In this regular update, we round-up FinTech-related financial services regulatory developments for the week ending 29 July 2022.
Recent updates from Herbert Smith Freehills include:
|DRCF Roundtable on E2EE – summary report
Ofcom, the Information Commissioner’s Office (ICO) and the FCA have published a summary of the views of stakeholders on end-to-end encryption (E2EE), online safety technology, and the role of digital regulators in this sector.
The Digital Regulation Cooperation Forum’s (DRCF) plan of work for 2021 to 2022 identified E2EE as a key technology, and in light of this, Ofcom, the ICO and the FCA held an E2EE roundtable on 27 January 2022. The objectives were to understand: the benefits and risks of E2EE for online services and their users; and its implications for digital regulation. [28 Jul 2022]
|Law Commission of England and Wales consults on law reform proposals for digital assets
The Law Commission of England and Wales has published a consultation paper which contains provisional law reform proposals to ensure that the law recognises and protects digital assets (including non-fungible tokens (NFTs), crypto-tokens and cryptoassets) in a digitised world. The Law Commission was asked by HM Government (HMG) to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish.
Feedback to the consultation is requested by 4 November 2022. [28 Jul 2022]
|HMT: Joint statement on the UK-U.S. Financial Regulatory Working Group meeting
HM Treasury (HMT) has published the joint statement of the UK-U.S. Financial Regulatory Working Group following its meeting on 21 July 2022. The Working Group meeting focused on seven themes: international and bilateral cooperation; benchmark transition; financial innovation; sustainable finance; non-bank financial intermediation; operational resilience; and cross-border regimes. The next Working Group meeting is expected to take place later in 2022. [27 Jul 2022]
|CTJ: Speech on DLT and digital assets
The Courts and Tribunals Judiciary (CTJ) has published a speech by Sir Geoffrey Vos, Master of the Rolls at the Bank of England (BoE) Digital Assets Symposium. In his speech, Sir Geoffrey discussed the the economic value of English law in relation to distributed ledger technology (DLT) and digital assets. [25 Jul 2022]
|ASIC releases enforcement and regulatory update
The Australian Securities and Investment Commission (ASIC) has released its enforcement and regulatory update for 1 April to 30 June 2022. The report focuses on ASIC’s key enforcement actions over the last quarter, including commencing proceedings in the Federal Court against:
The report also highlights ASIC’s work in improving financial reporting requirements for Australian Financial Services licensees and calling for better disclosure of business risks and asset values in financial reports. [28 Jul 2022]
|APRA consults on new prudential standard to strengthen operational resilience
The Australian Prudential Regulation Authority (APRA) is consulting on a new prudential standard designed to strengthen the management of operational risk in the banking, insurance and superannuation industries. Operational risk concerns the potential for financial loss or material disruption to business due to inadequate or failed internal processes or systems, the actions of people or external drivers and events, such as a pandemic or natural disaster. The standard will replace the five existing standards relating to business continuity and outsourcing.
Responses are requested by 21 October 2022. APRA intends to finalise the standard in early 2023 and release draft guidance for consultation before it comes into effect from 1 January 2024. [28 Jul 2022]
|HKMA shares sound practices for payment operations
The HKMA has issued a circular to authorised institutions (AIs) to share sound practices for payment operations.
The HKMA notes that a few payment-related operational incidents were reported by AIs in the past year. Most of these incidents were caused by IT system malfunctions, rendering the AIs unable to complete payment transactions within the cut-off timelines specified by the Hong Kong Interbank Clearing Limited.
The HKMA therefore wishes to remind AIs of the importance of maintaining high operational resilience with respect to their payment operations. AIs should treat payment operations as critical operations and should have in place robust business continuity plans to ensure that their payment functions can continue to operate in the event of disruptions, taking into account the supervisory guidance in the HKMA’s Supervisory Policy Manual module OR-2 (Operational Resilience), module TM-G-1 (General Principles for Technology Risk Management) and module TM-G-2 (Business Continuity Planning).
The HKMA has identified some sound practices in light of the experience obtained from the earlier operational incidents. AIs should review their existing practices against the sound practices and where gaps are identified, should critically evaluate the need to enhance existing practices. The sound practices relate to:
The HKMA has indicated that it will step up its surveillance of AIs’ payment operations, including undertaking examinations focused on payment operations. [28 Jul 2022]
|SECT consults on governance of digital asset operators
The Securities and Exchange Commission, Thailand (SECT) is consulting on proposed amendments to regulations relating to the qualification of authorized director and manager of digital asset operators, including the composition of board of directors and audit committee.
Responses are requested by 23 August 2022. [25 Jul 2022]
|SEC charges former Coinbase Manager, two others in crypto asset insider trading action
The SEC announced insider trading charges against a former Coinbase product manager, his brother, and his friend for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.
The SEC’s complaint alleges that, while employed at Coinbase, the former product manager helped to coordinate the platform’s public listing announcements that included what crypto assets or tokens would be made available for trading. According to the SEC’s complaint, Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, in breach of his duties, the former product manager repeatedly tipped the timing and content of upcoming listing announcements to his brother and his friend. Ahead of those announcements, which usually resulted in an increase in the assets’ prices, the defendants allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit. The long-running insider trading scheme generated illicit profits totaling more than $1.1 million.
The SEC’s complaint, charges the defendants with violating the antifraud provisions of the securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against all three individuals. [21 Jul 2022]
|DoJ obtains conviction against New York Resident for cryptocurrency fraud scheme
The Department of Justice (DoJ) announced that a federal jury convicted a New York man in connection with a scheme to defraud investors by marketing and selling fraudulent virtual currency. According to court documents and evidence presented at trial, the defendant founded a purported cryptocurrency and virtual payment services company headquartered in Las Vegas, Nevada, and offered virtual payment services through a fraudulent digital currency, which he marketed to investors between 2014 and 2017 using misrepresentations about the nature and value of the cryptocurrency.
The defendant and his associates falsely claimed that his company was a fully functioning cryptocurrency backed by $300 million in gold, oil and other valuable assets. The defendant also falsely told investors that his company had a partnership with well-established payment service providers and that the fraudulent cryptocurrency could readily be exchanged for government-backed paper currency or other virtual currencies. The defendant promulgated these misrepresentations through social media, the internet, email and text messages. In reality, there was no gold or other valuable assets backing the fraudulent cryptocurrency, no partnerships with any payment service providers and the cryptocurrency was not readily transferable. Over the course of the scheme, the defendant misappropriated over $6 million of investor funds for his own personal gain.
The defendant was convicted of four counts of wire fraud brought by the Commodity Futures Trading Commission (CFTC), which carries a maximum statutory penalty of up to 20 years in prison for each count, and three counts of money laundering, which carries a maximum statutory penalty of up to 10 years in prison for each count. [21 Jul 2022]
Ukraine-related sanctions information
Regular updates on sanctions and other developments that may impact businesses with interests or operations in Ukraine and/or Russia are available on our FSR and Corporate Crime Notes blog here.