Hello Fintech Friends,

Welcome to another week of fintech policy updates. This week, we present a comprehensive overview of the past week's main developments across the realms of crypto regulation, enforcement measures, artificial intelligence (AI), and the dynamic world of payments.

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1. Crypto Regulation

As 2023 draws to a close, the congressional debates surrounding crypto regulation show no signs of abating. On Monday, December 12, five Democratic lawmakers, spearheaded by Sen. Elizabeth Warren (D-MA), introduced the "Digital Asset Anti-Money Laundering Act." This legislative initiative aims to address the use of crypto in illicit finance by extending Bank Secrecy Act requirements, such as know-your-customer (KYC) rules, to various crypto industry participants, including miners, validators, and wallet providers. However, like its predecessors, the fate of this bill in Congress appears uncertain, with partisan divides over crypto issues serving as a formidable hurdle to its passage.

Beyond the halls of Congress, the Financial Stability Oversight Council (FSOC), comprising the nation's key financial regulators, released its annual report last Thursday. The report urged Congress to pass legislation that regulates crypto spot markets and stablecoins—the same recommendations the FSOC made in 2022. The report, however, revealed that the FSOC may explore alternative measures to address risks associated with stablecoins should comprehensive legislation prove elusive.

In another significant development, the U.S. Securities and Exchange Commission (SEC) officially rejected Coinbase's petition for the establishment of cryptocurrency rules and regulations last Friday. Submitted in July 2022, Coinbase's petition sought an "updated rulebook" to provide clear guidance for crypto companies navigating the regulatory landscape. The SEC's response highlighted the applicability of existing laws and regulations to crypto securities markets as well as the SEC’s need to maintain discretion in setting its rulemaking priorities. In response, Coinbase characterized the SEC's decision as "arbitrary and capricious" and announced its intention to petition for a review.

The U.S. Financial Accounting Standards Board (FASB) has released a standards update on crypto holdings by corporations. Under the existing standards, companies are obligated to report a loss if the value of their held crypto falls below the purchase price, irrespective of whether the assets are sold or not, while gains couldn't be reported. With the updated standards, both losses and gains from crypto holdings will now be recognized as net income.

Internationally, South Korea has issued a regulation implementing the Virtual Asset User Protection Act, enacted in July. Noteworthy provisions in the new regulation include a mandate for storing 80% of the economic value of users' virtual assets in cold wallets and a requirement to pay interest to investors on their holdings on exchanges. In Brazil, President Lula da Silva has approved a law imposing a 15% tax on the overseas crypto holdings of Brazilian citizens. And the Basel Committee on Banking Supervision is proposing revisions to the prudential standard governing bank exposures to crypto-assets, particularly stablecoins. The proposed changes focus on the composition of reserves supporting stablecoins if such stablecoins are to fall into the 1b category of crypto-assets and, consequently, benefit from preferential regulatory treatment.

2. Enforcement

Binance’s troubles seem far from over. Last week, the SEC seized upon the recent $4.3B settlement between the crypto exchange and the Department of Justice and other U.S. authorities, requesting the court hearing its case against Binance to take Binance's admissions in the settlement, alongside those of its former CEO Changpeng Zhao, into account. Meanwhile, Tether, the issuer of the world's largest stablecoin, has declared its intention to freeze tokens held in wallets associated with individuals on the U.S. Office of Foreign Asset Controls (OFAC) list of sanctioned individuals. The move marks a noteworthy departure from Tether’s previous stance of resisting such requests from law enforcement agencies over the years.

3. AI

Earlier this month, the EU Council and Parliament reached a provisional agreement on groundbreaking AI regulation, marking the first of its kind by a major global power. The accord mandates transparency obligations for foundational models like ChatGPT and general-purpose AI systems (GPAI) before they enter the market. Foundation models posing systemic risk will face more stringent requirements, including model evaluations, systemic risk assessments, and cybersecurity measures. Additionally, governments' use of real-time biometric surveillance in public spaces will be restricted. The legislation is anticipated to be officially approved next year and is slated to take effect two years thereafter.

In the U.S., the SEC is quietly probing the use of AI by investment advisers through requests of information on how advisers integrate this new technology into their practices. Simultaneously, the FSOC identified AI for the first time as a potential source of vulnerability in the financial system in its 2023 annual report. The FSOC recommended consolidating regulatory capacity to identify and address emerging risks associated with the use of AI in finance. In contrast, the UK Financial Conduct Authority (FCA) said last week that existing regulatory frameworks are sufficient to tackle the challenges posed by AI, signaling a more permissive stance toward the new technology.

4. Payments

China has unveiled new measures aimed at strengthening oversight of non-banking payment companies, introducing stricter licensing rules and bolstered risk management protocols. The objective is to prevent fund misappropriation and financial crimes while ensuring transparency and reasonable fee structures for these platforms. In response to an ongoing antitrust case in the European Union, Apple has announced that it will allow competitors to access its tap-to-pay mobile wallet system. Additionally, SWIFT has developed an API-based interoperability model for electronic bills of lading which will allow financial institutions to exchange electronic bills of lading across multiple trade platforms using existing SWIFT connectivity.

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See you next week!