Hello Fintech Friends,

Welcome to another week of fintech policy updates. We're here with the latest developments in crypto regulation, enforcement, central bank digital currencies (CBDCs), and artificial intelligence (AI) from both the U.S. and around the world. Let's dive in.

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1. Crypto Regulation

On October 30, the UK Treasury released its official response to the consultation on digital assets, outlining an ambitious plan to introduce a comprehensive crypto regulatory framework in the coming year. This initiative aims to level the regulatory playing field between digital asset companies and their traditional finance counterparts. The proposed regulation will require firms providing services to UK retail consumers, regardless of their geographic location, to obtain proper authorization. Additionally, crypto exchanges will be obliged to disclose detailed admission standards and new asset listings. Furthermore, the proposed regulation will cover fiat-backed stablecoins, granting supervisory authority to the Bank of England, Financial Conduct Authority (FCA), and Payment Systems Regulator (PSR) over stablecoin issuers. Through this upcoming regulation, the government is taking a major step towards solidifying the UK’s position as a global crypto hub.

In Turkey, Finance Minister Mehmet Şimşek announced last Tuesday that Turkey is very close to introducing a comprehensive crypto regulation, marking the crucial final step toward removing the nation from the Financial Action Task Force’s (FATF) "gray list." This designation is typically assigned to countries lacking adequate regulatory frameworks for money laundering and terrorist financing, a status Turkey has held since 2021. Minister Şimşek highlighted Turkey's commendable progress, stating that his country has successfully met 39 of the 40 FATF requirements and that the impending crypto regulation is poised to address the final outstanding requirement.

2. Enforcement

In a landmark verdict, jurors in the Southern District of New York unanimously found Sam Bankman-Fried (SBF), the former CEO of the now-defunct crypto exchange FTX, guilty on all seven counts he faced. The next step in this suspenseful criminal trial is the sentencing, with U.S. District Judge Lewis Kaplan tasked with determining SBF's fate, a decision that could potentially lead to a maximum sentence of 115 years in prison.

In other news, payment sector giant PayPal disclosed that it had been subpoenaed by the Securities and Exchange Commission (SEC) regarding its dollar-backed stablecoin. The company stated that it is actively collaborating with the SEC's request for relevant documents.

Meanwhile, a lawsuit brought forth by the crypto advocacy group Coin Center against the U.S. Treasury was dismissed. The lawsuit challenged the inclusion of the Tornado Cash crypto mixer in the Treasury's "Specially Designated National or Blocked Person" list in November of the prior year. Notably, the court's ruling underscored that Treasury's decision does not impinge upon the plaintiffs' First Amendment rights.

The Government Accountability Office (GAO) concluded that the SEC erred in not categorizing SAB 121 as a rule under the Congressional Review Act. SAB 121 offers guidance to financial institutions handling customers' crypto assets, stipulating that they must hold these assets on their balance sheets. This raises the cost of crypto custody, particularly for banks, due to the substantial capital reserves financial institutions have to hold against their customers' digital assets. Following the GAO’s conclusion, the SEC will now be required to refer the rule to Congress for approval. However, given the current Democratic majority in the Senate, the rule is expected to remain intact.

3. CBDCs

Last week, the Swiss National Bank unveiled plans to kick off a CBDC pilot on December 1. The pilot will focus on a wholesale use case for the digital franc and will be executed in partnership with six prominent financial institutions from Switzerland and Germany, in addition to the Swiss digital exchange SIX. In Europe, the European Central Bank (ECB) pushed back against a provision in the draft digital euro legislation proposed by the European Parliament and Council. This provision mandates that the digital euro should be readily available for offline transactions once it is rolled out. The ECB argues that the insistence on offline functionality at this stage could potentially lead to a delay in the digital euro's launch if this aspect is not sufficiently finalized by the time of issuance.

4. AI  

On October 30, the White House issued a long-anticipated executive order on AI, a comprehensive document spanning over 100 pages. The executive order introduced novel regulations for future AI models that are larger than GPT-4, which is believed to have used around 20 trillion trillion operations to build. Such models will be subject to new rules and will have to be reported to the National Institute of Standards and Technology (NIST). The order also includes other important initiatives, particularly with respect to safeguarding privacy, the responsible application of AI in healthcare, and the establishment of a dedicated U.S. AI Safety Institute within the Department of Commerce. It also calls for the preparation of a comprehensive report on AI’s potential impacts on the labor market. Just two days after the executive order, the Office of Management and Budget (OMB) released additional guidance outlining how the federal government will leverage AI. The guidance included the administration's strategies to establish AI governance structures in federal agencies, advance responsible AI innovation, increase transparency, protect federal workers, and manage risks from government uses of AI.

Later in the week, representatives from 29 nations, including the U.S., the EU, and China, convened at Bletchley Park, UK, to discuss the risks posed by AI and to build regulatory frameworks for this novel technology. The inaugural session of the AI Safety Summit culminated in the joint signing of the Bletchley Declaration, which underscores the imperative of reining in unregulated AI development. The declaration also places significant emphasis on the collaborative identification of AI risks and the cultivation of a scientifically grounded comprehension of such risks. Additionally, it advocates for the formulation of risk-oriented policies, individually tailored to the distinct circumstances of each nation.

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See you next week!