Global Digital Assets Digest September 2022

1. EU legislators: Agreed text of MICA

On 5 October 2022, the Council of the EU released an information note attaching a letter sent to the European Parliament Economic and Monetary Affairs Committee on progress made in relation to relating to MiCA.

The letter confirms that a draft overall compromise package has been agreed by the Council's Permanent Representative Committee and that if the European Parliament adopts its position at first reading in the form set out in the Annex to the letter, the Council will approve the Parliament's position and adopt the act.

MiCA was introduced by the European Commission in October 2020 (see our briefing here) as part of the EU Digital Finance Package. The Council and the Parliament reached political agreement on MiCA in June 2022.

2. FIA: Consultation Response: FIA EPTA response to the second Basel Committee Consultative Document “Prudential treatment of crypto asset exposures

On 30 September 2022, FIA issued a response to the second Basel Committee consultation in the prudential treatment of cryptoassets. The consultation had set out a number of proposals including the development of the specific standards text for inclusion in the Basel Framework in the form of new chapter (SCO60).

In the response, the FIA argues that without clarification the proposed framework would undermine consensus post-crisis reforms and discourage banks from facilitating the central clearing of crypto-asset linked derivatives.

Key points

• The response calls for an adjustment to SCO 60.14, noting that disqualifying permissionless blockchains from Group 1 cryptoassets would effectively mean that all major stablecoins (who are all on the Ethereum blockchain) would be excluded. The response argues that this exclusion would be "systematically detrimental".
• Although now billed as a 100 per cent capital charge for Group 2 cryptoassets, the risk weight of 1250 per cent remains the basis assumption in the consultation does not reflect the overall impact of crypto assets.
• FIA expresses concern about the provisional exposure limit of 1 per cent of Tier 1 capital set out in SCO60.122 and SCO60.124 in relation to a financial institution’s exposure to Group 2 crypto assets. It argues that the exposure limit should be removed or modified so that increasing the maximum exposure to crypto assets that institutions can enter into, via a higher maximum exposure limit and better recognition of the risk-reducing effects of hedging.

3. ECB: Publication: Progress on the investigation phase of a digital euro

On 29 September 2022, the ECB issued a report on the progress made during the investigation phase of the digital euro project.. The report confirms that there will be a holistic review at the end of the investigation phase on the overall design of a digital euro.

The ECB has also issued a letter from Fabio Panetta to Irene Tinagli, ECON Chair summarising the report and next steps.

Key points

• The investigation phase explores design and distribution options for the digital euro to meet the needs of end users. Overall, the next design decisions will have to be made on the settlement model, the distribution model, the role of intermediaries, and funding / defunding.
• In a baseline scenario, compatible with the current regulatory framework, a digital euro would provide a level of privacy equal to that of current private sector digital solutions. The Eurosystem will also explore two options that go beyond this baseline scenario: the “selective privacy” option; and the “offline functionality” option
• The design stage of the digital euro is also looking at how to curb the use of the digital euro as a form of investment.
• The Governing Council will decide in autumn 2023 whether to start a realisation phase to develop and test the appropriate technical solutions and business arrangements necessary to provide a digital euro.
• A decision on the possible issuance of a digital euro may only come later, depending on EU legislative developments (i.e. a European Commission proposal for a Regulation to establish and govern essential aspects of the digital euro).

4. ECB: Speech by Fabio Panetta: Building on our strengths: the role of the public and private sectors in the digital euro ecosystem

On 29 September 2022, the ECB issued a speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament on the role of the Eurosystem and private market participants in the digital euro ecosystem.
In January 2020, the ECB Governing Council created the Eurosystem's High-Level Task Force on Central Bank Digital Currency. In the speech Mr Panetta also looks back at work conducted with stakeholders in the last year in relation to the digital Euro. Mr Panetta confirms that he will continue to hold regular hearings with ECON while legislative discussions about a regulation to establish the digital euro, likely to proposed in the first quarter of 2023, continue.

Key points

• The Eurosystem must maintain full control over digital euro issuance and settlement via the Eurosystem performing settlement activities for intermediaries distributing digital euro to end users.
• The digital euro can be designed to ensure that the Eurosystem only processes data to settle transactions, with no possibility to track payments sent or received by any specific use.

• The ECB wants to make a digital euro available to people who currently have no or limited access to digital payments, so as to improve financial inclusion.
• The digital euro accounts and the associated payment operations would be offered and operated by private intermediaries as they are best placed to be the direct counterparts for individuals, merchants and businesses that would use the digital euro.
• The ECB will develop prototypes to explore a variety of user interface solutions for making payments with digital euro.

The ECB will start work on a rulebook for a the digital euro scheme as it considers it is best suited to achieve objectives. The digital euro scheme would contain a common framework for euro area intermediaries to develop products and services built on a digital euro, establishing a set of common operational rules and technical standards.

5. EBA: Work Programme 2023

On 29 September 2022, the EBA published its 2023 Work Programme. The Work Programme package summarises the main objectives, priorities and deliverables of the EBA in the future and is based on tasks specified in relevant EU banking sector legislation. The EBA's work for 2023 is defined under five strategic areas (one of which is digital finance and the delivery of MiCA/DORA mandates) and 19 activities.

The EBA states that it will need to develop policy work from MiCA in advance of the application date. Outputs foreseen by the Work Programme include consultation papers on regulatory technical standards covering: information to be submitted in an application for authorisation to issue asset referenced tokens (ARTs); the use of ARTs as a means of payment; conflicts of interest; complaints handling; and governance arrangements.

6. IMF: Publication: Fintech - Towards Central Bank Digital Currencies in Asia and the Pacific: Results of a Regional Survey

On 28 September 2022, the IMF issued a report on central bank digital currencies in Asia and the Pacific. The report provides an overview of recent developments related to CBDCs and cryptoassets in Asia, drawing on survey responses from 34 Asian economies and country case studies. Despite a variety of outcomes, the report states that most countries in the region are currently undertaking some form of research into a CBDC, with some at advanced stages of testing and pilots.

Key points

• Asia-Pacific countries have been at the forefront of digital innovation, and their interest in CBDCs is a natural next step. Central banks in Asia are interested both in wholesale and retail CBDCs
• Only a few countries currently have the legal authority to issue a CBDC, while others are contemplating legal reforms.
• Organizational arrangements vary among different CBDC projects in Asia Pacific. Countries at the most advanced development stages have established a special unit to lead CBDC projects, including China, India, and Thailand.
• The key drivers for countries’ interest in CBDCs differ by income group. High-income countries are generally more interested in the ability of CBDCs to enhance the efficiency and safety of the payment system as well as to satisfy the growing demand for digital cash/payments. Middle-income countries view financial inclusion and financial stability as important drivers.
• Although there is a range of technology and design choices for a CBDC, countries at more advanced stages in Asia seem to adopt common features. In terms of the operational model, there is a preference for CBDC to take a hybrid form, wherein the central bank is the issuer, and the private sector is the distributor. In terms of design features for CBDCs, there is a preference for the instruments to be non-interest bearing, with limits on individual holdings, to prevent adverse financial stability implications.

7. BIS: Speech: Opportunities and challenges of the tokenisation of finance: which role for central banks

On 28 September 2022, BIS issued a speech by Denis Beau, First Deputy Governor, on the role of central banks in the tokenisation of finance.

Notable points

• The development of the crypto-asset ecosystem is at a turning point having expanded its initial scope and become increasingly interwoven with traditional finance. The ongoing stress in the cryptoasset market is changing the dynamics of the ecosystem and leading towards greater concentration.
• Central banks could accompany the tokenization of finance by leveraging new technologies to provide central bank digital currencies, thereby improving the efficiency of securities settlement and payment systems. Central banks need to further consider new technologies to prepare for the future of finance.
• In addition, the development of crypto-asset and decentralised finance comes with significant policy challenges for public authorities in terms of the regulation of market players and for finding an appropriate balance between public money and private assets.

8. BIS: Speech: Anchors and catalysts - central banks' dual role in innovation

On 28 September 2022, BIS issued a speech by François Villeroy de Galhau, Governor of the Bank of France, on central banks' dual role in innovation. In his speech, Mr Villeroy de Galhau spoke of how the so-called "triangle of disruptions (new players; new settlement assets based on blockchain; and new decentralised market infrastructures could) offer the potential for cheaper and faster services but could also lead to fragmentation and to systemic risk.

In the speech, Villeroy de Galhau called for a swift adoption of MiCA and welcomed the agreement on the extension of transparency rules to transfers of cryptoassets. Noting slower progress in other jurisdictions, Mr warned against Villeroy de Galhau diverging or contradictory regulations and argued that the regulation of cryptoassets payments more broadly calls for "pragmatic" or "focused" multilateralism. Mr Villeroy de Galhau also argues that a wholesale CBDC could significantly contribute to improving cross-border and cross-currency payments and not offering them could encourage the uptake of stablecoins.

9. ESMA: Report on the DLT Pilot - Regime On the Call for Evidence on the DLT Pilot Regime and compensatory measures on supervisory data

On 27 September 2022, ESMA published a report following its call for evidence on the Regulation on a pilot regime for market infrastructures based on distributed ledger technology (see our briefing for further details). Under the Regulation, ESMA is required to assess whether the RTS developed under MiFIR relative to certain pre- and post-trade transparency and data reporting requirements need to be amended to be effectively applied also to securities issued, traded, and recorded on DLT. In the report, ESMA concludes that there is no need to amend the RTS on transparency and data reporting requirements before the DLT Pilot starts applying in March 2023.

ESMA confirms that it will work on supervisory guidance clarifying the application of certain elements of the RTS on transparency and data reporting requirements. ESMA confirms that it will also issue guidance on questions received by various stakeholders on the DLT Pilot.

10. ECB: Speech by Fabio Panetta: Demystifying wholesale central bank digital currency

On 26 September 2022, the ECB issued a speech on wholesale central bank digital currency by Fabio Panetta Member of the Executive Board of the ECB, at the Symposium on “Payments and Securities Settlement in Europe – today and tomorrow” hosted by the Deutsche Bundesbank.
In the speech, Mr Panetta stated that the Eurosystem is committed to providing settlement in central bank money for wholesale transactions through infrastructures that are fit for purpose.

Key points

• Wholesale CBDC has existed for decades, providing digital infrastructures for the settlement of transactions between banks in central bank money. Focus should therefore be on adapting existing infrastructures as technologies and needs evolve.
• CBDC can be based on any digital technology, not just DLT. In the euro area, the Eurosystem allows banks to settle wholesale digital transactions via its TARGET Services using a centralised ledger.

• Wholesale CBDC and retail CBDC differ in many ways – they have different starting points and different actors.
• Significant progress has been made in integrating and modernising wholesale payment systems in the last 20 years: the launch of TARGET in 1999; the launch of TARGET2 in 2007; the launch of TARGET2-Securities harmonised post-trade services for financial instruments; and TARGET Instant Payment Settlement (TIPS).
• Stakeholders expect DLT to be used largely for securities post-trade processes, where it could help to reduce costs, processing times and the need for reconciliation.
• Despite the uncertainties surrounding DLT’s potential, the ECB wants to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement

The Eurosystem is exploring ways in which market participants who adopt DLT could interact with the TARGET Services to settle the euro cash leg of their transactions in central bank money: creating a bridge between market DLT platforms and central bank infrastructures; or creating a new DLT-based wholesale settlement service with DLT-based central bank money.

11. European Commission: Speech: 2022 State of the Union Address by President von der Leyen

On 14 September 2022, European Commission President, Ursula von der Leyen, made her annual State of the Union speech. The speech and accompanying letter of intent look back at the Commission's achievements, set out the priorities for the year ahead and introduce initiatives that will likely be included. In the letter of intent President von der Leyen refers to the rising importance of digital transformations and states that the European Commission will continue looking at new digital opportunities and trends, such as the Metaverse. The speech also makes references to key initiatives for 2023, including possible legislative proposals on establishing the digital euro.

12. BIS (CPMI): Paper: Liquidity bridges across central banks for cross-border payments

On 7 September 2022, BIS issued a report on liquidity bridges in relation to central banks for cross-border payments. The report, produced by the Committee on Payments and Market Infrastructures (CPMI) Cross-Border Payments Liquidity Workstream, completes the second action of Building Block 11 of the 19 Building Blocks set out in the G20 Cross-Border Payments Programme (reciprocal liquidity arrangements across central banks).

The report is intended to set out a framework for central banks in considering the potential design and feature choices of central bank liquidity bridges and is intended to assist them with deciding whether to establish liquidity bridges. The report considers a liquidity bridge to be a cross-currency intraday liquidity arrangement between two or more central banks where large-value payment system (LVPS) participants pledge collateral (typically cash) to a given central bank (facilitating central bank) in exchange for short-term (typically intraday) liquidity from another central bank (lending central bank) in the latter’s currency. Input for the report is gained from information gathered about the two liquidity bridges already in existence: a bilateral liquidity bridge between the BoE and DNB; and a multilateral liquidity bridge arrangement among the central banks of Denmark, Sweden and Norway – the Scandinavian Cash Pool.

13. European Commission: Speech by Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union: Financial literacy

On 7 September 2022, the European Commission issued a speech by Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union in relation to financial literacy. In the speech, Ms McGuiness outlined why financial literacy was important and referred to efforts to promote financial literacy via the Capital Markets Union, as well as the OECD framework on financial literacy, which is being developed with the European Commission. Ms McGuiness notes that the framework sets out in detail the different knowledge, skills and attitudes that adults need to have in order to be financially literate and that the framework now has competences pertaining to digital currencies, digital tools and payment methods and cryptoassets.

14. ICMA: Appoints Head of Fintech and Digitalisation

On 5 September 2022, ICMA issued a speech confirming the appointment of Georgina Jarratt as Managing Director, Head of Fintech and Digitalisation and as a new member of the Executive Committee. The speech notes that Fintech and digitalisation are transforming financial markets. The announcement refers to various ICMA initiatives including: the Common Domain Model (CDM) for repo and bonds and the Common Data Dictionary for primary bond markets, as well as running established working groups on DLT and blockchain in bond markets and market electronification.

15. ESMA: Report: Trends, Risks and Vulnerabilities report (No 2 2022)

On 1 September 2022, ESMA published its second Trends, Risks and Vulnerabilities report of 2022. The report contains some data in relation to cryptoassets sector.

Key points

• Cryptoasset markets fell over 60 per cent in value in the first half of 2022 from an all-time high in 2021. The sharp sell-off added to investor mistrust and confirmed the speculative nature of many business models.
• Since January 2021, Bitcoin and Ethereum have shown a positive correlation with equities, while correlation with gold tends to be negative. The co-movement of cryptoassets with equities might be a consequence of greater adoption by institutional investors but could also indicate greater spillover risks with traditional markets.
• While stablecoins make up a relatively small percentage of total cryptoassets market capitalisation, they are instrumental to both decentralised finance and cryptoassets markets generally. Recent episodes have brought into question the underlying financial engineering in cryptoasset markets.

16. FSB: Speech by Dietrich Domanski: Making the most of digital payments – a cross-border perspective

On 31 August 2022, the FSB issued a keynote speech by Dietrich Domanski, Secretary General, Financial Stability Board, at the CBDC Conference 2022.The speech notes looks at the role financial regulation plays in promoting efficient and safe cross-border digital payments, referring to various initiatives (such as the FSB's Cross Border Payments Roadmap) to improve cross border payments. He spoke about how the FSB approached harnessing the benefits of innovation while containing the risks at a practical level. Mr Domanski,notes financial stability implications of volatility of stablecoin markets and notes that participants in cryptoassets sector often combine activities that fall under different sectoral regimes (e.g. trading platforms often integrate vertically activities such as trading, order pairing, settlement, lending provisioning, proprietary trading, brokerage and custody services).

Key next steps

• FSB will report to the G20 Finance Ministers and Central Bank Governors in October 2022 on regulatory and supervisory approaches to stablecoins and other cryptoassets.
• FSB will issue a public consultation on the high-level recommendations for the regulation, supervision and oversight of “global stablecoin” arrangements.
• The FSB will issue a public consultation on its proposed recommendations for promoting international consistency of regulatory and supervisory approaches to other cryptoassets and cryptoasset markets and strengthening international cooperation and coordination.

17. Bank of England: Speech by Dave Ramsden: Message received and understood

On 29 September 2022, the Bank of England issued a speech by Dave Ramsden on the usefulness of real-life data in helping the Bank meet its monetary and financial objectives. In the speech, Mr Ramsden looks in particular at how the Bank is working on improving the quality of payments data. Mr Ramsden argues that the COVID-19 pandemic served as a catalyst for extending use of the Bank’s payments data and the role played by CHAPS.

Mr Ramsden also refers to the renewal of the Bank’s Real Time Gross Settlement (RTGS) Service and the possible impact of ISO 20022 on tackling fraud and financial crime. Mr Ramsden states that the UK has been playing a leading role in the work programme led by FSB and states that stakeholders should renew their efforts in relation to the G20 Roadmap for Cross-Border Payments.

18. Bank of England: Speech by Sir Jon Cunliffe: Innovation in post trade services - opportunities, risks and the role for the public sector

On 28 September 2022, the Bank of England issued a speech by Jon Cunliffe on innovation in post-trade services. The speech noted the increasing regulatory scrutiny of the cryptoassets sector.

Key points

• Cryptoassets have begun to develop greater connection with the conventional financial system and consumer protection and financial integrity concerns still need to be addressed.
• Regulators should begin extending existing standards and regulatory regimes to crypto before not after it is becomes systemically important.
• Regulators need to be mindful of the greater and potentially more disruptive impact on the financial system that may emerge from the transfer of technologies developed in the cryptoassets sector into traditional finance.
• A key aspect is the exchange of tokenised representations of the money and securities currently traded in the mainstream financial sector.
• The Post-Trade Taskforce, an industry-led body has noted that “innovation in post-trade processes and client onboarding processes has at times lagged behind other parts of financial markets". The cryptoasset sector may be able to assist.
• Consolidation across both trade and post-trade functions are a significant opportunity that could result in major changes in capital market infrastructures and business models. This could result in benefits in efficiency, speed and resilience.
• Smart contracts appear to have the potential to go much further than integrating trade and post trade functions into a single operation and can incorporate related services.
• Operational resilience of DLT-based systems needs to be proven over time and the industry needs assurance that DLT based systems can work in different contexts.

19. Economic Crime and Corporate Transparency Bill 2022

On 22 September 2022, the Economic Crime and Corporate Transparency Bill 2022 was introduced into the House of Commons. It follows the Economic Crime (Transparency and Enforcement) Act, which received Royal Assent in 2022 and is designed to tackle economic crime and improve transparency over corporate entities. The Bill includes amendments to the Proceeds of Crime Act 2002 (POCA) to support the recovery of cryptoassets.

Notable provisions

• Improving the criminal confiscation powers in Parts 2, 3 and 4 of POCA in relation to cryptoassets to: enable officers to seize cryptoassets during the course of an investigation without first having arrested someone for an offence; enable officers to seize cryptoasset-related items (i.e. providing officers with the authority to "recreate" cryptoasset wallets and transfer assets into a law enforcement-controlled wallet); and enable courts to better enforce unpaid confiscation orders against a defendant’s cryptoassets.

• Bringing cryptoassets within the scope of civil forfeiture powers in Part 5 of POCA 2002 (provisions include: enabling law enforcement to recover cryptoassets direct from cryptoasset exchange providers and custodian wallet providers; enabling detained cryptoassets, or those which have been frozen in a wallet, to be converted to cash pending the outcome of a final forfeiture hearing; and providing for the destruction of cryptoassets in exceptional circumstances).
• Ensuring that forfeiture powers are accompanied by supplementary investigative powers in Part 8 of POCA.

20. House of Commons: Research briefing: Government’s regulatory approach to cryptoassets and currencies

On 8 September 2022, the House of Commons issued a report on the Government’s regulatory approach to cryptoassets and currencies. Areas covered are: what are cryptoassets; UK regulation of crypotassets; press notices; and parliamentary material. The report notes that, overall, UK regulators have attempted to balance supporting innovation with protecting consumers and financial stability and summarises legal and regulatory position in relation to cryptoassets.

21. FOS: Webpage: Quarterly complaints data: Q1 2022/23

On 7 September 2022 FOS updated its webpage on quarterly complaints data, covering the period April to June 2022. The quarterly updates on financial products and services include the number of enquiries and new cases received, and the proportion of complaints resolved in favour of customers.

The webpage states that between April and June 2022, FOS received 65,740 new enquiries and 35,029 new complaints about financial products, upholding on average 34 per cent of these complaints. The webpage states that investment scams have seen the biggest increase as a proportion of “authorised” scam complaints (and over half of these complaints involve cryptocurrency), despite the number of “authorised” scam complaints decreasing overall. Authorised scams refer to scams where a person or business is tricked into sending money to a fraudster posing as a genuine account holder. FOS notes that in investment scams involving cryptocurrency, consumers are promised an investment that did not materialise, or are persuaded to open a cryptocurrency account and inadvertently sent money to a fraudster.

22. House of Commons (Treasury Committee): Report: Future of financial services regulation: responses to the Committee’s First Report

On 7 September 2022, the House of Commons Treasury Committee published responses from the Government, PRA and FCA to its June 2022 report on the Future of Financial Services Regulation. The report contains details of the Government's response to the observation made by the Committee about innovations taking place in payments systems and in relation to alternative means of exchange (such as cryptoassets) and the benefits and challenges that this poses. The Government summarises work it has done in relation to bringing stablecoins as a means of payment within the UK regulatory perimeter; its work on the adequacy of the regulatory perimeter for payments; the central bank digital currency Taskforce; and the regulation of cryptoasset financial promotions. The FCA also summarises its work in relation to FCA Innovation Services.

23. Financial Services and Markets Bill 2022-23– Second reading

On 7 September 2022, the Financial Services and Markets Bill 2022-23 had its second reading in the House of Commons. The Bill contains provisions relating to stablecoins as payments and DLT. It was introduced into the House of Commons on 20 July 2022. Key provisions of the Bill include an FCA authorisation and supervision regime for issuers of, and payment service providers using stablecoins; enabling HM Treasury to apply a bespoke administration regime (the Financial Markets Infrastructure Special Administration Regime (FMI SAR)) in respect of digital settlement asset firm, as consulted on earlier this year; permitting HM Treasury to establish one or more FMI sandboxes.

24. Bank of England: Report: Real-Time Gross Settlement (RTGS) system and CHAPS Annual Report 2021/22

On 6 September 2022, the Bank of England published its Annual Report for RTGS and CHAPS. The report notes that the RTGS Renewal Programme has had to deal with challenges but continues to progress.

The report states that for 2021/22, focus was on "preparation and realisation", ahead of the transition to the renewed RTGS and that key outcomes and activities were focused around four strategic themes: safe and resilient; well run; responsive; and renewed. Developments in this regard include: a new operational resilience framework adopted in April 2022; a new version of the CHAPS Reference Manual which took effect in January 2022; an April 2022 consultation on a tariff for the renewed RTGS service and a second consultation on the future roadmap for RTGS following the delivery of a new core ledger in 2024; and a revised timetable for the implementation of the RTGS Renewal Programme to be undertaken in a single stage in April 2023. The report confirms that towards the end of 2022, the Bank of England will publish a response to the consultation on the post-2024 roadmap for RTGS.

The report also states that in in 2021/22, the Bank of England looked at recent developments in digital identification within the payments industry (in collaboration with the Bank’s FinTech Hub), the delivery of the New Payments Architecture, activity in the cross-border payments space, digitalisation and automation, and increased interest in distributed ledger technology solutions.

25. FinTech Innovation Hub of BaFin

On 1 September 2022, the Federal Financial Supervisory Authority (BaFin) launched its FinTech Innovation Hub (available in German only). The hub offers a structured overview and regulatory assessment of various fintech business models and provides further information on necessary licences and applicable regulatory provisions.

26. Guidance on crypto securities register management licensing procedure

On 1 June 2022, BaFin published guidance on the crypto securities register management (Kryptowertpapierregisterführung) licensing procedure (available in German only). Since this new financial service has been included in the German Banking Act (KWG), entities that intend to provide the service do need a BaFin licence. The guidance provides interested entities with relevant information on the licensing procedure.

27. MAS: Speech by Mr Ravi Menon at the Green Shoots Seminar

On 29 August 2022, Mr Ravi Menon, the Managing Director of the Monetary Authority of Singapore (MAS) gave a speech at the Green Shoots Seminar, clarifying the MAS' stance on cryptocurrency and digital assets: namely that it maintains a restrictive stance on cryptocurrency speculation because of the inherent volatility and the risks that it poses to the general public, particularly retail investors. Amongst other things, the MAS has announced that it is taking a "four-pronged approach" to building the digital asset ecosystem: exploring the potential of distributed ledger technology in promising use cases; supporting the tokenisation of financial and real economy assets; enabling digital currency connectivity; and anchoring players with strong value propositions and risk management.

In addition, the MAS has emphasised the five areas of risk in digital assets that its regulatory approach is focused on, namely: first, combat money laundering and terrorist financing risks; second, manage technology and cyber related risks; third, safeguard against harm to retail investors by including customer suitability tests and restricting the use of leverage and credit facilities for cryptocurrency trading; fourth, uphold the promise of stability in stablecoins; and fifth, mitigate potential financial stability risks.

Ultimately, the MAS has reiterated that it is seeking to adopt a "synergistic and holistic approach" to develop Singapore as an "innovative and responsible global digital asset hub".

28. Singapore High Court: Finding in respect of chairman of BK Group

On 26 August 2022, the Singapore High Court found that Kim Byung-gun, the chairman of BK Group who wanted to acquire Bithumb Holdings (the second-largest virtual asset exchange in Korea, with more than 8 million registered users to date) was guilty of selling BXA coins without first obtaining the permission of Lee Jung-hoon, the former chairman of Bithumb Holdings. Kim had previously accused Lee of defrauding him in the process of a jointly planned acquisition of Bithumb, and had commenced trial against Lee in South Korea. However, the Singapore High Court has now ordered Kim to return the proceeds gained from the sale of BXA coins to Singapore-based consortium BTHMN. A copy of the Singapore High Court's decision is available here.

29. Singapore High Court : Hodlnaut placed under interim judicial management

On 29 August 2022, cryptocurrency lender, Hodlnaut, was placed under interim judicial management, three weeks after it froze withdrawals, owing to "difficult market conditions". This comes after it had previously applied to be put under judicial management on 13 August 2022. The Singapore High Court deemed it appropriate to place Hodlnaut under IJM as the company’s "assets were probably in some jeopardy and that the directors and management of the [c]ompany would not be able to function without being liable for insolvent trading at this time". A copy of the Singapore High Court's decision is available here.

30. Reserve Bank releases White Paper on CBDC pilot

On 26 September 2022, the Reserve Bank of Australia and the Digital Finance Cooperative Research Centre released a White Paper entitled "Australian CBDC Pilot for Digital Finance Innovation". It describes a joint research project to explore use cases for a central bank digital currency (CBDC or eAUD) in Australia.

The project intends to test a general-purpose pilot CBDC issued as a liability of the Reserve Bank of Australia for use in real world/live implementations of services offered by Australian industry participants, both wholesale and retail.

The initial set of research questions to be addressed by the project include what, if any, are the emerging business models and use cases that a CBDC would support, that are not effectively supported by existing payments and settlement infrastructures in Australia.

The selected use case providers for the live pilot will be announced in December 2022. In mid-2023, a report will be published with findings that will contribute to the ongoing research into the desirability and feasibility of a CBDC in Australia.

31. Australian Board of Taxation commences digital asset review

The Board of Taxation, a non-statutory advisory body to the Australian Government, has commenced a review into the tax treatment of digital assets and transactions in Australia. This review stems from a request of the former Government in March 2022, to review and make recommendations on an appropriate policy framework for the taxation of digital assets and transactions in Australia.

The terms of reference of the review include: the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues; the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem; and the taxation of digital assets and transactions in comparative jurisdictions and how international experience may inform the taxation of digital assets and transactions in Australia.

There have been some comments made about the effectiveness and value of this review given that the current Government has recently announced a "token mapping" exercise (as mentioned in the August edition of this Digest). It is likely that the findings of the Government's token mapping exercise, which will consider the proper legal and regulatory treatment of digital assets, will inform the appropriate tax treatment of the different types of digital assets, rendering it premature to provide submissions to the Board of Taxation's review on the optimal tax treatment of those assets before the token mapping exercise is complete.

Submissions to the Board of Taxation's review are due by 30 September 2022, with a view for the Board to report back to the Government by the end of this year.

32. Treasury: Crypto is not a foreign currency

The Treasury has released an exposure draft of the Treasury Laws Amendment (Measures for Consultation) Bill 2022 along with a consultation paper to clarify that cryptocurrency is not a foreign currency for Australian income tax purposes.

The draft legislation relies on amending the existing definition of digital currency in the A New Tax System (Goods and Services Tax) Act 1999 before adopting it as an exclusion from the definition of foreign currency in the Income Tax Assessment Act 1997 (Cth).

This is relevant to an Australian Tax Office Tax Ruling (TR 2014/25) which states that Bitcoin is not a foreign currency. The ATO came to this conclusion for a number of reasons but one of the main reasons being that it is not recognised as legal tender by any government. Of course, that is no longer true given El Salvador recognises Bitcoin as legal currency. The legislation will confirm that Bitcoin (and other cryptocurrencies) are not foreign currency for tax purposes, notwithstanding their recognition a legal tender by some countries. For the purposes of the amendments, the term "digital currency" does not include digital currencies issued by, or under the authority of a government agency which continue to be taxed as a foreign currency.

The closing date for comments on this exposure draft is 30 September 2022.

33. ASIC: Corporate Plan 2022-26: Cryptoassets a strategic priority

On 22 September 2022, ASIC released its Corporate Plan 2022-26, identifying cryptoassets as a core strategic project. Actions outlined in the plan include the following: supporting the development of an effective regulatory framework focused on consumer protection and market integrity; taking enforcement action to protect consumer from harms associated with cryptoassets; and working with domestic and international peers to monitor risks, develop coordinated responses to issues and develop international policy regarding cryptoassets and decentralised finance.

34. US Department of Justice Releases Report on Law Enforcement in Digital Assets and Establishes Nationwide Digital Asset Coordinator Network

On 16 September 2022, the US Department of Justice (DOJ) announced significant actions regarding digital assets, including the public release of its report, pursuant to President Biden’s 9 March 2022 Executive Order on Ensuring Responsible Development of Digital Assets, on The Role of Law Enforcement in Detecting, Investigating, and Prosecuting Criminal Activity Related to Digital Assets; and the establishment of the nationwide Digital Asset Coordinator (DAC) Network, in furtherance of the department’s efforts to combat the growing threat posed by the illicit use of digital assets to the American public.

35. White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets

On 16 September 2022, in response to President Biden’s 9 March 2022 Executive Order on Ensuring Responsible Development of Digital Assets, the

White House released a fact sheet designed to provide a comprehensive framework for the responsible development of digital assets, reflecting nine reports submitted by diverse stakeholders across government, industry, academia, and civil society. The fact sheet expressly focuses on seven issues:

• Protecting Consumers, Investors, and Businesses
• Promoting Access to Safe, Affordable Financial Services
• Fostering Financial Stability
• Advancing Responsible Innovation
• Reinforcing the US' Global Financial Leadership and Competitiveness
• Fighting Illicit Finance
• Exploring a US Central Bank Digital Currency

36. US Department of the Treasury's Office of Foreign Assets Control Issues FAQs Clarifying Sanctions Against Tornado Cash

On 13 September 2022, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) published four new Frequently Asked Questions clarifying some aspects of economic sanctions that it imposed against virtual currency (VC) mixer Tornado Cash. On 8 August 2022, Tornado Cash was sanctioned by OFAC for allegedly laundering US $7 billion (including proceeds from North Korean cybercrime activity).

37. US Securities and Exchange Commission Announces New Office for Crypto Filings

On 9 September 2022, the US Securities and Exchange Commission (SEC) announced plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance's Disclosure Review Program (DRP). The Office of Crypto Assets will continue the work currently performed across the DRP to review filings involving crypto assets. Assigning companies and filings to one office will enable the DRP to better focus its resources and expertise to address the unique and evolving filing review issues related to crypto assets.

38. US Federal Deposit Insurance Corporation Issues Cease and Desist Letters to Five Companies For Making Crypto-Related False or Misleading Representations about Deposit Insurance

1. Cryptonews.com
2. Cryptosec.info
3. SmartAsset.com
4. FTX US
5. FDICCrypto.com

Based upon evidence collected by the FDIC, each of these companies made false representations—including on their websites and social media accounts—stating or suggesting that certain crypto–related products are FDIC–insured or that stocks held in brokerage accounts are FDIC–insured.

No updates in this months edition.

39. Guardian: South Korea asks Interpol to prevent Terra founder from fleeing extradition

This article reports that South Korean authorities have asked Interpol for a red notice to prevent Do Kwon, founder of Terra/Luna cryptocurrency platform, from fleeing extradition. This follows events in May 2022 which saw the collapse of the algorithmic stablecoin.

40. Reuters: Ethereum blockchain to undergo major upgrade

This article reports on the upgrade to Ethereum blockchain known as the "Merge". The upgrade changes how transactions on the Ethereum blockchain occur. The process results in Ethereum moving from a "proof of work" system to a "proof of stake" protocol.