Summary
- This week in crypto policy, the ESMA released a risk analysis report titled ‘Decentralised Finance in the EU: Developments and Risks’ on 11 October 2023. The report points out risks in DeFi due to its speculative nature, security vulnerabilities, and lack of responsible parties.
- APAC Cryptocurrency Developments – Philippines’ Coins.ph and Circle form a partnership to promote USDC-denominated remittance as a faster and cost-effective method for international transfers. Malaysia’s Hata has received in-principle approval to operate as a digital asset exchange and broker, aiming for a 2024 launch. The Bank of Korea, with the Bank for International Settlements, is exploring a Korean Wholesale CBDC for interbank settlements.
- Reports on Hamas’s use of crypto activity show how the group halted activity from April 2023 and sheds light on a larger trend: security officials and law enforcement agencies have been increasingly leveraging blockchain analysis techniques to disrupt Hamas’ illicit activities.
- View the weekly crypto policy update on Twitter and LinkedIn.
EU’s New DeFi Risk Report
The European Securities and Markets Authority (ESMA) has had a particularly active week in terms of crypto regulation, as the EU’s financial markets regulator and supervisor published a risk analysis report called ‘Decentralised Finance in the EU: Developments and Risks,’ on 11 October 2023.
According to the 22-page published report, it “highlights that although investors’ exposure to DeFi remains small overall, there are serious risks to investor protection, due to the highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party.”
Despite coming down heavily on the negatives of DeFi, ESMA observed that “the estimated number of DeFi users continues to grow, although at a slower pace, and some predict continued growth in the years to come, mainly as a result of the ongoing development of new DeFi use cases, the increasing adoption of crypto assets by mainstream investors, and the continued emergence of new DeFi protocols.”
ESMA said that it will continue to actively monitor DeFi developments, as DeFi activities and arrangements continue to evolve quickly and raise challenges and risks. The regulator also intends to contribute to international initiatives on the topic of DeFi.
Furthermore, ESMA published a paper about the technical requirements of Markets in Crypto Assets Regulation (MiCA) on 5 October 2023. “The aim of these public consultations is to collect views, comments, and opinions from stakeholders and market participants on the appropriate implementation of MiCA,” said the EU’s financial markets regulator and supervisor.
ESMA has asked the stakeholders to submit feedback for this consultation paper by 14 December 2023. The regulator is looking for feedback on – sustainability indicators for distributed ledgers, disclosures of inside information, technical requirements for white papers, trade transparency measures; and record-keeping and business continuity requirements for crypto-asset service providers.
This is the second consultation package released by ESMA, having published the first one in July 2023, after which the stakeholders’ group broadly welcomed ESMA’s approach, clarifying views on issues such as conflicts of interest and reverse solicitation. The third and final consultation package will be published in Q1 2024.
Philippines, Malaysia, Singapore, South Korea: APAC Continues To Progress
Coins.ph, the Philippines’ premier cryptocurrency exchange and digital wallet provider, has entered a strategic partnership with global fintech, Circle Internet Financial, to promote the USDC-denominated remittance as a swift, cost-effective, and secure method for international money transfers. (USDC is a regulated, fully-backed digital dollar, or stablecoin, that is available 24/7, moves at internet speed, and is always redeemable 1:1 for U.S. dollars)
This collaboration aims to enhance financial inclusion in the country and address challenges posed by high fees and transaction delays in traditional remittance channels.
Commenting on the partnership Coins.ph CEO Wei Zhou said, “Coins.ph’s partnership with Circle aims to show how USDC can provide a faster, lower-cost, and more accessible remittance option for our 18 million Filipino users and their families and loved ones abroad.”
Zhou emphasized the company’s vision of expanding to reach more Southeast Asian markets while facilitating greater access to financial services and dismantling traditional barriers.
Hata Gets Conditional Nod For Digital Asset Exchange Operations
Hata, a Malaysia-based global crypto exchange, has been granted in-principle approval by the Securities Commision Malaysia to function as a “digital asset exchange” and “digital broker” within Malaysia’s Recognised Market Operator framework. Notably, this positions Hata as the fifth registered market operator in the Southeast Asian nation.
The company disclosed in a recent press release its intentions to garner complete approvals from the Malaysian securities regulator and is eyeing a launch for its platform to local clientele by the beginning of 2024.
Singapore Banks Heighten Client Scrutiny Amidst $1.8 Billion Fraud
In the wake of a massive $1.8 billion money-laundering scandal, Singapore’s banking sector is intensifying its oversight of customers, especially those from countries such as China, Turkey, Dominica, Cyprus, and more. Financial institutions have signaled prolonged waiting times for opening private bank accounts.
In one of the nation’s most extensive probes, Singapore apprehended 10 individuals last month, confiscating assets, including luxury items, cash, and crypto assets. All the suspects held Chinese passports.
The Monetary Authority of Singapore (MAS) has since directed all financial entities to examine transactions associated with these suspects meticulously.
Bank of Korea and BIS Explore Wholesale CBDC Potential
The Bank of Korea, in partnership with the Bank for International Settlements (BIS), has initiated a pilot program to explore the potential of a Korean Wholesale CBDC that aims to aid banks in interbank settlements and issue fractionally-backed digital currencies.
The move follows the Bank of Korea’s experiments with a retail CBDC in 2022 involving 14 financial institutions. While the previous pilot was successful, the bank identified potential challenges, including undermining the traditional banking role and privacy concerns.
Notably, the New York Federal Reserve conducted a similar test recently, yielding positive results.
The Role of Blockchain Analysis in Countering Hamas Activity
Before we go, we wanted to address this week’s headlines on Hamas and crypto.
Reports from blockchain analysis firms have revealed a significant development this year: Hamas, a known militant organization, made the decision to suspend its cryptocurrency donation campaigns. The group cited concerns that such contributions were inadvertently leading to actions against its network of supporters. This move sheds light on a larger trend: security officials and law enforcement agencies have been increasingly leveraging blockchain analysis techniques to disrupt Hamas’ illicit activities. By delving into the intricate details of blockchain transactions, investigators have managed to pinpoint the exchanges that Hamas employs to acquire crypto wallets. This nuance is pivotal in dismantling the group’s financial infrastructure.
Participating in terrorist crypto crowdfunding campaigns inherently exposes donors to substantial risks. Reports say, while these campaigns allow for funds to be sent to wallets under the group’s control, the transactions are conducted on a public ledger. This openness provides investigators with crucial leads to identify both terrorist operatives and their financial backers. Furthermore, the public nature of crowdfunding means that cryptocurrency exchanges worldwide can take proactive measures against Hamas’ funding mechanisms. Upon detecting wallet addresses associated with Hamas, exchanges can closely monitor them, flag suspicious activity, and even close the accounts of customers attempting transactions with them.
For years, experts in crypto national security have emphasized the imperative for US law enforcement and intelligence agencies to develop advanced skills in blockchain analysis. The government’s proficiency in this field has seen notable progress in recent years, and it is poised to remain an integral component of the national security skillset. Several security officials have publicly attested that they successfully intercepted funds from falling into the wrong hands thanks to this technology.
The regulatory policy implication is crystal clear: the most effective means of constraining crypto terrorist financing lies in maintaining a well-regulated crypto sector. This necessitates clear and enforced Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and sanctions rules. Establishing and upholding these standards will fortify the financial system against illicit activities while preserving the integrity of the crypto industry.
