Group items tagged

Here is a dumb model of financial regulation. There are two general ways for authorities to regulate financial activities. Call one "rulemaking." A regulator thinks about some financial things, decides how they should work, solicits comments from industry participants and the general public, and writes a rule explaining in some detail how things will work. After that, everyone who does those things knows what the rules are and what things they are and are not allowed to do. Call the other "regulation by enforcement." The regulator doesn't spend much time writing specific new rules, but just relies on some general old rules saying things like, you know, "don't use an artifice to defraud." What that means can be unclear and, more to the point, if the regulators decide to go after you for using some artifices, your life will be unpleasant even if you ultimately win. Knowing this dynamic, the regulators can use enforcement actions to decide and declare what is and is not allowed. Everyone goes around doing things, and then some of them get sued by the regulator and have to pay a bunch of money to settle the lawsuits. Everyone watches those lawsuits, and each lawsuit tells everyone a bit more about what is and is not allowed. If the regulators sue someone for doing X, and you're also doing X, you stop doing X. "Don't do X" has become a rule without any rulemaking. The first person to get sued for X didn't know that that was the rule, though, and gets in trouble and has to pay a fine.

The New York Fed is reportedly poised to unveil a proof-of-concept for "regulated liability networks" - an experiment around tracking and transmitting tokenized debt issued by an array of regulated financial institutions. Citi's Tony McLaughlin, a leader in the field of regulated liability networks. in a recent blog post on Citi's website, wrote, "It may be possible for central banks and regulators to create a new direction for the regulated sector through a slight pivot in existing CBDC projects and the nascent tokenization of commercial bank money. They may adopt a broader view of the task at hand - not the tokenization of central bank liabilities, but the tokenization of all regulated liabilities on a common platform." https://www.citibank.com/tts/insights/articles/article191.html

The World Bank Group and the Cambridge Centre for Alternative Finance published a survey containing responses from regulators in more than 110 jurisdictions around the world on their approaches (and challenges) to the regulation of peer-to-peer lending, equity crowdfunding, and initial coin offerings.

According to the report, 90 percent of regulators "mentioned benchmarking and lessons learned from other jurisdictions as key triggers prompting changes in regulation more frequently than any other trigger." The survey also found that less than a quarter of respondents formally regulate peer-to-peer lending and initial coin offerings, while less than 40 percent of respondents have frameworks in place to regulate equity crowdfunding. Respondents also noted that new innovations and models are stretching regulatory resources. Regulatory resources dedicated to equity crowdfunding and initial coin offerings since 2017 have grown by over one-third and one-sixth for peer-to-peer lending. The survey also questioned the extent to which "light touch" regulatory frameworks are applied across those three areas. Lastly, the study finds that low-income jurisdictions are catching up to high-income jurisdictions, especially in regard to the regulation of peer-to-peer lenders. Here, low-income areas "are almost three times as likely as high-income ones to review their regulatory frameworks for peer-to-peer lending (43% vs. 16%)." However, as the study further shows, low-income jurisdictions are far less likely to have active regulatory innovation initiatives in place (innovation offices, sandboxes, RegTech/SupTech programs).

"This Chris Brummer article looks at regulation by enforcement, and explains that as a legal matter, regulators generally enjoy discretion as to whether to make policy through rulemaking, adjudication, or by filing a lawsuit in federal court. However, there are some exceptions to this principle, as well as some reasons to believe that new doctrinal developments hostile to agency adjudications could reduce the discretion of agencies to choose their policymaking tool, especially where their actions are understood to be naked attempts to grab turf or circumvent democratic norms embedded in the Administrative Procedure Act. In this Article, we analyze the incentives facing agencies when choosing to regulate by enforcement, consider some of the new risks, and lay out a framework for thinking about when agencies should regulate by rule, and when they should regulate by enforcement."

The Regulators have noted that there are no Platforms recognized as exchanges (and therefore regulated as such) in Canada. The consultation with stakeholders aims to benefit the trading public (by way of regulation and improved security over their crypto-assets), and the Platforms themselves, which have indicated such regulation would assist with consumer confidence as the Platforms seek to expand their operations.

David Longworth, former Deputy Governor of the Bank of Canada on the major macro-level risks arising from current and future digital financial innovation and what the implications are for Canadian regulators. Regulators should enact a number of policies, including requiring the use of Explainable AI (XAI) in lending decisions, taking care not to rush into open banking regulations, extending the coverage of stress tests to include stresses relating to borrowing from non-bank financial intermediaries, and increasing the amount of data on lending and short-term financing from lenders, whether regulated or not.

"Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator. In fact, neither USDC nor Tether tokens are "stablecoins" in anything other than name. These tokens are backed by illiquid and risky debt obligations - a critical weakness that no prudential regulator would allow to exist as this creates undue risk for their customers."

"Hong Kong continues to refine the manner in which cryptoassets and activities are regulated. In 2019, the Hong Kong Securities and Futures Commission (SFC) commenced an opt-in licensing regime for virtual asset trading platforms (Opt-in Regime).[1] In 2020, the Financial Services and the Treasury Bureau (FSTB) of the Government of the Hong Kong Special Administrative Region launched a consultation (Consultation) on proposals to enhance anti-money laundering and counter-terrorist financing (AML/CTF) regulation in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).[2] One of the key proposals includes a new wide-ranging licensing regime for virtual asset services providers (VASPs), which will also be regulated by the SFC. The changes are amongst others intended to align Hong Kong's regulations with the latest requirements and recommendations of the Financial Action Task Force."

The Swedish Financial Supervisory Authority (SFSA) generally acts as the competent regulator responsible for ongoing supervision of fintech products and services and for the issuance of supplementary regulations and formal guidance. The SFSA is responsible for ensuring that the business of (regulated) fintech companies is carried out in accordance with applicable laws and regulations.

Circle CEO Jeremy Allaire sent a letter to the U.S. Department of the Treasury, appealing for regulators to collaborate with the industry in adopting crypto regulations. He took particular aim at rumored proposed regulations that would prohibit unhosted or self-hosted wallets, claiming that they would significantly harm industry and American competitiveness and yield economic and industry advantage to Chinese firms. Allaire said that industry and regulators need some time to sort out best practices in regulating emerging technology together. Four members of the Congressional Blockchain Caucus also sent a letter to Treasury Secretary Mnuchkin defending the technology behind self-hosting wallets.

"When designing privacy protection regulation, regulators face a challenging trade-off. On one hand, individuals are reluctant to share their personal data due to concerns about potential abuse or misuse. To protect consumers' privacy, regulators may consider limiting or even prohibiting the collection of personal data. On the other hand, data play a vital role for data-intensive firms like fintechs, which rely heavily on personal information to screen and price borrowers. Privacy regulation could thus potentially hinder the growth of fintechs and weaken competition in the financial sector."

Japan's revised Payments Services Act was passed by the Diet and promulgated in June 2022, with the aim of introducing new regulations on stable coins. This amendment has entered into force on June 1, 2023. Under the new regulations stablecoins that can be redeemable in fiat currencies will be regulated as electronic payment instruments (EPIs). Those who are permitted to issue EPIs directly to Japanese residents are limited to banks, funds transfer services providers, trust banks or trust companies that are licensed in Japan. Only licensed EPI business providers (EPIBPs) can sell or purchases EPIs, act as an intermediary for EPI issuance, sales and purchases, or provide EPI custody services. EPIBPs are subject to AML/CFT regulations, including a travel rule. In other words, EPIBPs are required to provide the customer's identification information when transferring EPIs to any other EPIBPs.

"Currently, there is no overarching regulatory framework for stablecoins in Canada, and no authority has asserted jurisdiction over the operations of their issuers. This article is the first scholarly work to provide a detailed assessment of the jurisdictional perimeter, and risk-informed regulatory design principles, for fiat-backed stablecoins in Canada. It provides two unique and vital contributions to policy formation in stablecoin regulation. First, it analyzes whether stablecoins are securities, investment funds, or derivatives based on statutory definitions and interpretive jurisprudence. Second, it assesses whether a securities-based regulatory framework is sufficient to mitigate the risks that stablecoins pose, or if it leaves gaps that must be filled by banking, payments, and systemic risk regulators. While securities authorities have a reasonable case for legal jurisdiction over stablecoins based on how they are currently used, there are several "gaps" if stablecoins are exclusively regulated under securities law, and while many protections are provided, the full breadth of risks will not be mitigated. If Canadian securities regulators move forward with a stablecoin policy framework, they must do so with an eye to resulting gaps. Ultimately, a comprehensive framework will require inter-agency cooperation, across the financial regulatory landscape, to adequately address all stablecoin risks. It must apply "same risk, same regulation" principles, contextualized to support innovation, financial inclusion, and competition, using tiered parameters, and parallel and complementary inter-agency oversight. It must seek international regulatory cooperation, data-sharing, and contemplate contagion, interconnection, and the consequences of the potential failure of a global stablecoin issuer."

The overall goal of any regulation should be to fasten the activities of the most proximate regulators to particular asset classes or value transfer/exchange mechanisms so as to avoid regulatory arbitrage. Where there are no proximate regulations to do so, regulatory sandboxes by the most proximate regulators could be employed.

In 'Why Financial Regulation Keeps Falling Short', we identify the key drivers of this fundamental mismatch between finance and financial regulation, demonstrate how this mismatch contributes to undesirable policy outcomes, and lay the conceptual foundations for understanding how the processes governing how financial regulation is made can be improved in ways that help close this gap."

"This article attempts to outline the range of regulations or guidance provided by the states with regard to virtual currency regulations or blockchain specific technologies. Because the law is rapidly developing we will try to update it quarterly to address new regulations or case law impacting the industry."

Popular "buy now, pay later" shopping services like Klarna will fact stricter regulation under proposals announced by the U.K. government Tuesday. The Treasury said buy now, pay later (BNPL) firms would come under the supervision of the Financial Conduct Authority (FCA), which regulates financial services firms and markets in Britain. Such firms will be required to conduct affordability checks before lending to customers, the government said, while people will also be allowed to escalate complaints to the U.K.'s financial ombudsman. https://www.gov.uk/government/publications/government-announces-intention-to-regulate-buy-now-pay-later

Paxos Trust lawyer and chief compliance officer Dan Burstein claims that Tether's USDT and Circle's USDC are unregulated "stablecoins" in name only. Paxo-issued Paxos Standard (PAX) and Binance Dollar (BUSD) are approved and regulated by the New York State Department of Financial Services (NYDFS). That means each token is backed by reserves in the safest instruments, such as bank deposits insured by the US Federal Deposit Insurance Corporation or short-term maturity US Treasuries. Gemini Dollars (GUSD) issued by Gemini Trust Company, are similarly NYDFS regulated.

The World Federation of Exchanges encourages global standard-setting bodies to generate a taxonomy for all global stablecoins (GSCs) and crypto-assets. In adopting the use of a global taxonomy, a common understanding would develop of whether a GSC or crypto-asset fits a certain classification or definition (eg do the features of the crypto-asset meet the definition/classification of a security) which would, in turn, reduce the variance in application of regulation, to GSCs/crypto-assets, between jurisdictions. Whilst differences might remain across the globe in securities regulation itself, the fragmented approach to the type of GSC/crypto-asset which falls under that regulation would potentially be reduced. This results in a more universal application of regulation, especially if the principle of 'same business, same risk, same rules' is applied and is focused on regulatory objectives and outcomes.

ASEAN Plus Group has released a comprehensive guide to Asia-Pacific payment services regulations. For each country, it gives an overview of the current state of the domestic payment industry, the regulators in charge of overseeing the sector, the different types of licenses available, the licensing requirements, the state of cryptoassets regulations, intellectual property laws in place, as well as anti-money laundering and counter-terrorism financing (AML/CTF), tech risk, and data privacy requirements, among other key topics.