolve expressed at the PFIC meeting, marks a major step forward in the Pacific region's efforts to combat financial crimes and maintain economic stability.
Australia’s first case of crypto fraud is set to be dealt with in a civil claim in Federal Court. The case reportedly revolves around former world boxing champion Jeff Fenech, Gold Coast Mayor Tom Tate, and a group of duped investors across Australia and New Zealand.
Contracoin and its Founder and CEO Barry Lipscombe have been accused of engaging in misleading and deceptive conduct by pitching a crypto coin, supposedly backed by real estate which was not for sale.
Three months ago, the court found the parties had settled their dispute and ordered Mr Lipscombe to pay the investors more than AUD 200,000 but the investors have reportedly not been paid yet.
Investor Dan Harden told Sky News Australia, “It’s not about getting our money back, it’s about stopping these guys from taking innocent people’s money”.
The investors have now issued Mr Lipscombe with a personal bankruptcy notice and Contracoin with a statutory demand. Another hearing is expected to take place in Sydney’s Federal Court early next year.
Australian companies will soon be required to report any ransomware cyberattacks, a move aimed at bolstering transparency in the wake of the country's significant cybercrime losses, which amounted to AUD 2.59 billion in 2021. The upcoming national cybersecurity strategy, set for reveal in November, will introduce a mandatory notification system for such attacks, though non-compliance will not incur a fine.
While businesses will retain the option to pay ransoms, National Cyber Security Coordinator Air Marshal Darren Goldie has advised against this practice. This stance aligns with Australia's recent commitment, alongside nearly 40 other nations, to refuse ransomware demands targeting government agencies.
The Australian government plans to engage the business community in shaping this mandatory system. Home Affairs and Cyber Security Minister Clare O’Neil highlighted the development of a ransomware playbook, offering guidelines for businesses and citizens on handling and recovering from ransom demands.
Globally, ransomware remains a prevalent threat in the digital economy. The United States Department of Justice, recognising this challenge, has doubled its crypto crimes team, focusing on combating ransomware. Research by Chainalysis indicates an uptick in ransomware funds being laundered through crypto mining pools, with one instance showing a wallet receiving USD 158.3 million from ransomware sources since 2018.
DP World Australia, a major Australian port operator, has successfully resumed its online operations following a cyberattack that disrupted its facilities in Melbourne, Sydney, Brisbane, and Perth. The attack, occurring between 10 and 13 October, briefly impacted around 40% of Australia's import and export activities, which the company manages.
Despite the temporary shutdown, the cyberattack did not disturb the supply chain for major Australian supermarkets, as reported by the BBC. Operations restarted after thorough system checks.
The incident is still under investigation, with ongoing efforts to mitigate any further risks. The Australian government's cyber security coordinator, Darren Goldie, acknowledged the company's effective response in restoring its sites.
This cyberattack comes amidst other operational challenges for DP World, including industrial action affecting customer deliveries. Workers have been striking for pay increases since October, leading to extended industrial action until 20 November.
The Australian Bureau of Statistics reveals that over 20% of businesses experienced cyberattacks in the 2021-22 financial year, a significant increase from 2019-20. Globally, the threat of cybercrime is escalating, with GlobalData projecting worldwide cybercrime costs to reach USD 10.5 trillion by 2025. Consequently, cybersecurity revenues are expected to rise to USD 344 billion by 2030.
China In:Review
SlowMist, a crypto security firm, has uncovered a phishing scam in China that has siphoned off substantial amounts of money from cryptocurrency users. The scam involved a counterfeit Skype video app, exploiting the ban on international applications in China, where users often seek such apps on third-party platforms.
The scammers targeted popular apps like Telegram, WhatsApp, and Skype, creating fake versions embedded with malware to attack crypto wallets. SlowMist's investigation revealed discrepancies in the app versions, with the fake Skype app displaying version 8.87.0.403, against the official 8.107.0.215 version. The phishing back-end domain initially impersonated the Binance exchange in November 2022 before mimicking a Skype domain in May 2023.
The fraudulent app was designed to upload user data, including phone numbers and device information, by requesting access to internal files - a common permission for social media apps. It specifically searched for cryptocurrency wallet addresses in images and messages, replacing them with addresses controlled by the scammers. SlowMist's tests found addresses for Tron (TRX) and Ether (ETH) being targeted. SlowMist has since blacklisted all wallet addresses associated with this phishing operation.
In a bid to diversify assets and prepare for potential immigration, affluent Chinese individuals are increasingly turning to clandestine methods to move large sums of money out of the country. A notable example is 32-year-old Phoebe, who relocated nearly RMB 1 million to Hong Kong, a financial gateway with access to global markets, using an informal, unregulated system known as hawala.
This intricate operation relies on a network of individuals to transfer funds across borders without formal banking channels, a practice magnified post-pandemic amid rising geopolitical tensions and domestic economic woes in China. While traditional investment havens like the US and Vancouver remain popular, Singapore has emerged as a prime destination, evidenced by the burgeoning number of wealthy Chinese creating family offices there.
However, this practice is not without risks. In China, using illegal currency exchange services can attract heavy fines or imprisonment. Moreover, banks in regions like Hong Kong, the UK, and Singapore are vigilant against suspicious transactions, given the potential legal and operational risks.
Despite stringent capital controls in China, allowing only USD 50,000 annual overseas transfers, underground networks provide alternatives through methods like "smurfing", where numerous individuals use their legal remittance quotas to channel larger amounts abroad. Other strategies include manipulating trade contracts and inflating import values.
While the scale of this underground industry remains uncertain, Chinese authorities have revealed large-scale operations in their investigations. For instance, an operation in Gansu province was found to control assets worth RMB 75.6 billion, spread across a vast network.
领英推荐
The People's Bank of China (PBOC) is advocating for an expansion and consolidation of the nation's credit rating industry, encouraging fintech firms to enter the market and existing rating companies to enhance their global competitiveness. This initiative aligns with the Central Financial Work Conference's recommendations to improve the social credit system's capacity and quality.
Despite housing 52 credit rating enterprises, including foreign entities and joint ventures, China's credit rating sector has faced criticism for overly favorable local issuer scores and slow response to changing risk profiles. This was highlighted by the 2018 surge in corporate bond defaults, including defaults by issuers previously rated highly by domestic companies.
The PBOC's recent opinion piece also emphasised the need for a multilayered credit reporting system, balancing the central bank's system with a market-driven approach. This comes in the wake of the 2014 State Council framework for a comprehensive social credit system.
China's central credit information system, the Credit Reference Center, launched in 2006, primarily focuses on data from traditional lenders. To bridge gaps, Baihang Credit Scoring was introduced in 2018, pooling data from alternative lending sources. Similarly, Pudao Credit, licensed in 2020, is a collaborative effort involving state-owned and private fintech firms.
Hong Kong In:Review
RD Wallet Technologies, founded by Norman Chan Tak-lam, Hong Kong's ex-central banker, is set to launch a digital wallet enabling cross-border payments in five key currencies. This comes as Chan also plans to introduce a Hong Kong dollar-pegged stablecoin, aligning with Hong Kong's 2024 goal for a stablecoin licensing regime. The digital wallet, licensed in December last year, successfully trialed with over 150 companies, receiving approval from the Hong Kong Monetary Authority (HKMA) to become fully operational.
The wallet facilitates online account opening and foreign currency transactions in Hong Kong dollars, yuan, US dollars, yen, and euros. It significantly reduces the time required to open business accounts, offering a more efficient alternative to traditional banking methods.
Chan, who played a pivotal role in advancing fintech in Hong Kong during his tenure as HKMA CEO, views RD Wallet as a crucial step in enhancing trade efficiency and solidifying Hong Kong's status as a financial and trade hub. His upcoming stablecoin initiative, targeting the first Hong Kong dollar-linked stablecoin, will proceed under forthcoming government regulations.
This development is distinct from the HKMA's e-HKD project and remains unaffected by the recent JPEX scandal, with Chan emphasising the importance of regulation and licensing in the virtual asset industry.
Korea In:Review
Do Kwon, founder of the ill-fated algorithmic stablecoin TerraUSD, faces continued incarceration following the rejection of his appeal by Montenegro's highest court. Kwon, formerly the CEO of Terraform Labs, and a fellow executive were sentenced to four months' jail in June by a Montenegrin court for using counterfeit passports in an attempt to escape to Dubai via private jet. Montenegro is concurrently deliberating Kwon's extradition, with South Korea and the US both seeking jurisdiction.
The demise of TerraUSD and its associated cryptocurrency Luna in May last year wiped out approximately USD 40 billion, leaving numerous investors destitute. Following the collapse, Terraform Labs appointed an interim CEO and acquired a cross-chain portfolio manager.
Kwon is concurrently embroiled in legal battles in the US, facing a civil fraud lawsuit from the Securities and Exchange Commission and multiple criminal charges from the Justice Department related to the crash of TerraUSD and Luna. If extradited to South Korea, he may confront the country's severest financial crime sentence, though Kwon denies any fraudulent activity.
Kwon fled his Singapore residence in September 2022 after a South Korean arrest warrant was issued, leading to months as a fugitive in Serbia and Montenegro. He continued to remotely manage Terraform Labs during this period, stepping down as CEO in May. His initial bail agreement for EUR 400,000 collapsed, and he remains detained in Spu? prison near Podgorica, Montenegro, under challenging conditions.
Singapore In:Review
At the Singapore FinTech Festival 2023, Mr. Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS), emphasised the nation's commitment to shaping a cutting-edge financial ecosystem. Central to this vision are three key goals: facilitating instant cross-border payments, enabling seamless financial transactions through interoperable digital networks and assets, and fostering a trusted sustainability ecosystem for net-zero transition.
Singapore’s journey in electronic payments has transitioned from domestic transfers to multilateral networks. Innovations like FAST, PayNow, and the SGQR system have streamlined payments, evidenced by their widespread acceptance among merchants. Notably, Singapore has advanced in instant payment linkages, connecting with systems in Thailand, India, and soon, Malaysia. These efforts are part of a broader ambition to establish multilateral real-time payment networks globally.
The MAS is also focusing on the potential of digital assets and money to revolutionise financial transactions. This includes exploring tokenisation of various asset classes and piloting the live issuance of wholesale central bank digital currencies (CBDCs) for instant settlements. Stablecoins, if well-regulated, are also seen as a key component of the digital money landscape.
In digital infrastructure, the MAS has introduced the Global Layer One initiative, aiming to establish a unified digital platform for cross-border transactions, compliant with regulatory standards.
Additionally, Mr. Menon highlighted Project Greenprint, which aims to create a comprehensive data ecosystem to aid sustainable finance. This project includes the upcoming launch of 'Gprnt.ai ', a platform to streamline ESG reporting, especially for SMEs.
Ravi Menon, the Managing Director of the Monetary Authority of Singapore (MAS), has critiqued cryptocurrencies for their inadequacy as a medium of exchange or store of value, arguing that stablecoins and central bank digital currencies (CBDCs) are more likely to shape the future financial ecosystem. Speaking at the Singapore Fintech Festival, Menon identified four potential digital money forms: privately issued cryptocurrencies, CBDCs, tokenised bank liabilities, and well-regulated stablecoins.
Menon expressed scepticism about cryptocurrencies like Bitcoin (BTC), which, despite a 121% increase this year, has experienced significant price volatility and has led to substantial losses for many investors. In contrast, the MAS sees well-regulated stablecoins as a promising component of digital finance, alongside CBDCs and tokenised bank liabilities. Menon cited StraitsX’s stablecoin and Paxos Digital's new USD-pegged stablecoin as examples.
Addressing the limitations of current digital asset networks, Menon announced the MAS's launch of the Global Layer One (GL1) initiative. This initiative aims to create interoperable, regulatory-compliant networks for seamless global financial transactions. GL1 reflects Singapore's vision of FinTech serving broader purposes, including solving real-world challenges and enhancing societal wellbeing.
The Monetary Authority of Singapore (MAS) announced collaborations with the financial industry to enhance asset tokenisation and develop scalable tokenised markets under Project Guardian. This initiative aims to boost liquidity, create investment opportunities, and improve financial market efficiency.
Project Guardian involves 17 financial institutions exploring various tokenisation applications across the capital markets, including Citi, T. Rowe Price, Fidelity International, BNY Mellon, OCBC, Ant International, Franklin Templeton, J.P. Morgan, and Apollo. These pilots focus on efficient digital asset trading, cross-border FX payment solutions, treasury management for multi-currency settlement, and tokenised money market funds.
Additionally, MAS is launching a new Variable Capital Company (VCC) funds workstream, in collaboration with the Accounting and Corporate Regulatory Authority (ACRA), to address legal, policy, and tax aspects of digital asset networks.
Key initiatives also include the Global Layer One (GL1) project and the Interlinked Network Model (INM), aiming to establish an open, digital infrastructure for seamless cross-border transactions and asset trading. A whitepaper on INM, developed jointly with financial institutions and FinTechs, outlines practical applications and design considerations.
The International Monetary Fund (IMF) has joined Project Guardian's policymaker group, bringing an international perspective on policy and legal issues. MAS encourages more policymakers and financial institutions to participate in GL1's development.
The Monetary Authority of Singapore (MAS) announced three major initiatives to foster the safe and innovative use of digital money in Singapore. These include a blueprint for a digital Singapore dollar infrastructure, expanded digital money trials, and the issuance of a "live" central bank digital currency (CBDC) for wholesale settlement. MAS's focus is on wholesale CBDCs, tokenised bank liabilities, and regulated stablecoins.
The Orchid Blueprint, unveiled by MAS, outlines the necessary infrastructure for future digital money transactions. Key components include a settlement ledger, a tokenisation bridge, a programmability protocol using Purpose Bound Money (PBM), and a Name Service for wallet address translation.
MAS is expanding digital money trials under Project Orchid with four new initiatives in collaboration with industry players. These trials will explore varied aspects such as tokenised bank liabilities, wallet interoperability, supplier financing, and institutional payment controls, involving entities like OCBC, UOB, Ant International, Fazz, Grab, Amazon, HSBC, and J.P. Morgan.
Furthermore, in 2024, MAS will start the development of a "live" wholesale CBDC for interbank settlement, a significant step beyond previous test environments. The initial pilot will focus on using the CBDC for retail payments between commercial banks, with potential future expansions into cross-border trade settlements. This initiative marks a key milestone in MAS’s ongoing digital money journey, which began in 2016.
Best of the Rest In:Review
Bitgin, a Taiwanese cryptocurrency exchange, is currently under police investigation for potential money laundering, following the arrest of its Chief Operating Officer, Yuting Zhang. Zhang is implicated in the '88 Guild Hall' money laundering scandal, which involved a large-scale operation led by businessmen Zhemin Guo and Chengwen Tu, utilising foreign exchange offices and crypto exchanges for illicit activities from late 2021 to March 2022.
The exchange, in a statement, assured that its operations remain unaffected by the investigation and arrest, and it is actively cooperating with authorities. "Bitgin is fully cooperating with the investigating unit and actively providing all necessary assistance to ensure the smooth conduct of the investigation," the exchange stated.
In Taiwan, cryptocurrency exchanges operate without official regulation. However, local exchanges, including Bitgin, formed the Virtual Asset Service Provider Preparatory Office in September for self-regulation. Following Zhang's involvement in the investigation, Bitgin has temporarily suspended its participation in this group.
Taiwan’s Financial Supervisory Commission has recently introduced stringent rules to eliminate unregistered foreign crypto exchanges. However, it promotes self-regulation among local exchanges rather than enforcing a regulatory framework.
On 16 November the US Attorney’s Office for the Southern District of New York and the FBI announced the arrest of Zhong Shi Gao, Naifeng Xu, and Fei Jiang for their involvement in a USD 10 million cryptocurrency fraud scheme. The trio is accused of stealing substantial funds from US banks and financial institutions, converting these into cryptocurrencies, and subsequently transferring them to foreign crypto exchanges.
The specific exchanges and cryptocurrencies used in the operation have not been disclosed. The scheme, which operated from 2018 to 2022, involved manipulating bank transactions and falsely claiming them as unauthorised, duping banks into doubling some account balances. The accused also enlisted accomplices, particularly temporary residents from China and Taiwan in the US, to aid in executing the fraud, primarily targeting bank branches in New York City’s metropolitan area.
Each individual now faces charges that could lead to up to 80 years in prison. Additionally, they have each been charged with aggravated identity theft, which carries a mandatory two-year prison sentence.
Turkey, the world's fourth-largest crypto-trading nation, is set to introduce new regulations focused on licensing and taxation in the crypto market. This move comes as the country experiences a surge in crypto trading amid high inflation and a declining lira, driving demand for alternative assets. The regulations are also aimed at addressing the concerns of the Financial Action Task Force (FATF), which added Turkey to its 'grey list' due to risks of money laundering and other financial crimes.
Bora Erdamar, director at BlockchainIST Center, anticipates that licensing standards will be a key aspect of the new regulation, along with measures to enhance digital security, custody services, and proof of reserves. Turkey's crypto transaction volumes reached approximately USD 170 billion last year, positioning it behind the United States, India, and the United Kingdom.
Finance Minister Mehmet Simsek has indicated that the new legislation will comply with FATF's recommendations, which could remove Turkey from the grey list. Grey-listed countries face potential impacts on investment ratings and reputation, as they are seen as insufficient in combating financial crimes.
The Turkish government has announced plans to regulate crypto asset service providers and tax digital virtual assets in 2024. Amidst concerns over security following fraud investigations and system breakdowns in local exchanges, these regulations are expected to bring much-needed structure and trust to the burgeoning sector.
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