Thomas Murray Digital Newsletter
In this issue:
- The EU’s landmark Markets in Crypto Assets legislation has finally been published and ratified, and the Transfer of Funds Regulation receives preliminary approval
- SWIFT makes a play to keep itself at the heart of linking financial institutions in the developing DLT-based financial system by piloting a framework to link tokenisation and settlement systems and a system to ensure interoperability between digital and traditional finance
- BNY Mellon, the world’s largest custodian, begins rolling out its digital asset custody service to select clients as more leading name banks including Société Générale announce and launch their own digital asset servicing offerings
- OECD launches global Crypto-Asset Reporting Framework; EU extends Russia crypto sanctions; Basel Committee crypto reserve pushback continues; Coinbase partners with Google and continues service expansion; digital Euro plans updated
Major Digital Asset Developments
|EU ratifies MiCA, and TFR is Approved
Following provisional agreement in July by the European Parliament and Council, the text of the Markets in Crypto Assets Regulation (MiCA) has been finalised and the bill has been ratified. The lawmakers of each European member state voted 28 to 1 in favour of the new laws, which are expected to enter into force within 18 months after publication in the Official Journal of the European Union (OJEU), slated for next spring. The regulatory package earmarks the first multi-jurisdictional approach to regulating crypto assets, as well as what it terms Crypto Asset Service Providers (CASPs). For an overview of MiCA’s scope, please see our previous newsletter.
Soon after the MiCA deal was reached, the independent – but very much related – Transfer of Funds Regulation (TFR) was also preliminarily agreed. In keeping with the anti-money laundering expectations set by Financial Action Task Force Recommendation 16 and supported by MiCA, known commonly as the Travel Rule, the EU’s Civil Liberties Committee confirmed that the tracing of cryptocurrency transfers remains crucial to preventing money laundering and fraudulent activity. As such, information on the source of assets and the beneficiary are to ‘travel’ together with the transaction instruction itself, which is to be stored and monitored by both sides of the exchange. CASPs such as regulated exchanges would be required to provide this information to the competent authorities if required. Furthermore, much to the concern of some crypto industry insiders and commentators, there will not be a minimum threshold or exemption for low-value transfers, as originally proposed, which means that all transactions that interface with or flow through a regulated/hosted wallet will be subject to scrutiny. Importantly, this will not apply for the time being to private/unhosted wallets, unless they interact with hosted wallets managed by a regulated CASP.
Coinbase CEO Brian Armstrong first responded to the initial proposal in April 2022, articulating his belief that this goes against the EU’s work to be a global leader regarding privacy (Cointelegraph). With the low-value exemption removed in the final MiCA text, this concern has been heightened. Beyond privacy, a further issue is that this measure will dramatically increase compliance costs for regulated entities and banks, which Armstrong further suggests may not even be able to comply from a cost or technical perspective. There is a chance that the parameters of the TFR could change given the continued pushback and the technical challenges, though given the concerted effort to tackle AML this seems unlikely. Still, the technical aspects of the text will need to be approved by the Economic and Monetary Affairs and Civil Liberties and Justice Committees and the EU Parliament before it can enter into force.
|SWIFT Forges Ahead with Blockchain Development and Integration
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) has announced a number of recent trials, experiments, and product enhancements aimed at reaffirming its role in the broader financial system. Recent projects have included a pilot in which it successfully implemented a common framework that was able to link asset tokenisation systems between Central Securities Depositories (CSDs) and Global Custodians. This was completed in partnership with Clearstream, Northern Trust, and SETL, a DLT technology and settlement platform. The pilot successfully demonstrated the ease with which tokenised assets, which included bonds and equities, could be issued and settled on a delivery-versus-payment basis (DvP), as well as redeemed, with settlement undertaken using fiat payment systems as well as with a Central Bank Digital Currency (CBDC).
SWIFT is also exploring the concept of interoperability, the ability to integrate traditional finance with native blockchain systems that do not necessarily easily communicate with one another today. Through a partnership with Chainlink Labs, a leading cross-chain interoperability protocol, the Cross-Chain Interoperability Protocol (CCIP) proof of concept is expected to enable SWIFT to instruct on-chain token transfers across all blockchain environments which, if successful, would mean that public blockchains could, subject to regulatory approval, be used to facilitate digital asset servicing and transfers of assets as well as securities.
|BNY Mellon Switches On Crypto Custody
Just over a year and a half since it first announced its intention to build a multi-asset digital platform (BNYM) to service bitcoin and other digital assets, last week BNY Mellon went live with the first elements of its much anticipated solution. Select institutional clients are being offered access to bitcoin and ether on its new platform, with the intention to roll this out to a wider audience over time, much like Blackrock’s approach in partnership with Coinbase (Coinbase) unveiled in August this year. This development comes at a time when numerous high-profile traditional banking, investment and infrastructure organisations are similarly releasing their own solutions to meet the needs of the rapidly growing digital assets industry. In the last year alone, Société Générale (SG Forge), BBVA, CACEIS, State Street, Citigroup, Nomura (Komainu), Nasdaq, BlackRock, DBS, Google, Invesco, Standard Chartered (Zodia), BNP Paribas, Schroders, Northern Trust, Bank Itaú, Deutsche Bank, ANZ, J.P. Morgan, U.S. Bank, Goldman Sachs, Commerzbank, Clearstream, and SIX (SIX Digital Exchange), among many others, have all announced or launched their digital asset solutions.
Legal and regulatory agency pressures, particularly in the US, have in part limited the flow of investment and activity in the institutional end of the sector. Banks have found it increasingly difficult to meet customer demands for crypto asset solutions, as articulated by State Street (see previous newsletter, first item) last month, primarily as a result of the SEC’s Staff Accounting Bulletin 121 (SEC) which expects banks to hold clients’ crypto assets as liabilities on their balance sheets, resulting in significantly increased regulatory capital requirements. Further, the Bank for International Settlements has continued to propose punitive capital requirements for banks and credit institutions which are also receiving industry-wide pushback. That said, the momentum is clear, and with BNY Mellon now firmly involved in supporting the ecosystem, and other industry behemoths firmly on its heels, it may well lead to a race for control between the global custodians and leading FinTechs such as Coinbase who have hitherto stolen a march on their traditional counterparts. This may too lead to a turnaround in fortunes for the digital asset market as a whole, which has been struggling much like most asset classes due to the tumultuous macro environment but also due to the dampening pressures applied by poorly-applied or delayed regulatory policies.
Other News and Links
|OECD Releases New Global Tax Reporting Framework for Crypto Assets (CoinDesk)
The Organisation for Economic Co-operation and Development (OECD) has released a tax reporting framework for crypto assets. The Crypto-Asset Reporting Framework (CARF) was presented to the G20 last week, and attempts to address how crypto assets should be considered in context of the G20’s Common Reporting Standard (CRS), designed to foster greater global transparency and eliminate tax evasion.
|Uzbekistan Introduces Monthly Fees for Cryptocurrency Companies (Bitcoin.com)
A new law has been adopted in Uzbekistan which requires digital asset service providers and cryptocurrency miners to pay monthly fees to the state depending on the service performed. Exchanges will reportedly be expected to pay as much as USD 11,000 per month, with failure to pay resulting in the suspension of their licences. Miners will be required to pay approximately USD 270 a month, while custodians will benefit from the lowest fee of approximately USD 135 per month.
|UK Shuts Down Temporary Crypto Company Licensing Program (CoinDesk)
Following Copper Technologies’ retraction of its attempted registration with the Financial Conduct Authority (FCA), and Revolut’s successful application last month, the Temporary Registration Regime (TRR) has now come to an end. Subsequently, any and all firms looking to engage with certain types of crypto assets, or provide services for them, is required to seek full FCA registration.
|EU Issues Bitcoin, Crypto Ban on Russia with New Sanctions (Bitcoin Magazine)
The EU has doubled down on its crypto sanctions against Russia by prohibiting the transfer of crypto assets from Russian-based cryptocurrency wallets. This comes a month after the Russian Ministry of Finance conceded that cryptocurrencies are needed to support its cross-border settlement needs.
|TRON Becomes Legal Tender in Dominica (CryptoSlate)
The Commonwealth of Dominica has legalised the use of the TRON blockchain’s native tokens as a medium of payment in the country, in order to boost tourism as well as better position it within the context of an emerging global digital economy.
|France Approves its Third-Biggest Bank to Operate Digital Asset Services (The Block)
Société Générale’s subsidiary, SG Forge, has received regulatory approval from the French financial markets regulator, Autorité des Marchés Financiers (AMF), to operate as a digital asset service provider (DASP), offering custody and exchange services.
|Crypto Exchange Binance Receives Licence to Operate in Kazakhstan (CoinDesk)
|Industry Pushes Back Again on Basel Committee’s Crypto Reserve Measures (Finextra)
For the second time, the Bank for International Settlements’ Basel Committee on Banking Supervision has received further push back from industry associations including the Global Financial Markets Association, the Futures Industry Association and the International Swaps and Derivatives Association regarding its second consultation document published on 30 June on the ‘prudential treatment of cryptoasset exposures’. In 2021, the Basel Committee issued a proposal – largely viewed by the industry as unviable and even punitive – to require banks to reserve capital to cover the whole value of cryptocurrency holdings. Following stiff resistance, as we reported last November, the BIS withdrew that model and went back to the drawing board. The second proposal appeard to take a more refined and pragmatic approach, however, it has continued to be met with stiff resistance by numerous industry groups who argue yet again that the rules would reduce, and in some cases ‘preclude banks from utilising the benefits of distributed ledger technology (“DLT”) to perform certain traditional banking, financial intermediation and other financial functions more efficiently.’ Significant to the proposal is the idea of exposure limits to Group 1a/b (akin to traditional assets or those with effective stabilisation mechanisms, i.e. stablecoins) and Group 2a/b type crypto assets (unbacked crypto assets such as cryptocurrencies, as well as other assets that are not covered under Group 1). However, the proposal does not, according to the associations, take into account hedging that is often performed by financial institutions to limit their short and long term exposure. As such, they would still be subject to a 100% capital charge for Group 2 assets, which for all intents and purposes are the predominant digital asset type in circulation today, and those most in client demand.
|Coinbase Gets Singapore Digital Payment Token License (CoinDesk)
Coinbase Expands Services in Australia, Calling Country a ‘Priority Market for Us’ (CoinDesk)
Coinbase Commences Partnership with Signature Bank to Provide Real Time Settlement via Signet (Business Wire)
Coinbase Hires Fintech Executive to Lead European Expansion (Bloomberg UK)
|Germany’s 2nd Largest Bank DZ to Launch Crypto Custody (Ledger Insights)
|Google Selects Coinbase to take Cloud Payments with Cryptocurrencies and Will Use Its Custody Tool (CNBC)
Google is set to enable certain clients to pay for cloud services using digital currencies, reportedly as soon as early next year. It has appointed Coinbase (NASDAQ: COIN) to support it with the payment process and is also considering Coinbase’s Prime services for trading and custody. With reciprocity in mind, Coinbase is said to be moving some of its applications from Amazon’s Web Services to Google’s cloud.
|Paxos Wins Custody Deal for Fidelity, Schwab-backed Digital Asset Exchange EDXM (Ledger Insights)
|Custodian Anchorage Adds to Asia Push with Batch of Institutional Crypto Partners (CoinDesk)
|JPMorgan and Visa Link Blockchain Payment Networks (Finextra)
J.P. Morgan (JPM) and Visa are due to establish a link between their proprietary blockchain networks, Liink and B2B Connect respectively, with Visa expected to benefit from JPM’s account validation tool, Confirm.
|SIX Integrates CryptoCompare’s Cryptocurrency Data Feed (Finance Feeds)
|Progress on the Investigation Phase of a Digital Euro (European Central Bank)
A digital Euro will not be released until at least 2026. It will come with restrictions designed to slow the disintermediation of banks through conversions of bank deposits into CBDC holdings, and with an interest structure that disincentivises holding high digital Euro balances.
|India Preps Digital Rupee Pilot (Finextra)
|RBA and Digital Finance Cooperative Research Centre White Paper: Australian CBDC Pilot for Digital Finance Innovation (Reserve Bank of Australia)
|Project Icebreaker: Central Banks of Israel, Norway and Sweden Team Up with the BIS to Explore Retail CBDC for International Payments (Bank for International Settlements)
|Anchors and Catalysts: Central Banks’ Dual Role in Innovation – Speech by François Villeroy de Galhau, Governor of the Banque de France (Bank de France)
In this speech at the Conference on Opportunities and Challenges of the Tokenisation of Finance in Paris, the Banque de France announced wholesale CBDC projects to improve CBDC liquidity through automated market makers in DeFi markets and to issue and trade tokenised bonds.
The Banque de France has also joined a consortium of 14 banks and market infrastructures launched by SWIFT to conduct a new CBDC experiment for interbank settlement purposes.
|Innovation in Post Trade Services – Opportunities, Risks and the Role for the Public Sector − Speech by Sir Jon Cunliffe (Bank of England)
The post-trade sector could see huge consolidation and disintermediation as smart contracts operated by single centralised or decentralised entities replace custodians, exchanges, CCPs and CSDs, removing settlement risk but reducing the ability to correct erroneous transactions and increasing liquidity risk. The FMI Sandbox being launched by the Bank of England, Financial Conduct Authority and HM Treasury will focus initially on testing DLT securities settlement systems and their integration with trading platforms.
Thomas Murray Digital
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