Risk In:Review #74 - 29 September 2024
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
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Perspectives
This week’s Perspectives is heavily crypto-focused, with both the illicit and regulatory sides of crypto featuring in the headlines.
Over-the-counter (OTC) cryptocurrency trading in China is experiencing a resurgence, driven by growing interest in alternative investments as the country's economy struggles with underperforming equity and property markets.
Recent data from Chainalysis Inc. reveals that inflows into China's OTC market exceeded USD 20 billion in each of the first three quarters of 2024, totalling USD 75.4 billion by the end of September.
Despite China's ban on cryptocurrency trading, imposed in 2021 due to concerns over capital outflows and money laundering, demand for digital assets continues unabated.
OTC trading platforms, which operate outside of public exchanges, offer a discreet way for investors to exchange yuan for cryptocurrencies, functioning in a regulatory grey zone.
Interestingly, Chainalysis noted that 55% of these trades involve transfers of over USD 1 million, hinting at participation by affluent individuals and businesses.
In contrast, Hong Kong is refining its approach to OTC derivatives reporting, particularly for digital assets.
Regulatory bodies like the HKMA and SFC have committed to adopting European standards, including Digital Token Identifiers (DTIs) and Unique Product Identifiers (UPIs) by September 2025.
This reflects a global trend toward standardising crypto asset identification and transaction reporting, an essential step in integrating digital assets into mainstream financial systems.
Meanwhile, South Korea has taken a harsher stance against cryptocurrency-related crime.
Following high-profile scandals like the Terraform Labs collapse, new legislation imposes severe penalties, including life sentences for crypto fraud involving over USD 4 million.
Additionally, stringent requirements for crypto service providers to protect customer funds are in place, with enforcement aimed at curbing illegal transactions and improving security in the sector.
This differs from the approach seen in the US, where Caroline Ellison, former CEO of Alameda Research, has been sentenced to 24 months in prison for her role in the FTX scandal.
Ellison's cooperation with prosecutors led to a reduced sentence, as she helped secure a conviction against Sam Bankman-Fried, who orchestrated the USD 8 billion fraud.
Finally, on the enforcement front, Binance has shown its capacity to assist law enforcement, particularly in India, where it helped track and dismantle a USD 47.6 million gaming scam.
Through collaboration with local authorities, Binance provided critical data to trace digital wallets linked to the fraud, reinforcing the importance of public-private partnerships in tackling financial crime in the cryptocurrency space.
This Week In:Review
Australia
China
Hong Kong
India
Korea
Singapore
Best of the Rest
Australia In:Review
Australia's financial regulator, the Australian Securities and Investments Commission (ASIC), is updating its guidelines to require all crypto-related products to secure a financial services licence before operating.
This change follows unsuccessful legal actions against yield-generating products BlockEarn and Finder Wallet. The policy shift aims to provide regulatory clarity but has sparked debate, with some industry players concerned it could stifle innovation.
Under the new guidelines, Australian crypto exchanges will need official financial service licences to operate. ASIC has classified Bitcoin, Ethereum, and other digital assets as covered by the Corporations Act, meaning many unlicensed Web3 services will need to comply with new regulations.
The updated framework is expected to come into effect in late November, with further legislative changes possibly delayed until after the 2025 election.
Industry experts have welcomed the move for its potential to offer regulatory certainty, although critics, including Opposition Senator Andrew Bragg, argue it marks a step back for Australia's position in the global crypto market.
Bragg highlighted the potential of tokenised housing to address affordability issues and urged a more progressive approach to Web3 regulations.
China In:Review
China’s over-the-counter (OTC) cryptocurrency brokers are experiencing unprecedented inflows, highlighting a growing appetite for alternative investments amid a faltering economy and weak equity and property markets.
According to Chainalysis Inc., inflows surpassed USD 20 billion in each of the first three quarters of 2024, totaling USD 75.4 billion, the highest since 2021. This trend underscores ongoing Chinese demand for crypto despite a ban on digital-asset trading imposed three years ago due to concerns over currency outflows and money laundering.
OTC services provide a discreet way for investors to exchange yuan for cryptocurrencies without using public exchanges, often operating in a regulatory grey zone. Peer-to-peer trading also allows for direct transactions between individuals, bypassing formal trading platforms.
Chainalysis noted that about 55% of the funds received by China’s OTC traders are from transfers exceeding USD 1 million, suggesting involvement from wealthy individuals or businesses.
Despite regulatory crackdowns, the demand for crypto in China persists. Cross-border transactions using digital assets, particularly between Russian and Chinese firms, and recent police raids targeting illicit forex trading, indicate the ongoing appeal of crypto.
While Hong Kong has positioned itself as a crypto hub, mainland China’s strict controls remain a significant enforcement challenge for authorities.
Hong Kong In:Review
Cryptocurrency fraudsters have scammed 13 investors in Hong Kong, resulting in losses totalling USD 1.9 million in the first nine months of 2024. The largest reported loss was USD 514,000 suffered by a victim in a Kowloon crypto shop after a series of seemingly successful transactions.
The scams are concentrated in Kowloon’s Sham Shui Po district, where fake crypto shops lure investors with promises of lucrative deals and favourable rates. The scheme often involves enticing victims with initial successful trades to build trust before locking them inside the shop during a larger transaction.
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In one case, a 43-year-old man was trapped after handing over cash to a receptionist who disappeared with the funds. Authorities arrested two suspects based on surveillance footage, and the search continues for additional perpetrators.
These fraudulent operations typically involve renting prominent locations and using counterfeit cash bundles to persuade victims to transfer their cryptocurrency.
Hong Kong police have urged investors to exercise caution and conduct thorough research before engaging with such shops. As authorities work to clamp down on the scam, more cases are expected to emerge in the coming months.
Hong Kong's top financial regulators, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), have announced plans to align their over-the-counter (OTC) derivatives reporting requirements with standards set by the European Securities and Markets Authority (ESMA).
The new standards aim to integrate Digital Token Identifiers (DTIs) into reporting, mirroring ESMA's adoption of DTIs in October 2023. These identifiers help clearly distinguish crypto assets in OTC derivatives, addressing the challenge that such investments do not fit within traditional asset classes like interest rates, foreign exchange, credit, commodities, and equities.
Hong Kong regulators also plan to incorporate the Unique Product Identifier (UPI) in transaction reporting and will monitor similar mandates from other jurisdictions. The updated reporting requirements are expected to be implemented by 29 September 2025.
The Hong Kong Monetary Authority (HKMA) has initiated the second phase of its digital currency pilot, now termed Project e-HKD+, as part of a broader effort to explore the digital money ecosystem.
This phase involves eleven groups of firms testing innovative use cases for the potential e-Hong Kong dollar (e-HKD) and tokenised deposits. The trials, which began 23 September 2024, aim to share findings with the public by the end of 2025.
Phase two focuses on three key themes: settlement of tokenised assets, programmability, and offline payments. The HKMA aims to assess the commercial feasibility of new forms of digital money for individuals and businesses. Selected firms, including HSBC, Standard Chartered, and Visa, will participate in sandbox testing environments to accelerate development.
Project e-HKD+ represents a significant shift from exploring e-HKD alone to examining the broader digital money ecosystem. The HKMA plans to advance legal frameworks to support the potential issuance of e-HKD, enhance industry collaboration through an e-HKD Industry Forum, and address key technical issues such as programmability.
Despite global uncertainty about the adoption of central bank digital currencies (CBDCs), Hong Kong continues to push forward, contrasting with more cautious approaches seen in nations like Canada and Australia.
Hong Kong police have launched an investigation into the cryptocurrency trading platform Hounax after 131 individuals reported losing HKD 120 million (USD 15.4 million) in an alleged scam.
Victims, aged between 19 and 78, include a 69-year-old retired woman who lost HKD 12 million. The platform lured investors with promises of high returns, but when users attempted to withdraw funds, they were unable to do so, prompting suspicions and the ensuing investigation.
The Securities and Futures Commission (SFC) had previously flagged Hounax as a suspicious virtual asset trading platform, citing false claims of partnerships with financial institutions and venture capital firms. The SFC noted that Hounax targeted Hong Kong investors with misleading information on its website and social media.
In response to these incidents, lawmaker Johnny Ng has called for the SFC to adopt a more proactive stance in identifying and addressing unlicensed crypto trading platforms, emphasising the need for early intervention to protect investors.
This investigation follows the recent crackdown on another platform, JPEX, where 2,623 victims reported losses totalling approximately HKD 1.6 billion. Authorities have made 66 arrests in connection with the JPEX case.
India In:Review
Binance, the largest cryptocurrency exchange by trading volume, has assisted India's Enforcement Directorate (ED) in tracing funds and arresting four individuals connected to a gaming scam worth USD 47.6 million.
The victims were lured into online betting and gaming, where they were promised easy earnings before being trapped. Binance played a pivotal role in providing key intelligence and analytical support to trace the funds and dismantle the fraud network, particularly uncovering links to digital wallets through cooperation with its Financial Intelligence Unit (FIU).
The scam revolved around the Fiewin gaming app, which ensnared unsuspecting victims with false promises of earnings. While the ED has not confirmed whether the funds have been recovered, Binance's collaboration highlights the importance of public-private partnerships in addressing complex financial crimes.
Earlier this year, Binance registered with India's Financial Investigation Unit as one of two foreign exchanges, marking a step towards crypto legitimacy in the largely unregulated Indian market. In 2022, Binance similarly aided the ED in freezing millions in another gaming app-related money-laundering investigation.
Korea In:Review
The Financial Services Commission (FSC) of South Korea has approved the formation of the Digital Asset Protection Foundation, a nonprofit organisation focused on safeguarding virtual assets when cryptocurrency exchanges shut down.
The foundation aims to ensure the safe return of assets to their rightful owners from defunct exchanges. This decision comes in response to concerns over delayed asset returns due to difficulties in contacting exchange operators or users failing to claim their assets.
Of the 22 cryptocurrency exchanges operating in South Korea, 10 have already closed, and 3 have temporarily suspended operations. The foundation’s creation, expected to launch next month, is seen as a critical step in enhancing the security of user assets and reducing market confusion following exchange closures.
The Digital Asset eXchange Association has been advocating for such a body to protect consumers.
In parallel, South Korea has postponed the implementation of a 20% tax on cryptocurrency gains until 2028. Initially planned for 2023, the delay aims to provide time for the development of a comprehensive regulatory framework to ensure market stability and security.
South Korea's financial regulator has announced plans to impose life sentences for individuals found guilty of crypto scams where illicit gains exceed USD 4 million. This measure follows the enactment of the Virtual Asset Users Protection Act in July 2024, which aims to prevent crypto crime through stringent penalties.
The law was partially inspired by the collapse of Terraform Labs, founded by South Korean entrepreneur Do Kwon, and the demise of crypto exchange FTX. The crash of TerraUSD and Luna in May 2022 wiped out USD 40 billion in shareholder value and triggered the "crypto winter."
Additional measures in the Act include fines amounting to three to five times the illegal gains, as well as prison sentences of up to one year. Virtual Asset Service Providers are also required to store at least 80% of customers' funds in cold storage and maintain a reserve fund for cybersecurity breaches.
The Financial Supervisory Service (FSS) has committed to enforcing the Act with a zero-tolerance approach, focusing investigative resources on detecting illegal transactions. The regulator has warned that punitive measures will be severe to deter crypto crime, which has led some perpetrators to extreme lengths to evade capture.
Singapore In:Review
The Monetary Authority of Singapore (MAS) has launched the Cyber and Technology Resilience Experts (CTREX) Panel, a key initiative designed to strengthen the operational resilience of the financial sector through advanced technology and cybersecurity measures.
Replacing the former Cyber Security Advisory Panel, the CTREX Panel broadens its scope to include not only cybersecurity but also overall technology resilience.
The panel, comprising 13 global industry leaders and experts in both fields, will advise MAS on emerging technological risks and strategies to enhance resilience within Singapore’s financial institutions.
This initiative comes in response to the rapid digital transformation in the financial sector, with MAS recognising the critical need to address technology risks that could impact the sector’s stability. The panel's inaugural meeting is scheduled for mid-2025.
MAS Managing Director, Mr Chia Der Jiun, stressed the importance of the panel's role in maintaining technological readiness and managing cyber risks, highlighting the value of global perspectives in building robust capabilities.
Best of the Rest In:Review
Caroline Ellison, former CEO of Alameda Research and key figure in the FTX scandal, was sentenced to 24 months in prison by Judge Lewis Kaplan in Manhattan federal court.
Ellison, once romantically involved with FTX founder Sam Bankman-Fried, cooperated extensively with prosecutors, providing critical testimony that helped convict Bankman-Fried of orchestrating an USD 8 billion fraud.
Despite facing up to 110 years in prison, Ellison received a lighter sentence due to her cooperation, which prosecutors described as "exemplary."
Ellison led Alameda Research, the trading arm of FTX, and admitted to using customer funds from FTX to support risky trades and personal expenses. Her role in the collapse of FTX, once valued at USD 32 billion, was pivotal, although the blame was largely placed on Bankman-Fried.
Ellison expressed remorse for her actions during the hearing, apologising for misleading customers.
Judge Kaplan acknowledged her assistance but stated that the severity of the crimes required jail time. In addition to her prison sentence, Ellison must forfeit USD 11 billion in assets. Other FTX executives, including Ryan Salame and Gary Wang, are also facing sentencing for their roles in the scandal.
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