Summary
- This week in crypto policy news we saw an epic 38-hour final negotiating session on the Artificial Intelligence Act in the EU.
- The Lithuanian authorities announced tighter requirements for crypto-asset companies for better supervision of such companies and their services.
- Taiwan set up a Financial Technology Bureau to oversee cryptocurrencies to protect investors and increase regulation.
- The UK’s National Audit Office published a report reviewing how the Financial Conduct Authority is responding to changes in the market and to its remit.
- For those who want to share this update, view the crypto policy roundup on Twitter and LinkedIn.
In 2021, the UK’s financial services sector, a crucial £173.6 billion industry encompassing banking, insurance, and investment management, entered a period of significant transformation. The FCA is navigating these changes, especially in the post-Brexit era, where the Financial Services and Markets Act 2023 (FSMA 2023) has expanded its remit and objectives.
NAO’s report critically assesses the FCA’s preparedness in adapting to the evolving financial landscape, marked by the emergence of new products like crypto assets and advancements in AI technology. It examines the FCA’s strategic response, resource allocation, and performance metrics in the context of these rapid changes. The report emphasizes the need for the FCA to utilize data and demonstrate agility and targeted responsiveness to maintain regulatory effectiveness.
The report also criticized FCA for being slow to act, saying “Even when an issue falls inside the FCA’s perimeter, or it has the power to act, it can take years for the FCA to implement any enforcement action.” Part of that delay caused by the FCA is attributed to a lack of staff with crypto skills.
Groundbreaking Artificial Intelligence Act Sees Provisional Agreement
On 9 December 2023, the European Union reached a provisional agreement on the AI Act, a pioneering regulation aimed at ensuring AI development is safe, respects fundamental rights, and fosters innovation. This act introduces strict rules for high-risk AI systems, including those impacting health, safety, and democracy, requiring a mandatory fundamental rights impact assessment. It notably bans AI applications that could threaten citizen rights or democracy, such as biometric categorization based on sensitive characteristics, untargeted facial recognition scraping, and social scoring systems. Law enforcement’s use of real-time biometric identification is tightly controlled, allowed only under specific conditions like preventing terrorism or locating serious crime suspects.
European Parliament’s Brando Benifei (Italy) said, “Thanks to the European Parliament’s resilience, the world’s first horizontal legislation on artificial intelligence will keep the European promise – ensuring that rights and freedoms are at the center of the development of this ground-breaking technology. Correct implementation will be key – the Parliament will continue to keep a close eye, to ensure support for new business ideas with sandboxes, and effective rules for the most powerful models.”
The act also establishes obligations for general-purpose AI systems, demanding transparency, risk assessments, and adherence to EU standards. To support innovation and protect SMEs regulatory sandboxes for AI development are promoted. Non-compliance with these rules can result in hefty fines, up to 35 million euros or 7% of global turnover. This legislation positions the EU as a leader in regulating AI, balancing technological advancement with the protection of rights and democratic values.
The Council of the EU is actively promoting the AI Act as another global first (similar to GDPR on data protection), hoping that ‘the Brussels effect’ will see it become the global gold standard.
European Union Establishes AMLA to Strengthen Anti-Money Laundering Efforts
The European Parliament and the Council of the EU have reached a landmark agreement to establish the Anti-Money Laundering Authority (AMLA), a significant move to enhance the enforcement of the EU’s anti-money laundering and anti-terrorist financing rules. AMLA is tasked with overseeing the EU’s new regulations aimed at curbing illicit money flows, focusing on directly supervising high-risk financial entities in at least six member states. It will also play a pivotal role in coordinating and standardizing the actions of national supervisors, mediating disputes, and supporting financial intelligence units in analyzing suspicious transactions.
This agreement includes harmonizing rules across member states, establishing whistleblower protections, and ensuring effective cooperation between national financial intelligence units and AMLA. Additionally, AMLA will have a critical role in preventing the circumvention of targeted financial sanctions. The decision on AMLA’s headquarters is pending, with a selection expected in 2024. This initiative marks a significant step in the EU’s commitment to combating financial crimes and enhancing cross-border financial security.
Lithuania Tightens Regulations on Crypto-Asset Companies Amid Rising Risks
Lithuania authorities, recognizing the growing risks in the crypto-asset sector, are urgently tightening regulations to better supervise companies providing such services. The Bank of Lithuania, Ministry of the Interior, Ministry of Finance, and the Financial Crime Investigation Service (FCIS) warn that inaction could damage Lithuania’s reputation as a reliable jurisdiction negatively impacting its financial system and international fintech operations. The measures include closer supervision of crypto-asset service providers, with a focus on preventing money laundering and terrorist financing. The Ministry of Finance has drafted laws to set new operational standards and establish a licensing process for these providers, aiming for a more transparent and sustainable crypto-asset sector.
Commenting on the same, Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania said, “The activities of the crypto-asset sector are innovative, but crypto-assets are also often used as a tool for money laundering and fraud. The Bank of Lithuania has repeatedly warned consumers, financial market participants and institutions about these risks. It is extremely important that the crypto-asset market is properly controlled, therefore, it is necesary to strengthen the legal regulation in Lithuania, and we are actively contributing our expertise to preparing concrete measures, initiating and submitting proposals.”
These actions precede the EU’s MiCA Regulation, set to be implemented in December 2024, with Lithuania opting not to apply the transitional period and start enforcing the new requirements immediately. While it’s welcome that Lithuania is thinking seriously about ensuring timely and consistent application of MiCA, observers think it is unfortunate that they falsely portray cryptoassets as “often used as a tool for money laundering and fraud”.
APAC: Taiwan, Japan, Hong Kong
Taiwan FSC Establishes Financial Technology Bureau for Crypto Oversight
In APAC, Taiwan’s Financial Supervisory Commission (FSC) has established a Financial Technology Bureau dedicated to overseeing the cryptocurrency sector. This move, confirmed by FSC chairman Huang Tien-Mu, comes in response to the Executive Yuan Council’s directive to enhance crypto regulation.
The initiative aims to protect investors and increase regulatory measures amidst the growing prevalence of financial technology and associated risks. The FSC’s Fintech Bureau will focus on tightening regulations around the cryptocurrency market. This decision is partly influenced by recent cybersecurity incidents, such as the $26 million loss suffered by Taipei-based trading platform Kronos Research. Additionally, the FSC is considering the introduction of cryptocurrency exchange-traded funds (ETFs) and is studying foreign cryptocurrency futures products and ETFs, indicating a potential easing of restrictions in line with global market trends.
The FSC is also actively exploring the potential introduction of Bitcoin ETFs, aligning with the global trend of integrating digital assets into regulated financial markets. Observing developments in countries like the US, Canada, and Australia, where cryptocurrency ETFs are already trading, the FSC is conducting thorough research on international cryptocurrency futures products and ETFs.
Japan to Revise Crypto Corporate Tax to Retain Web3 Firms
Japan is considering a significant change in its corporate tax policy for cryptocurrencies,v aiming to exempt companies from paying taxes on unrealized gains from digital assets. This move, proposed by the country’s ruling coalition, seeks to alter the current system where companies are taxed based on mark-to-market valuations of their crypto holdings at the end of each fiscal year.
The proposal, intended for inclusion in the fiscal 2024 tax reform plan, is a response to the exodus of Web3 firms to more tax-friendly jurisdictions like Singapore, Dubai, and Switzerland. This tax reform aligns with Japan’s growing embrace of Web3 technologies, as evidenced by recent developments like the strategic partnership between stablecoin issuer Circle and SBI Holdings to enhance the adoption of USDC and integrate Circle’s Web3 services in Japan.
Hong Kong’s SFC Intensifies Crackdown on Crypto Frauds HongKongDAO and BitCuped
Hong Kong’s SFC has issued a public warning against suspected virtual asset-related frauds involving Frauds HongKongDAO and BitCuped, and has requested the police force to block access to the websites along with cease and desist letters being issued.
According to SFC, HKD appears to operate at least two Telegram groups, one in Chinese with over 10,000 members and the other in English with over 1,700 members. In the Telegram groups, the increase in the purported “market” price and future market value of the HKD token appears to be touted to lure investors to purchase the HKD token.
The SFC warns that such misleading statements could deceive the public into believing that HKD’s operations are legitimate. BitCuped is similarly under scrutiny for falsely claiming affiliations with prominent figures to enhance its credibility. In response, the SFC has requested the Hong Kong Police Force to block these entities’ websites and issued cease and desist letters.
