Australia and BIS address CBDCs; OCC, PCAOB and US Senators Address Crypto Risk; SEC, DOJ and USSS Continue Crypto Enforcement Actions | Baker Hostetler
Reserve Bank of Australia and BIS start work to promote CBDCs
Of Amos Kim
In a recent announcement, the Reserve Bank of Australia and the Digital Finance Cooperative Research Center (DFCRC) released details of an ongoing research project exploring the benefits of a central bank digital currency (CBDC) in Australia, including the proposed use cases and providers invited. to participate in a live pilot. According to the announcement, the pilot will involve a “limited scale pilot CBDC that is a true digital requirement of the Reserve Bank” and pilot participants will range “from smaller fintechs to large financial institutions.” A DFCRC program director said the pilot could cover a variety of issues that could be addressed by CBDC, “including some involving the use of CBDC for atomic settlement of transactions in tokenized assets.”
In another recent announcement, the Bank for International Settlements (BIS) Innovation Hub published a report on the results of Project Icebreaker, a collaboration between the BIS Innovation Hub, the Bank of Israel, Norges Bank and Sveriges Riksbank that seeks to advance the G20’s “priority to improve cross-border payments.” According to the report, Project Icebreaker focuses on digital central bank currencies (rCBDCs) and “explores a specific way to connect rCBDC systems with several additional features” to “promote simplicity and interoperability, reduce settlement risk, and promote competition and transparency for cross-border rCBDC payments .” Among other things, Project Icebreaker proposes an rCBDC model that seeks to eliminate time gaps between payment initiation and settlement “via an atomic payment-versus-payment (PvP) scheme using Hash Time Locked Contracts (HTLC),” allowing payers “to access competitive exchange rates regardless of the payment service provider, and “reduces the risk of insufficient liquidity.” The report makes the following key recommendations for central banks looking to implement a rCBDC for cross-border payments: (1) consider ways to incorporate contingent settlement, e.g., HTLC; (2) consider ways to ensure system availability and short response times 24/7/365 to maximize speed and minimize failed payments; (3) consider adopting current messaging and addressing standards and ensure flexibility in adopting future standards; (4) consider ways to provide immediate rCBDC liquidity for FX providers 24/7/365; and (5) promote transparent and competitive incentives for FX-l vendors.
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Acting Comptroller of the Currency and PCAOB Addresses Crypto Risk
Of Robert A. Musiala Jr.
This week, Acting Comptroller of the Currency Michael J. Hsu gave a speech titled “Trust and Global Banking: Lessons for Crypto.” In the speech, the Acting Comptroller drew parallels between the recent failure of the FTX exchange and the 1991 failure of the Bank of Credit and Commerce International (BCCI), “which failed in 1991 and led to significant changes in how global banks are supervised.” Acting Comptroller emphasized among others, the importance of global coordination in banking matters and the role of the Basel Committee on Banking Supervision (BCBS) in establishing such standards as articulated in the First, Second and Third Basel Accords, and more recently BCBS developed supervisory standards for crypto asset exposures.
In relation to the crypto markets, the acting comptroller said that while Satoshi Nakamoto’s bitcoin whitepaper is “elegant in its arguments”, in practice crypto has proven to be extraordinarily messy and complex. According to the Acting Comptroller, “Intermediaries are required for crypto to work at any scale.” Drawing parallels between the failures of BCCI and FTX, the acting comptroller noted that both “faced fragmented oversight.” lacked a “lead or ‘home'” regulator with the authority and responsibility to develop a consolidated and holistic view of the firms; operated across jurisdictions that lacked information-sharing frameworks; and “used multiple auditors to ensure that no one could have a holistic view of their firms.” According to the Acting Comptroller, “[a]As a result, BCCI and FTX were able to carry out and conceal fraudulent activity and operate with an astonishing lack of basic risk management and internal controls over an extended period.” In conclusion, the Acting Comptroller highlighted, among other things, the need for a “comprehensive global oversight and regulatory framework for crypto participants.”
In a related development, the Public Company Accounting and Oversight Board (PCAOB) this week issued an investor advisory addressing so-called “proof of reserve reports” (PoR reports). According to Investor Advisory, “Crypto entities may engage a service provider to issue a PoR report in an attempt to reassure customers in response to widespread concerns about, for example, the type of reserve holdings, or the security and availability of customers” digital assets in the event that any or all customers decide to withdraw their assets (eg if there is a run on a crypto exchange or stablecoin issuer).” Investor Advisory warned, among other things, that PoR engagements “are not subject to PCAOB auditing standards” and “are not subject to PCAOB inspection,” and PoR reports “provide no assurance that such reserves will be adequate as of the date of the PoR report , in the future, or that the customer’s assets will be protected.”
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Binance and Binance.US Face Inquiry from US Senators
Of Keith R. Murphy
According to recent reports and a letter published by the office of US Senator Elizabeth Warren, cryptocurrency exchange Binance and its US arm Binance.US are the subject of a broad request by US Senators Elizabeth Warren, Chris Van Hollen and Roger Marshall, MD, to hand over documents and provide answers regarding the companies’ balances, users, and policies and procedures, including with respect to the relationship between Binance and Binance.US. According to the letter, a related press release and related news reports, the request is based on growing concerns over the finances, risk management and regulatory compliance of the two companies and other related entities. As stated in the letter, the senators claim that “the companies’ apparent attempts to evade the enforcement of anti-money laundering laws, securities laws, information reporting requirements and other financial regulations cast serious doubt on the stability and legitimacy of Binance and its related entities and your commitment to your customers.”
The letter notes that Binance is facing investigations on several fronts, including evasion of criminal sanctions, money laundering conspiracy, unlicensed money transmission, questions about the company’s financial health and increasing scrutiny of an opaque corporate structure, and states that “Binance and its related entities have evaded regulators intentionally, moved assets to criminals and sanctions evaders, and concealed basic financial information from customers and the public.” One of the allegations raised in the letter is that “Binance has intentionally allowed US-based users to illegally access and trade unregulated products on the main exchange,” which is not licensed to operate in the US. The senators further raise concerns in the letter about the security of clients’ assets and the potential impact of the companies’ activities on the stability of the cryptocurrency market and the broader financial market. According to a report, Binance responded that there are significant misconceptions about their regulatory trading and that the companies will respond to the information requests. The letter asks for a response by 16 . March 2023.
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The SEC and DOJ continue enforcement actions targeting crypto-fraud schemes
Of Joanna F. Wasick
On Monday, the US Securities and Exchange Commission (SEC) announced that it had filed an emergency action and obtained an asset freeze, appointment of a receiver and other relief against Miami-based investment adviser BK Coin Management LLC (BKCoin) and one of its principals, Kevin Kang , in connection with a four-year cryptoasset fraud scheme, in which BKCoin raised approximately $100 million from at least 55 investors. According to the SEC’s complaint, BKCoin and Kang told investors that their money would be used to trade cryptoassets and represented that BKCoin would generate returns for investors through separately managed accounts and private funds. Instead, the SEC alleges, the defendants ignored the fund structure, commingled investor assets and used more than $3.6 million to make Ponzi-like payments. The complaint further alleges that Kang misappropriated at least $371,000 of investor money for personal use.
On Wednesday, the US Department of Justice announced the guilty indictments of six people for their roles in an internationally coordinated fraud and money laundering ring that tricked individuals into investing in AirBit Club, an alleged cryptocurrency mining and trading company. As part of their guilty pleas, the defendants have collectively been ordered to forfeit their fraudulent proceeds consisting of US fiat currency, bitcoin and real estate worth up to $100 million. A US attorney stated: “The defendants took advantage of the growing hype around cryptocurrency to con unsuspecting victims around the world out of millions of dollars with false promises that their money was invested in cryptocurrency trading and mining.”
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Bitcoin ATM operators arrested, charged with criminal violations
Of Lauren Bass
According to a press release from the US Secret Service (USSS), three people were recently arrested for illegally owning and operating bitcoin kiosks (ATMs) across Ohio without a money transfer license. The individuals, along with their business entity, were reportedly indicted on charges including conspiracy, money laundering, receiving stolen property and engaging in a pattern of corrupt activity. Reports indicate that in connection with these arrests, the USSS’ Cyber Fraud and Money Laundering Task Force seized over 50 bitcoin ATMs across Ohio.
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