In this Newsletter:
For previous editions of the Global Payments Newsletter, please visit our Financial Services practice page.
Regulatory Developments
United Kingdom: Financial Services and Markets Bill 2022-23 introduced to Parliament
On 20 July 2022, the Financial Services and Markets Bill 2022-23 was introduced to Parliament and had its first reading in the House of Commons. Explanatory notes to the Bill were also published.
The Bill, described by the Chancellor of the Exchequer in his Mansion House speech on 19 July as a ‘landmark piece of legislation’, is intended to facilitate major reforms to the UK financial services regulatory regime post-Brexit. It sets out provisions relating to, among other things:
- The eventual revocation of retained EU law relating to financial services.
- A framework for the regulation of digital settlement assets to bring stablecoins into the scope of regulation when used as a form of payment.
- The appointment of the FCA as the lead regulator for access to cash. HM Treasury will be empowered to designate firms to be subject to FCA oversight for the purpose of ensuring the continued provision of cash access (i.e., cash withdrawal and deposit) services across the UK, or parts of the UK.
- The granting of powers to the Bank of England to oversee the wholesale cash industry.
- Amendment of the Payment Services Regulations 2017 to clarify that nothing in regulation 90 affects the liability of a payment service provider where the Payment Systems Regulator (PSR) has exercised its regulatory powers in relation to APP scams. This will enable the PSR to use its regulatory powers (whether in relation to payment system operators, payment service providers, or in combination), to require mandatory reimbursement by PSPs in cases of APP scams.
- Placing a duty on the PSR to take regulatory action on APP scam reimbursement by participants in the Faster Payments Service, by requiring the PSR to consult on a draft regulatory requirement, and impose a regulatory requirement, within two and six months respectively of the legislation coming into force.
- A framework for the designation of critical third parties.
- Clarification of the application of the Bank of England’s power under the Banking Act 2009 to recognise a payment system as systemic, for the purposes of engaging the Bank’s regulatory powers under Part 5 of the Act. The clarification ensures that a payment system can be recognised before it has commenced operating within the UK.
- Revisions to the regulatory framework under the Financial Services and Markets Act 2000 (FSMA) that applies to the FCA and the PRA.
The Bill will have its second reading in the House of Commons on 7 September 2022.
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United States: U.S. Department of the Treasury publishes framework for international engagement on digital assets
On 7 July 2022, the U.S. Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Commerce, the Administrator of the U.S. Agency for International Development (USAID), and the heads of other relevant agencies, delivered to President Biden a framework for interagency engagement with foreign counterparts and in international fora as directed in the President’s Executive Order on Ensuring Responsible Development of Digital Assets (March 2022).
The Executive Order required the Treasury Department to lead an interagency effort in developing policy recommendations for mitigating risks associated with crypto. The framework is guided by the principal policy objectives of the Executive Order and the key elements of the framework are:
- to protect consumers, investors, and businesses in the United States and globally by promoting technology and regulatory standards that reflect U.S. values;
- to protect U.S. and global financial stability and mitigate systemic risk;
- to mitigate illicit finance and national security risks posed by misuse of digital assets and counter and respond to efforts by foreign adversaries to drive standards and promote their protocols;
- to reinforce U.S. leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets and by advancing technology and regulatory standards that align with U.S. values;
- to promote access to safe and affordable financial services; and
to support technological advances that promote responsible development and use of digital assets by advancing research and relationships that increase shared learning.
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Europe: EBA publishes opinion and report in response to call for advice on PSD2 review
On 23 June 2022, the EBA published an opinion with annexed report, which set out its findings and advice in response to the European Commission's November 2021 call for advice on the review of PSD2.
The EBA outlines many issues it has identified in the implementation and application of PSD2 and specific proposals on how to address these issues to ensure a harmonised and consistent application of the legal requirements across the EU. These include:
- Merging PSD2 and the Electronic Money Directive (2009/110/EC), which the EBA strongly supports.
- Clarifying the application of strong customer authentication (SCA) and the transactions in scope and also addressing enforcement shortcomings relating to the implementation and application of SCA for e-commerce card-based transactions and the removal of obstacles to the provision of account information services (AIS) and payment initiation services (PIS).
- Addressing underlying issues and obstacles to the provision of PIS and AIS, including proposals for AIS providers to apply their own SCA with their customers instead of relying on authentication procedures by banks, empowering customers to remain in control of their data and supporting the development of high-quality interfaces across the EU.
- Moving from Open Banking to Open Finance, or alternatively expanding from access to payment accounts data towards access to other types of financial data.
- Addressing new security risks for customers such as social engineering fraud where customers are tricked into initiating a payment transaction and concerns about authentication approaches that have resulted in certain groups being excluded from using payment services online.
- Addressing unwarranted de-risking practices by banks affecting payment and e-money institutions and adjusting the prudential requirements.
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United Kingdom: HMT consultation and call for evidence on payments regulation and the systemic perimeter
On 20 July 2022, HM Treasury (HMT) published a consultation and call for evidence on the government’s approach to reforms to the payments regulatory landscape, including the systemic payments perimeter of the Bank of England.
The consultation meets a government commitment made in its October 2021 Payments Landscape Review response to explore reforms to the systemic payments perimeter under supervision of the Bank of England. It sets out:
- why now is the time to review the applicability of the Bank of England’s existing regulatory perimeter over payment systems;
- the government’s principles in approaching any reforms; and
- potential adjustments to the framework of the Banking Act 2009.
In addition, the consultation:
- outlines the government’s considerations as to how the payments regulatory framework fits with the outcomes of the Future Regulatory Framework Review;
- seeks views on exploring the scope of application of a Senior Managers & Certification Regime for the regulation of payments; and
- seeks views on changes to the current regulatory framework of the Payment Systems Regulator (PSR), as set out in the Financial Services (Banking Reform) Act 2013.
The consultation closes on 11 October 2022.
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Europe: Council presidency and European Parliament reach provisional agreement on MiCA proposal
On 30 June 2022, the European Council presidency and the European Parliament reached a provisional agreement on the markets in cryptoassets (MiCA) legislative proposal which covers issuers of unbacked cryptoassets, and so-called "stablecoins", as well as the trading venues and the wallets where cryptoassets are held. The provisional agreement is subject to approval by the Council of the EU and the European Parliament before going through the formal adoption procedure.
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United Kingdom: Draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022 amend Payment Services Regulations 2017
On 6 July 2022, HM Treasury published a draft version of the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, with a draft explanatory memorandum. Among other things, the Regulations amend the Payment Services Regulations 2017 to revise the drafting of provisions relating to declarations made by small payment institutions relating to close links. The Regulations will come into force 21 days after the day on which they are laid.
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United Kingdom: FCA evaluation report on digital sandbox sustainability pilot
On 23 June 2022, the FCA published an evaluation report on supporting innovation in ESG data and disclosures, which provides an overview of the digital sandbox sustainability pilot.
The FCA is now building on the lessons learned during the two years of the pilot to inform a future and permanent operating model for the digital sandbox. The report provides an overview of the digital sandbox sustainability cohort, and discusses the key lessons learned.
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United Kingdom: UK Finance whitepaper about the fair use of artificial intelligence in financial services
On 23 June 2022, UK Finance and Herbert Smith Freehills published a whitepaper on the fair use of artificial intelligence (AI) in financial services. The purpose of the whitepaper is to add to the debate surrounding how AI should be used in the financial services sector and highlight areas where further guidance may be beneficial to firms and customers.
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Europe: European Parliament to consider proposed Regulation on digital operational resilience at October 2022 plenary session
On 28 June 2022, the European Parliament updated its procedure file on the proposed Regulation on digital operational resilience for the financial sector (DORA).
The procedure file indicates that the Parliament will consider the proposed Regulation during its plenary session to be held from 17 to 20 October 2022. This follows the political agreement between the Parliament and the Council of the EU on DORA that was reached in May 2022.
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United Kingdom: Second post-implementation review of Network and Information Systems Regulations
On 4 July 2022, the UK government published its second, post-implementation review of the Network and Information Systems Regulations 2018 (NIS Regulations).
The review concludes that the NIS Regulations are largely working but could be improved in some areas, including the following:
- The definition of a reportable incident needs review, with the current legislation not capturing the right type or nature of incidents.
- Further guidance is needed to identify which organisations qualify as relevant digital service providers (RDSPs).
- More should be done to secure the supply chains of operators of essential services, where the supplier is critical to the provision of that essential service.
- The Department for Digital, Culture, Media and Sport (DCMS) needs to assess why the enforcement regime is not being used where it is merited.
- Greater consistency in regulatory implementation across sectors is required, alongside the creation of performance metrics.
As a next step, the government considers that the cyber resilience proposals that have been consulted on will address some of the above concerns. It also plans to use this review to further shape policy proposals in this area.
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United Kingdom: FCA and PSR publish terms of reference for the Open Banking Joint Regulatory Oversight Committee
On 24 June 2022, the FCA and the Payment Systems Regulator (PSR) published the terms of reference for the Open Banking Joint Regulatory Oversight Committee.
The overarching goal of the Committee is to support the continued growth of Open Banking for the benefit of consumers and businesses. The Committee will facilitate and oversee the transition from the Open Banking Implementation Entity (OBIE) to a Future Entity by providing interim oversight and guidance to the Future Entity including, but not limited to, the Entity's strategic direction, governance structure and funding arrangements. It will also provide input as appropriate on the permanent future framework for Open Banking.
The terms of reference also include a provisional timeline for the work of the Committee, which includes drawing up proposals for the design of the Future Entity and establishing recommendations for priorities and a strategic direction for the Future Entity by the end of Q4 2022.
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Europe: EBA decision on reporting payment fraud data under PSD2
On 1 July 2022, the EBA published a decision (dated 24 June 2022) concerning the reporting of payment fraud data under PSD2.
The decision specifies how competent authorities should transmit to the EBA aggregated statistical data on fraud from competent authorities designated in accordance with Article 96(6) of PSD2 and the EBA guidelines on fraud reporting under PSD2, which were last updated in January 2020. This data must be submitted through the European Centralised Infrastructure of Data (EUCLID) and it will be subject to the EBA decision on EUCLID (EBA/DC/2020/335).
The decision entered into force on 24 June 2022.
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Global: FSB interim report on implementation approach for cross-border payments targets
On 7 July 2022, the Financial Stability Board (FSB) published an interim report on the approach for monitoring progress towards meeting the targets for the G20 roadmap for enhancing cross-border payments.
In the report, the FSB makes preliminary recommendations about key performance indicators (KPIs) that could be used to monitor progress and identifies existing and potential sources of data for calculating those KPIs.
In October 2021, the FSB set quantitative global targets for addressing the four challenges faced by cross-border payments (cost, speed, access, transparency) as a key step in the G20 roadmap. These targets were set for each of the wholesale, retail and remittances markets. However, it warns in its report that measuring progress towards these targets will not be straightforward due to the absence of comprehensive data sources. The FSB proposes potential sources of data in each of the three markets.
The FSB requests feedback on the preliminary proposals in its report, in particular on whether it has identified appropriate sources of data and KPIs. The deadline for feedback is 31 July 2022.
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Europe: EPC releases revised SEPA Request-To-Pay scheme rulebook
On 30 June 2022, the European Payments Council (EPC) published version 2.1 of the Single Euro Payments Area (SEPA) Request-To-Pay (SRTP) scheme rulebook.
The SRTP scheme rulebook is a set of rules, practices and standards to enable an eligible SEPA request-to-pay (RTP) service provider to participate and operate in the SRTP scheme. The scheme allows a payee to request the initiation of a payment from a payer in respect of a wide range of physical or online payment methods.
On a related webpage, the EPC explains that the change introduced in version 2.1 of the scheme rulebook has no operational impact at this stage but specifies that as of 30 November 2023 the SRTP scheme participants will be obliged at the minimum to exchange SRTP messages based on application programming interfaces (APIs) to ensure full reachability. However, if they wish to, the scheme participants can use their APIs now.
The EPC has also published the default SRTP-related API specifications based on version 2.1 of the SRTP scheme rulebook.
The revised rulebook took effect from 30 June 2022.
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Global: CPMI report on interlinking payment systems and role of APIs
On 8 July 2022, the Committee on Payments and Market Infrastructures (CPMI) published a report setting out a framework for interlinking payment systems for cross-border payments and discussing the role of application programming interfaces (APIs).
The aim of the report is to help payment system operators and authorities understand and evaluate the benefits, challenges and risks of interlinking arrangements.
The report also sets out a framework of the factors and components that jurisdictions could consider when exploring the possibility of pursuing interlinking arrangements to improve cross-border payments. These include:
- Strategic and political factors, such as the need for support by relevant public and private sector stakeholders to generally support interlinking as a concept and the determination that, for a particular jurisdiction, interlinking arrangements are an effective solution for enhancing cross-border payments.
- Legal, regulatory and oversight factors, such as appropriate service and security requirements for payment service providers, the need to achieve legal certainty in an interlinking arrangement and sufficiently comprehensive oversight arrangements.
The report reflects the building blocks set out in the CPMI's July 2020 report on enhancing cross-border payments, which were endorsed by the G20 in October 2020.
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Global: FSB report on broader adoption of LEI in cross-border payments
On 7 July 2022, the Financial Stability Board (FSB) published a report on options to improve the adoption of the legal entity identifier (LEI), in particular for use in cross-border payments.
The report explores the potential benefits of using the LEI in cross-border payment transactions and sets out recommendations and options to promote broader LEI adoption with a view to achieving the goals of the G20's October 2020 roadmap for enhancing cross-border payments. The report also highlights the potential benefits of the LEI in supporting straight-through processing and assisting market participants in meeting know-your-customer (KYC) requirements.
The recommendations are addressed to FSB member jurisdictions, the FSB itself, the Global Legal Entity Identifier Foundation (GLEIF) and the Regulatory Oversight Committee (ROC) (which oversees the GLEIF), and relevant standard-setting bodies. According to the FSB, achieving these goals will depend on promoting uptake of the LEI among non-financial corporates, as well as financial institutions.
The FSB will review progress in implementing the recommendations and publish a progress report by the end of 2024, together with a review of progress in implementing the recommendations of its 2019 thematic review on implementation of the LEI (LEI peer review).
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United Kingdom: PSR provisional decision on remedies for card-acquiring market review
On 29 June 2022, the Payment Systems Regulator (PSR) published a consultation paper setting out its provisional decision on remedies for the card-acquiring market review.
Of the four potential remedies suggested in its January 2022 consultation, the PSR is proposing the following three remedies:
- Greater transparency. Introducing summary boxes containing bespoke key price and non-price information for every merchant to be used alongside new online quotation tools to help merchants compare prices and other service features more efficiently.
- Greater engagement. Providers will send merchants trigger messages to prompt them to shop around, re-negotiate their contract or switch to get a better deal.
- Ability to change providers easily. Contractual limits will be placed on point of sale (POS) terminal contracts, so that merchants are not discouraged from searching for and switching providers. POS terminal leases and rental contracts will have a maximum duration of 18 months, and maximum one month’s notice after any renewal.
The PSR has dropped its proposal for direct measures to encourage digital comparison tools (DCTs) for merchants.
The PSR intends to implement the above remedies through specific directions given to the most significant providers of card-acquiring services. The consultation closes on 3 August 2022.
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United Kingdom: HMT publishes review of UK's AML/CFT regime
On 24 June 2022, HM Treasury published a review of the UK's anti-money laundering and countering the financing of terrorism (AML/CFT) regime.
The review focused on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs), ensuring the application of effective risk-based controls across the regulated sector and developing the AML supervisory regime. The review draws several conclusions:
- Supervisory reform is needed, and the government will consult further on options for reform.
- The government is committed to continuing to align with and champion the FATF's recommendations.
- The government will set out clear new objectives to the MLRs, in line with the FATF's methodology and embedding a renewed definition of effectiveness.
- The government will use existing processes, including the National Risk Assessment of Money Laundering and Terrorist Financing (NRA), to consider emerging ML/TF risks and to consider sectors for adding to the MLRs.
- The government will continue to engage with stakeholders to deepen understanding of the application of new technologies.
- The government will not overhaul the current guidance arrangements but will seek to make the existing guidance more streamlined, consistent and clear, and consider requests for further guidance on a case-by-case basis.
The government is due to publish its second Economic Crime Plan later this year, and many areas of interest from this review will be included in that wider forum.
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United Kingdom: Updated HM Treasury advisory notice on money laundering and terrorist financing controls in high-risk third countries
On 4 July 2022, HM Treasury published an updated version of its Money Laundering Advisory Notice: High Risk Third Countries, identifying various countries for which appropriate actions (including enhanced due diligence in high-risk situations) should be taken to minimise the associated risks.
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United Kingdom: Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 come into force
On 12 July 2022, the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 (SI 2022/782) came into force. The Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) by substituting the list of high-risk third countries in Schedule 3ZA for a new list.
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United Kingdom: Russia (Sanctions) (EU Exit) (Amendment) (No 10) Regulations 2022 enter into force
On 23 June 2022, the Russia (Sanctions) (EU Exit) (Amendment) (No 10) Regulations 2022 (SI 2022/689) (2022 Regulations) entered into force. Among the measures introduced by the amending regulations are prohibitions on the export to or for use in Russia of sterling or EU denominated banknotes and prohibitions on the provision of technical assistance, financial services, funds or brokering services relating to iron and steel imports.
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Europe: Council of the EU agrees partial position on proposal for new EU authority for anti-money laundering
On 29 June 2022, the Council of the EU agreed its partial position on the creation of a dedicated EU anti-money laundering authority (AMLA).
According to the Council’s related press release, given the cross-border nature of crime, the AMLA is expected to make a strong and useful contribution to fighting anti-money laundering and the financing of terrorism. Among other tasks, it will contribute to the harmonisation and co-ordination of supervisory practices in the financial and non-financial sectors, the direct supervision of high-risk and cross-border financial entities and the co-ordination of financial intelligence units.
In its position, the Council adds powers to the AMLA to directly supervise certain types of credit and financial institutions, including cryptoasset service providers, if they are considered risky. It also entrusts the AMLA with the supervision of up to 40 groups and entities – at least in the first selection process – and with ensuring a complete coverage of the internal market under its supervision. More powers are also given to the general board in the governance of the AMLA.
The Council's position is partial as it has not yet agreed on where the AMLA will be located.
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United Kingdom: FCA outlines its financial sanctions responsibilities and approach to assessing firms' sanctions systems and controls
On 12 July 2022, the House of Commons Treasury Committee published a letter (dated 4 July 2022) from the FCA responding to questions on its financial sanctions responsibilities in the context of recent developments. Some points of interest in the letter include that since the implementation of the Russian sanctions, the FCA has (among other things) developed, and is starting to use, a new analytics-based tool for assessing firms' sanctions controls. This tool objectively tests how effective firms are at identifying sanctioned parties, using test data generated by the FCA. The FCA is also increasing its focus on information that can support the identification of firms that may be at risk of breaching sanctions, firms that may attempt to circumvent sanctions and firms breaching sanctions.
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United Kingdom/United States: Joint statement on the U.S.-UK Financial Innovation Partnership meeting
On 29 June 2022, UK and U.S. participants in the U.S.-UK Financial Innovation Partnership (FIP) met in London and on 1 July they published a statement summarising the meeting. In this third meeting of the Regulatory Pillar of the FIP, participants gathered to exchange views on topics of mutual interest in the U.S. and UK regarding crypto and digital asset ecosystems and to deepen ties between U.S. and UK financial authorities on financial innovation. This included providing updates on their respective approaches to CBDCs and exchanging views on their respective plans for CBDC policy research and technology exploration.
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United Kingdom: Treasury Committee launches inquiry into cryptoassets
On 13 July 2022, the House of Commons Treasury Committee published a press release announcing the launch of an inquiry into cryptoassets. A related call for evidence provides more information on the scope of the inquiry, which will cover:
- the role of cryptoassets in the UK, including the opportunities and risks they may bring to consumers, businesses and the government, as well as the potential impact of distributed ledger technology (DLT) on financial institutions (including the central bank and financial infrastructures); and
- the regulatory response to cryptoassets from the government, the FCA and the Bank of England, assessing how regulation could be balanced to provide adequate protection for consumers and businesses without stifling innovation.
The call for evidence contains a long list of issues on which written submissions are invited, including the extent to which cryptoassets when used as digital currencies (such as stablecoin) are likely to replace traditional currencies, and how DLT can be applied in the financial services sector. According to the inquiry webpage, written evidence can be submitted to the Committee until 12 September 2022.
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Russia: Legislature passes bill to remove VAT on digital asset sales
On 28 June 2022, the State Duma, the lower house of the Russian legislature, passed a bill on the taxation of digital assets that exempts their sale from value-added tax (VAT) in the Russian Federation. Some other services of digital asset exchanges will also be exempted.
In addition, it has been reported that Russia's Sberbank is preparing to launch a stablecoin, and the Russian Central Bank first deputy chair stated in June that trials of a digital ruble will be moved forward from 2024 to April 2023. A pilot project involving 12 Russian banks is underway.
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Taiwan: Central Bank confirms second stage of CBDC study
On 5 July 2022, it was reported that Taiwan's central bank is still working on its digital currency and, while it's unclear when the scheme could roll out to the public, it will continue work on it.
Taiwan's central bank has been working on a pilot for a government-run digital currency for the past two years, to allow people to use a digital wallet and make payments without using a debit or credit card. The bank’s Governor confirmed Taiwan is ready to enter the second stage of its central bank digital currency (CBDC) study. This second stage consists of exploring how to scale the system's operational performance, as well as the feasibility of offline payment options to boost the resilience of the system.
The Governor noted that the central bank faces three major tasks next: communicating with the public and winning their support, ensuring the system's stability, and building the legal framework for the currency's operations.
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Morocco: Central Bank confirms cryptocurrency regulation bill
On 28 June 2022, it was reported that the Central Bank of Morocco, Bank Al-Maghrib (BAM) is currently in the process of developing a cryptocurrency regulatory framework bill and according to the bank's governor it is set to be introduced soon.
BAM's governor explained the institution is joining the International Monetary Fund (IMF) and the World Bank in developing the legislation. The regulations will reportedly not ban cryptocurrencies but are likely to promote innovation in the sector while protecting consumers. The regulations will also address concerns like money laundering and anti-terrorism financing.
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Global: Outcome of FATF plenary and publication of targeted update on implementation of FATF standards on virtual assets and VASPs
On 17 June 2022, the Financial Action Task Force (FATF) published a document setting out the outcomes from its plenary meeting, which took place between 14 and 17 June 2022.
Among other things, at the meeting the FATF finalised a targeted update on the implementation of the FATF standards to prevent the misuse of virtual assets and virtual asset service providers (VASPs) for money laundering, and the financing of terrorism and proliferation. The FATF subsequently published the report on 30 June 2022. It focuses on the implementation of the FATF's travel rule, which requires VASPs to collect or send information on the identities of the originator and beneficiary with virtual asset transfers. The report also provides an update on emerging risks and market developments that FATF continues to monitor, such as decentralised finance (DeFi), non-fungible tokens (NFTs) and unhosted wallets.
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Global: BCBS second consultation on prudential treatment of cryptoasset exposures
On 30 June 2022, the Basel Committee on Banking Supervision (BCBS) published a second consultative document on the prudential treatment of banks' cryptoasset exposures.
The revised proposals address issues raised by respondents to the first consultation on this topic in June 2021, and seek to achieve the general principles set out in that consultation, namely "same risk, same activity, same treatment", simplicity and minimum standards to which jurisdictions may apply additional measures if warranted.
The BCBS maintains the basic structure of its proposal from the first consultation. It divides cryptoassets into two broad groups:
- Group 1: those that meet in full a set of classification conditions. This includes tokenised traditional assets (Group 1a) and cryptoassets with effective stabilisation mechanisms (Group 1b), which would be subject to at least equivalent risk-based capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Capital Framework.
- Group 2: those that fail to meet any of the classification conditions (such as unbacked cryptoassets and stablecoins with ineffective stabilisation mechanisms). As they pose additional and higher risks compared with Group 1 cryptoassets, they would be subject to a newly prescribed conservative capital treatment.
The consultation closes on 30 September 2022.
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United Kingdom: HMRC call for evidence on taxation of decentralised finance
On 5 July 2022, HMRC published a call for evidence on possible changes to the taxation of cryptoasset loans and staking (ie where crypto is leased to the blockchain whereas lending involves leasing crypto to a borrower) in decentralised finance (DeFi). The government will use the information received from the call for evidence to decide what changes, if any, are needed to reduce administrative burdens and costs for taxpayers engaged in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved. The call for evidence closes on 31 August 2022.
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Global: BIS report on the future of the digital monetary system
On 21 June 2022, the Bank of International Settlements (BIS) published a report on the future of a digital monetary system.
In the report BIS explains a system grounded in a digital representation of central bank money could combine innovation with essential attributes such as safety, stability, accountability, openness and efficiency. Such a system would be capable of adapting continuously to serve the public interest. This vision is built on the foundation of trust in central banks, with a digital version of sovereign currencies at its core.
BIS argues that the future monetary system should be the fusion of new capabilities around the core of trust provided by the central bank. The private sector will provide customer-facing activities with new functions such as the tokenisation of money and financial instruments and instant retail payments through new interfaces. This combination could bring about lower costs, greater financial inclusion, more user control over financial data, improved integrity and seamless cross-border activity, helping to overcome shortcomings in today's arrangements. Such innovations could open a new chapter in the global monetary system.
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Australia: Council of Financial Regulators statement on cryptoassets and de-banking
On 23 June 2022, the Australian Council of Financial Regulators published a statement following its most recent meeting with key Australian regulators, which focused on issues around de-banking and cryptoassets.
Among other things, participants called for the development of a robust regulatory framework to address the potential financial stability issues posed by de-banking and cryptoassets, and discussed the possibility of incorporating payment stablecoins into Australia's future framework for regulating stored value facilities.
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India: Reserve Bank of India financial stability report refers to risks of cryptocurrencies
On 30 June 2022, the Reserve Bank of India (RBI) published its latest Financial Stability Report.
The report highlighted the risks posed by cryptocurrencies, including their speculative nature and their potential to be used to avoid sanctions and anti-money laundering/counter-terrorist financing controls. The report also notes that cryptocurrencies are like parallel currencies, which can undermine sovereign control over money supply, interest rates and macro-economic stability.
However, the report notes cryptocurrency is not an immediate danger, noting that it only represents 0.4% of global financial assets and that interoperability with the traditional financial system is limited. The report also notes that other factors pose a greater risk to the country's financial system, such as rising commodity prices and geopolitical tensions.
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Global: CPMI and IOSCO report on application of PFMI to stablecoin arrangements
On 13 July 2022, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report (and related press release) on the application of the Principles for Financial Market Infrastructures (FMIs) (PFMI) to stablecoin arrangements (SAs). This follows publication of a consultative report in October 2021.
The guidance in the report highlights that the transfer function of an SA is comparable to the transfer function performed by other types of FMI. As a result, an SA that performs the transfer function is considered an FMI for the purpose of applying the PFMI and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI.
The report is intended for use by systemically important SAs as they design, develop and operate their services and arrangements, including SAs that have the potential to become systemically important after launch. It is also for oversight authorities to use as they carry out their responsibilities for systemically important SAs.
The report does not cover issues specific to stablecoins denominated in, or pegged to a basket of, fiat currencies (multicurrency SAs). They will be covered in future work on whether the guidance in the report is sufficient to provide clarity to multicurrency SAs when seeking to observe the PFMI.
The CPMI and IOSCO will continue to examine issues associated with SAs and co-ordinate with other standard-setting bodies.
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Cambodia: Securities and Exchange Regulator signs MOU with Binance
On 30 June 2022, it was announced that crypto exchange Binance has signed a memorandum of understanding (MOU) with the Securities and Exchange Regulator of Cambodia (SERC).
Binance and SERC will work together to develop digital assets regulations in the country. SERC is looking to leverage Binance's technical expertise and experience in the field to develop its own legal framework for the digital asset market. The collaboration will aim to impose comprehensive rules on the domestic digital asset sector and support the endeavours of crypto firms. In addition, Binance will conduct training on digital assets in the region.
In May 2022, Binance signed a similar memorandum of understanding with the government of Kazakhstan to help it with crypto adoption and regulations. Similarly, it signed an MoU with the Dubai World Trade Centre Authority in December 2021.
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Singapore: MAS response to restrictions on cryptocurrency trading platforms
On 4 July 2022, the Monetary Authority of Singapore (MAS) published its response to a parliamentary question on restrictions on cryptocurrency trading platforms to protect members of the public.
MAS mentioned that they have gone further than most other regulators to restrict the marketing and advertising of cryptocurrency services in public areas, and to prohibit cryptocurrency trading being portrayed in a manner that trivialises its risks. All entities dealing in cryptocurrencies (referred to as digital payment token or DPT service providers) in Singapore are expected to comply with the MAS guidelines that were issued in January 2022. Since then, DPT service providers have taken actions to meet these rules, such as removing cryptocurrency ATMs from public areas and removing advertisements from public transport venues.
MAS also noted that it had been carefully considering the introduction of additional consumer protection safeguards. These may include placing limits on retail participation, and rules on the use of leverage when transacting in cryptocurrencies. Given the borderless nature of cryptocurrency markets, however, there is a need for regulatory co-ordination and co-operation globally. These issues are being discussed at various international standard-setting bodies where MAS actively participates.
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United States: U.S. Federal Reserve Vice Chair speech on need for greater crypto regulation
On 8 July 2022, the U.S. Federal Reserve Vice Chair, Lael Brainard, delivered a speech at a Bank of England conference on cryptoassets and decentralised finance.
In the speech, Lael Brainard noted that the crypto market is not yet big enough to pose a "systemic risk" to the traditional financial system; however, she added that now was the time to "ensure the regulatory perimeter encompasses crypto finance."
The speech notes that cryptocurrencies have the same basic risks to traditional finance options, but lack the regulation. The speech noted the recent volatility in the crypto market, as well as the collapse of Luna.
The Vice Chair highlighted the promise of blockchain technology and its ability to enhance the efficiency of the financial system. She also noted that a CBDC could help ensure future financial stability by providing the neutral trusted settlement layer in the future crypto financial system.
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Belgium: National Bank of Belgium publishes 2022 Financial Market Infrastructures and Payment Services report
On 27 June 2022, the National Bank of Belgium (NBB) published its 2022 Financial Market Infrastructures and Payment Services report (the Report). The Report provides a detailed overview of the changes in the regulatory framework for financial market infrastructures, custodians, payment service providers and critical service providers, the evolution of their activities, the NBB's approaches to oversight and prudential supervision, and its main objectives.
Digital operational resilience was one of the NBB's top priorities in 2021. The increased use of technology not only creates risks, but also provides business opportunities. Emerging technologies such as distributed ledger technology (DLT) are closely monitored to assess their impact on financial stability. The Report discusses DORA, the MiCA regulation, CBDCs, and the EU pilot regime for market infrastructures based on DLT.
Environmental and climate-related risks are another type of risk that has received more attention from the NBB. Although market infrastructures may not be exposed to climate risks in the same way as, for example, insurers insuring damage caused by extreme weather conditions, the NBB argues that entities active in the areas of custody, payments and financial messaging must also carefully manage this type of risk.
In addition to the ongoing supervision and annual assessments, the NBB keeps an eye on major changes. Among other topics, this year’s edition of the Report includes Euroclear Bank's project to join the pan-European settlement platform TARGET2-Securities (T2S), the introduction of the CSDR settlement discipline regime for CSDs, SWIFT's migration from the FIN MT standard to the ISO 20022 MX standard for messages, the entry into force of new capital requirement regulations (CRR 2 and CRD V) and a thematic article on the observations of the NBB during on-site inspections of British payment and e-money institutions that migrated to Belgium as part of their Brexit planning.
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Ireland: Central Bank highlights weaknesses in virtual asset service providers’ AML/CFT frameworks
On 11 July 2022, the Central Bank of Ireland (the CBI) issued a bulletin on its feedback on submissions received as part of the Irish virtual asset service provider (VASP) application process (which covers crypto exchanges).
The CBI was critical of AML/CFT compliance for most Irish VASP applicants, stating that:
“The Central Bank identified, in the vast majority of applications, a lack of understanding and compliance with key AML/CFT obligations, in addition to significant control weaknesses. The lack of compliance, coupled with control weaknesses, resulted in a significant number of the applicant firms not being able to demonstrate to the Central Bank that they could meet their AML/CFT obligations.”
The bulletin goes into greater detail on problem areas identified in VASP applications, including:
- the receipt of incomplete applications;
- inadequate ML/TF risk assessments;
- policies and procedures that were not compliant with Irish legislative requirements;
- inadequate screening for financial sanctions issues; and
lack of a physical presence and at least one senior management role in Ireland.
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Hong Kong: Securities and Futures Commission to licence virtual asset service providers
On 24 June 2022, the Hong Kong government published the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 in the Gazette. The Amendment Bill introduces a new licensing regime which requires virtual asset service providers (VASPs) to obtain a licence from the Securities and Futures Commission (SFC) in order to operate a virtual asset exchange in Hong Kong.
Licensed VASPs will be subject to the requirements stipulated by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and other requirements to be published and regulated by the SFC. The new regime will come into effect on 1 March 2023.
For more on this development, take a look at this Engage article by members of Hogan Lovells’ Hong Kong office.
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Global: IOSCO Cryptoasset roadmap for 2022-23
On 7 July 2022, the International Organization of Securities Commissions (IOSCO) issued its Crypto-Asset Roadmap for 2022-2023, setting out IOSCO's policy agenda and work programme for the cryptoasset sector over the next 12 to 24 months.
Earlier this year, IOSCO established a board-level fintech taskforce (FTF) which was mandated to develop, oversee, deliver and implement IOSCO's regulatory agenda for fintech and cryptoassets. The FTF will prioritise policy-focused work on cryptoasset markets and activities in its initial 12 to 24 months of operation, while continuing to monitor market developments associated with broader fintech-related trends and innovation. The FTF has set up two work streams focusing on crypto and digital assets and decentralised finance. Each workstream is aiming to publish a report with policy recommendations by the end of 2023.
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Global: IRSG report on use of CBDCs in wholesale markets
On 8 July 2022, the International Regulatory Strategy Group (IRSG) published a report on the use of central bank digital currencies (CBDCs) in wholesale markets.
In the report, the IRSG notes that potential benefits of CBDCs include accessibility to digital payments, increased payment efficiency and enhanced record keeping due to the ability to record and review all CBDC transactions.
The paper discusses three use cases on the benefits of CBDCs:
- Retail CBDC from a wholesale participant perspective.
- CBDC for securities settlement.
- CBDC for FX transactions.
The IRSG identifies legal, regulatory and practical considerations to ensure a CBDC would deliver value and avoid uncertainty in the three use cases.
It suggests that the development of CBDCs, particularly for wholesale use, should be encouraged, and sets out a number of recommendations for relevant governing bodies to consider.
The IRSG suggests that public-private collaboration at a global level is the best way to design interoperability into CBDC systems, which would maximise the benefits of faster and more efficient cross-border payments.
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Europe: Political agreement reached on proposed Regulation on information accompanying transfers of funds and certain cryptoassets
On 29 June 2022, the Council of the EU and the European Parliament reached a provisional political agreement on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets.
The proposed Regulation will introduce an obligation for cryptoasset service providers to collect and make accessible certain information about the originator and the beneficiary of the transfers of cryptoassets they operate.
Points of interest in a press release published by the Council announcing the agreement include:
- The new agreement requires that the full set of originator information travels with the cryptoasset transfer, regardless of the amount of cryptoassets transacted. There will be specific requirements for cryptoasset transfers between cryptoasset service providers and unhosted wallets.
- In due course, member states will have to ensure that all cryptoasset service providers qualify as obliged entities under the Fourth Money Laundering Directive (MLD4).
- The Council and the Parliament agreed on the urgency to ensure traceability of cryptoasset transfers and chose to align the timetable for application of the proposed Regulation with that of the proposed Regulation on markets in cryptoassets (MiCA).
The next step will be for the Council and the Parliament to approve the provisional agreement before formally adopting it.
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Europe: ESMA consults on guidelines on standard forms, formats and templates to apply to operate a DLT market infrastructure under DLT Pilot Regime Regulation
On 11 July 2022, ESMA published a consultation paper on draft guidelines on standard forms, formats and templates to apply for permission to operate a distributed ledger technology (DLT) market infrastructure (MI) under Regulation (EU) 2022/858 (the DLT Pilot Regime Regulation).
The consultation closes on 9 September 2022. ESMA will consider the feedback received with a view to finalising the guidelines ahead of 23 March 2023, when the DLT Pilot Regime Regulation will apply in EU member states.
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Global: FSB statement on international regulation and supervision of cryptoasset activities
On 11 July 2022, the Financial Stability Board (FSB) published a statement on international regulation and supervision of cryptoasset activities.
Among other things, the FSB states that the recent turmoil in cryptoasset markets highlights the importance of progressing its and the international standard-setters' ongoing work to address the potential financial stability risks posed by cryptoassets.
It is working to ensure that cryptoassets are subject to robust regulation and supervision and plans to report to the G20 in October on regulatory and supervisory approaches to stablecoins and other cryptoassets. At that meeting, it will submit:
- A public consultation report on the review of its high-level recommendations for the regulation, supervision and oversight of global stablecoin arrangements, including how existing frameworks may be extended to close gaps and implement the high-level recommendations. It published these recommendations in October 2020.
- A public consultation report that proposes recommendations for promoting international consistency of regulatory and supervisory approaches to other cryptoassets and cryptoasset markets and strengthening international co-operation and co-ordination.
Europe: Revolut and Stripe partner to support payments in Europe
On 6 July 2022, Revolut announced its partnership with Stripe, to support seamless payments in the UK and Europe. Stripe's infrastructure and international reach will help accelerate Revolut's expansion into new global markets.
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United Kingdom: Klarna launches digital wallet features for loyalty cards
On 22 June 22, Klarna announced the launch of its new loyalty card feature in the Klarna App. The feature allows users to store and access their physical loyalty cards digitally. This has been facilitated by Klarna's acquisition of mobile wallet provider Stocard in 2021.
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United Arab Emirates: Visa launches no-limit crypto card
On 3 July 2022, Visa announced the launch of its bitcoinblack card, a no limit Bitcoin card. The card will allow users to convert their Bitcoin, as well as other major cryptocurrencies, into spendable cash.
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Qatar: Qatar National Bank launches AliPay+ and WeChat Pay
On 5 July 2022, it was reported that Qatar National Bank had announced the launch of AliPay+ and WeChat Pay, making it the first bank in Qatar to launch these mobile wallet services. It is hoped that these mobile payment solutions will be a tool for merchants to attract the loyalty of customers travelling abroad.
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Global: Shieldpay partners with DirectID to implement account verification
On 28 June 2022, Shieldpay announced its partnership with DirectID to implement DirectID's open banking-powered bank account verification into the Shieldpay payments engine. Working together, DirectID's Connect widget and Shieldpay's payment engine allow customers to transfer funds online with digital escrow and trust services.
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United Kingdom / Ireland: Revolut rolls out physical card reader
On 5 July 2022, Revolut launched the Revolut card reader in the UK and Ireland, allowing merchants to accept card payments anywhere. The launch marks Revolut's move into in-person payments.
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Europe: AstroPay launches Visa debit card
On 23 June 2022, AstroPay launched its new product in Europe, a new Visa debit card. Users can use their balance with any merchant that accepts Visa without the need for intermediaries, making the payment journey simpler. AstroPay expects to launch into other markets in the next few months.
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Global: Meta launches Meta Pay and a digital wallet for the metaverse
On 22 June 2022, Meta announced the launch of Meta Pay, replacing Facebook Pay, as well as its work on a digital wallet for the metaverse. The proposed digital wallet will allow users to manage their identity, what they own and payment methods in the metaverse.
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United States: Klarna partners with Blackhawk to bring Buy-Now Pay-Later options to more physical retail locations
On 12 July 2022, Klarna announced its partnership with Blackhawk, extending the ability for consumers to use Klarna's Buy-Now Pay-Later (BNPL) options at a variety of physical retail locations across the United States.
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United Kingdom: Mastercard launches debit card for people living with dementia
On 7 July 2022, Mastercard launched Sibstar, a new debit card aiming to empower people living with dementia. The new debit card and app allows people living with dementia to access and spend their money while keeping it safe by managing how and where that money can be used via the app.
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Netherlands: ING pilots new peer-to-peer payment method
On 11 July 2022, ING announced it was teaming up with NXP Semiconductors and Samsung to pilot the industry's first ultra-wideband based peer-to-peer payment application that allows people to transfer money by simply pointing their phone at another person's smartphone.
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South Korea: Delio announces South Korea's first crypto bank
On 7 July 2022, it was reported that Delio had launched South Korea's first cryptocurrency bank, offering a money market deposit account that enables crypto deposit and withdrawal at any time. The account also offers daily compound earnings regardless of the performance when storing Bitcoin, Ethereum and Ripple.
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Surveys and Reports
United Kingdom: 60% of adults in the UK have used embedded finance services in the past year
On 6 July 2022, Temenos published a whitepaper which found that 60% of UK adults have used embedded finance services as part of the checkout process when shopping online in the past 12 months. This includes Buy-Now Pay-Later (BNPL) payments, rounding up at the checkout to donate to a charity, buying insurance with a high value item, taking out a loan at checkout or e-wallet services such as PayPal and Google Pay.
Additionally, the report found that 42% of UK adults have used e-wallet payment methods in the last year, with 51% of those being between 18 and 34 years old. The increasing use of embedded payment methods suggests the convenience and user-friendly nature of embedded finance options in day-to-day shopping.
The report also covers the rise of open banking around the world, and the emergence of new business models to adapt to a changing digital ecosystem. According to Temenos, Banking-as-a-Service (BaaS) is altering the traditional approach to financial services by creating a protected, contextualised, end-to-end service for consumers.
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United Kingdom: 36% of consumers say they have been unable to complete transactions due to Strong Customer Authentication
On 6 July 2022, Signifyd published the results from a survey which explored customer confusion and frustration with Strong Customer Authentication (SCA), which came into force for e-commerce in the UK on 14 March 2022.
The survey found that 36% of respondents had been unable to complete a transaction because of the new rules and 68% said they would abandon a retailer and turn to a rival if they had a bad online experience.
However, despite consumers' frustration, 73% of UK respondents agreed — either "strongly" or "somewhat" — that it was worth completing the new extra steps required at checkout to ensure that their transactions were protected. The story was similar in France and Italy, where 79% and 78% respectively favoured the new protections, but also said they would abandon retailers that provided a poor experience.
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Global: Contactless payments identified as a key driver of more frequent public transport usage
On 12 July 2022, Visa published the findings from its second Urban Mobility Survey. The survey, conducted across 14 markets across the world, found that 91% of respondents strongly or somewhat expect public transport to offer contactless payment, with 57% strongly expecting it.
Nearly half of respondents (44%) said one of the top benefits of offering contactless payments for public transport is convenience, followed by time saved because of faster transactions (40%), worrying less about having enough cash for fares (38%) and reducing contact with other surfaces and people (35%), the survey revealed.
Under a third of survey respondents (32%) said offering contactless payments is one of the top features that would encourage them to use public transport.
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United Kingdom: APP scams amount to losses of £583.2 million
On 30 June 2022, UK Finance published their Annual Fraud Report covering 2021.
Some key findings to note are:
- Unauthorised financial fraud losses across payment cards, remote banking and cheques totalled £730.4 million in 2021, a decrease of 7% compared to 2020.
- Banks and card companies prevented £1.4 billion in unauthorised fraud in 2021. This represents incidents that were detected and prevented by firms and is equivalent to 65.3p in every £1 of attempted fraud being stopped.
- In addition to this, UK Finance members reported 195,996 incidents of authorised push payment (APP) scams in 2021 with gross losses of £583.2 million, compared with £420.7 million in 2020.
Most notable in relation to the last point above is the rise in impersonation scams and in APP fraud overall. In 2021 the communications regulator Ofcom found that eight out of 10 people that were surveyed had been targeted with scam texts or phone calls, intended to convince them that they were from trusted organisations such as banks, the NHS or government departments.
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Authored by Virginia Montgomery and Julie Patient
