Group items tagged

The Financial Action Task Force (FATF) published guidance for applying a risk-based approach to anti-money laundering (AML) and countering the financing of terrorism (CFT) supervision. The guidance is intended to support supervisors in the transition from rules-based supervision to risk-based supervision. Among other things, it provides high-level guidance on risk-based supervision, which explains how supervisors should assess the risks their supervised sectors face and prioritise their activities.

Taking the example of the revised proposal for the Libra global stablecoin, this column describes how supervisors could harness information in distributed ledger based-finance via "embedded supervision." The aim is to increase the quality of data available to supervisors and reduce administrative costs for firms. The policy note concludes by discussing legislative and operational ways to promote low-cost supervision and a level playing field for small and large firms.

European supervisors are exploring the potential of supervisory technology (suptech) and developing new tools aimed at enhancing everyday supervision. Supervisors are interested in suptech's potential to make supervision more efficient and proactive, for example by speeding up data collection and analysis. Its emerging importance had become even more evident in the current crisis situation, which has substantially increased remote collaboration and off-site supervision.

The Bank for International Settlements Financial Stability Institute published a paper that takes stock of 71 suptech tools used for prudential supervision in 20 jurisdictions and explores the benefits, risks and implementation challenges. It found that more than half of the tools assess mainly qualitative data, underscoring the importance of analyzing textual information in prudential supervision. The remaining tools are split between those that analyze mainly quantitative data and others that scrutinize both quantitative and qualitative data. Despite these variations, all tools aim to extract deeper supervisory insights or to improve supervisory efficiency.

This BIS paper argues that asset tokenisation and underlying distributed ledger technology (DLT) open up new ways of supervising financial risks. It then puts the case for "embedded supervision", ie a framework that allows compliance with regulatory goals to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data.

This paper highlights the emerging supervisory practices that contribute to effective cybersecurity risk supervision, with an emphasis on how these practices can be adopted by those agencies that are at an early stage of developing a supervisory approach to strengthen cyber resilience.

German regulators twice looked into tightening the supervision of collapsed payments firm Wirecard and discussed it with the German and European central banks but no action was taken. In 2017, officials from BaFin and the Bundesbank, considered placing Wirecard on a list of financial companies to supervise but decided against it. In the second half of 2019, there were discussions for months, which involved the European Central Bank (ECB), about putting Wirecard on a watchlist to give authorities more power to investigate it. But the talks dragged into 2020 and were still inconclusive when they were "overtaken by events"!

The US Federal Reserve Board (FRB) published additional information on its program to supervise novel activities in the banks it oversees. Novel activities include complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or "blockchain" technology. The Fed also provided additional information on the process for Fed-supervised state banks to follow before engaging in certain dollar token or stablecoin activity, including demonstrating to its Fed supervisors that it has appropriate safeguards to conduct the activity safely and soundly.

"Under the Retail Payment Activities Act (RPAA), the Bank will be responsible for supervising payment service providers (PSPs). The aim is to build confidence in the safety and reliability of their services while protecting end users from specific risks. The Department of Finance Canada is leading the development of regulations for the supervisory framework with support from the Bank. Proposed regulations to help clarify details of the RPAA have been published in Part I of the Canada Gazette."

The Basel Committee on Banking Supervision published a report that considers the implications of the ongoing digitalization of finance on banks and supervision, including application programming interfaces (APIs), artificial intelligence and machine learning, distributed ledger technology (DLT) and cloud computing. It also considers the role of big techs, fintechs and third-party service providers, and new business models.

The G20 and the Bank for International Settlements Innovation Hub launched the G20 TechSprint Initiative to highlight the potential for new technologies to resolve regulatory compliance (RegTech) and supervision (SupTech) challenges. The BIS Innovation Hub published high-priority RegTech/SupTech operational problems and invited private firms to develop innovative technological solutions. The problem statements identify challenges in regulatory reporting, analytics, and monitoring and supervision, and have been developed from submissions received from Financial Stability Board member jurisdictions.

The Estonian Ministry of Finance published a consultation paper on how to regulate cryptographic assets. One key question is whether the Financial Supervision Authority should regulate virtual assets. Currently virtual currency service providers must obtain a license from the Financial Intelligence Unit, but supervision over the business activities of such entities is excercised in a limited capacity.

The default of Wirecard highlights several problems in the regulation and supervision of Fintech companies, with regulatory holes in investor protection, customer protection, and financial stability. This column argues that since Fintech companies can be very complex, their oversight requires understanding their business model and combining regulation and supervision based on both entities and activities. The global reach of Fintechs also calls for better coordination at the European level and beyond, but the authors do not see the need for new regulatory body to oversee Fintechs in Europe.

In a case pending in the Second U.S. Circuit Court of Appealsthe lawsuit, New York financial-services superintendent Linda Lacewell claims a company can't be a bank unless it accepts deposits, no matter that it offers other traditional bank services. According to the U.S. Office of the Comptroller of the Currency (OCC) this claim is legally and historically wrong, as well as risky. The OCC determines which companies qualify for charters as national banks or federal savings associations and supervises their activities. It contends that consumer protection and the safety and soundness of the U.S. financial system are at risk if the lawsuit succeeds, as services that formerly were subject to federal supervision are increasingly occurring in the shadow banking sector, outside the OCC's regulatory oversight.

The Financial Stability Board (FSB) published a report that sets out ten high-level recommendations for the regulation, supervision and oversight of "global stablecoin" (GSC) arrangements, both at the domestic and international level, that are proportionate to the risks. They support responsible innovation and provide sufficient flexibility for jurisdictions to implement domestic approaches. GSC arrangements are expected to adhere to all applicable regulatory standards and to address risks to financial stability before commencing operation, and to adapt to new regulatory requirements as necessary.

According to a new IMF Fintech Note, the rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks. To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed. Home supervisors should establish an entity-based approach to cover the global activities of a BigTech group, while host supervisors could in principle address local risks and concerns mainly through activity-based regulations. Cross-sector and cross-border cooperation are key in determining the future of the regulatory architecture. However, it can take several years before regulators have achieved a sufficiently robust legal and regulatory framework to address all risks arising from BigTech in financial services, and short-term solutions may be needed. In the interim, regulatory authorities should actively use all existing regulatory powers to manage risks, while BigTech should adopt and improve governance frameworks through industry codes of conduct and enhanced disclosures. Options should be explored to promote global consistency in the treatment of BigTechs, through existing or new global bodies with a broad mandate. The note recommends that the Joint Forum's 2012 Principles for the Supervision of Financial Conglomerates be reviewed to address regulatory gaps.

Indonesia's Financial Services Authority has prohibited financial firms from using, marketing, and/or facilitating crypto-asset trading. In addition, the financial regulator reminded the public to always beware of fraudulent Ponzi schemes under the guise of crypto. The OJK does not supervise or regulate crypto-assets. The regulation and supervision of crypto assets in Indonesia are carried out by the Commodity Futures Trading Authority and the Ministry of Trade.

The Federal Reserve Board issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities. The statement also makes clear that uninsured and insured banks supervised by the Board would be subject to the limitations on certain activities imposed on national banks, which are overseen by the Office of the Comptroller of the Currency. The equal treatment will promote a level playing field and limit regulatory arbitrage... The Board generally believes that issuing dollar- denominated tokens (dollar tokens) using distributed ledger technology or similar technologies on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices. The Board believes such tokens raise concerns related to operational, cybersecurity, and run risks, and may also present significant illicit finance risks, because-depending on their design-such tokens could circulate continuously, quickly, pseudonymously, and indefinitely among parties unknown to the issuing bank. Importantly, the Board believes such risks are pronounced where the issuing bank does not have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.

The Financial Stability Board (FSB) announced that it will submit to the October meeting of G20 finance ministers and central bank governors a public consultation report on its 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. The FSB will also submit a public consultation report that proposes recommendations for promoting international consistency of regulatory and supervisory approaches to other crypto-assets and crypto-asset markets and strengthening international cooperation and coordination.

"This paper aims to focus, in particular, on two complementary and co-related aspects involving CBCDs: (i) how can the full digitalisation and centralisation of the transaction ledger be combined with privacy and (ii) to what extent CBDCs affect the allocation of burden and the responsibility over supervision of retail transactions. Eminently, the use of cash ensures a form of default privacy that protects the individual against State and private intrusion. While this privacy has caused concern, due to its criminogenic potential, and has been consequently limited by anti-money laundering (AML) regulations, the remaining cone of shadow cash guarantees is a crucial limit to control. In the context of a shifting financial system, undergoing deep transformation due to increasing datafication and decentralisation of the market, a new governance of financial supervision and record-keeping-up to now based on a unique and centralised ledger-is crucial to redefine the trade-off between financial integrity and privacy. This article will examine the origins and characteristics of CBDCs, to then analyse how the trade-off between control and privacy is set to reshape this new architecture."