FINTECH & CRYPTOASSETS NEWSLETTER
September to October 2020
BANCO DE MÉXICO PUBLISHED THE GENERAL PROVISIONS APPLICABLE TO THE ELECTRONIC ISSUANCE OF REPRESENTATIVE TITLES OF SECURITIES OBJECTED TO DEPOSIT IN INSTITUTIONS FOR THE DEPOSIT OF SECURITIES.
September 30, 2020
Central Bank of Mexico published Circular 37/2020 in the Official Gazette of the Federation, in order to make modifications to Circular 4/2019 (General provisions applicable to Credit Institutions and Financial Technology Institutions in operations made with virtual assets) due to the analysis of the comments that was made to them within the term that were submitted to public consultation, modifying Provision 11 of Chapter III of the same. The modification was regarding contracting with third parties. It specifies that the authorization of the Board of Directors refers to the administrative body of the institution itself and not to that of the third party with which it is intended to contract.
FATF PUBLISHES INDICATORS TO IDENTIFY SUSPICIOUS TRANSACTIONS WITH CRYPTOCURRENCY
By means of a new statement by the Financial Action Task Force (FATF), cryptocurrencies are considered highly used among criminals. With this premise, FATF issued new recommendations for the member countries of this group, so that these countries apply it to the Virtual Asset Service Providers (VASPs) that operate in their territory. Specifically, they pointed out what are the actions of cryptocurrency users in the VASPs that should trigger the alarms and notify the authorities. Some activities that “indicate a red flag” are:
(i) Unusual operations according to the customer’s history of operations.
(ii) Immediately transfer funds to multiple virtual asset service providers.
(iii) Several high-value transactions with one type of cryptocurrency in less than 24 hours.
(iv) Structuring transactions in small amounts and below record keeping or reporting thresholds.
(v) Make a cryptocurrency-fiat exchange with a potential loss without a logical commercial explanation.
(vi) Converting a large amount of one type of crypto asset into other types of Cryptoasset without a logical commercial explanation.
(vii) Incoming transactions from many unrelated wallets in relatively small amounts, with subsequent transfer to another wallet or exchange for fiat currency.
(viii) The fraud or irregularity in the identity now of identifying the client in a service provider.
(ix) If most of a client’s source of wealth derives from investments in virtual assets, ICOs, or fraudulent ICOs.
(x) Other red indicators are related to the geographical location of those who participate in the transactions, age, the origin of funds, the amount of usual funding and some recurring patterns.
For the moment, there is no resistance from large exchanges and virtual asset service providers on these recommendations, even some have started to implement them. Member countries must establish mechanisms to implement these indicators, if they can be implemented in their legal, and financial systems.
CENTRAL BANKS OF THE WORLD PUBLISHED A JOINT DOCUMENT ABOUT THE CBDC DIGITAL CURRENCIES ISSUED BY CENTRAL BANKS
The Bank for International Settlements (BIS) reported that a select group of Central Banks from around the world have jointly produced a document focused on central bank digital currencies. In particular, 7 central banks have prepared, together with the BIS, a report, entitled “Central bank digital currencies: founding principles and basic characteristics”, in which “they identify the founding principles necessary for any Central Bank Digital Currency” (“CBDC”) for its acronym in English (“Central Bank Digital Currency”) publicly available help central banks to meet their public policy objectives. It is worth mentioning the importance of this phenomenon, since these digital currencies will be valid as legal tender in those countries.
UNITED STATES OF AMERICA
KRAKEN BECOMES THE FIRST CRYPTOBANK OF ITS KIND IN THE USA.
International cryptocurrency exchange, Kraken, was granted permits by the state of Wyoming to become the first institution empowered to operate as a cryptocurrency bank in the country. According to an official communication from Kraken, it was established that this will allow those who use digital assets such as cryptocurrencies to have reliable financial services, consumer protection, and will allow businesses to have a safe way to store their digital assets. Specifically, Kraken Financial will allow Kraken clients to pay bills, deposit/receive salaries in cryptocurrencies, and even incorporate digital assets into investment portfolios and business operations. All this for US residents
FEDERAL BANKS ARE AUTHORIZED TO HOLD RESERVES OF STABLECOINS.
The United States Department of the Treasury, through the Office of the Comptroller of the Currency (OCC), U.S. federal banks now can provide services to cryptocurrency companies, specifically stablecoins operators. In detail, it is an authorization for national banks, and savings associations, to hold deposits or reserves to issuers of stablecoins. Also, the statement notes that stablecoins are cryptocurrencies backed by fiat money such as the United States dollar or another foreign currency.
CRYPTOCURRENCY LAW DRAFT.
The US Customs and Immigration Service (ICE) wants to automate the control of internal financial transactions, including bitcoin transactions, with the help of specialized software. ICE’s technical department has just submitted a request for information with which companies are expected to present solutions that will help them digitize existing transactions, as well as add a centralized accounting system. ICE’s goal is for this tool to automate the workflow associated with financial transactions. The agency expects the software to track bitcoin-related transfers, purchases, and expenses. Companies that wish to offer their software have until November 9 of this year to present their proposals.
PAYPAL WILL ALLOW THE USE OF CRYPTOCURRENCIES.
The New York State Department of Financial Services (NYDFS) has granted PayPal a one-of-a-kind conditional BitLicense (an authorization to operate as a cryptocurrency exchange). One of the conditions to obtain this license is to associate with another company that already has a BitLicense. Therefore, PayPal partnered with Paxos Trust Company. Starting in 2021, the more than 300 million users will be able to buy, hold and sell cryptocurrencies directly from their PayPal account. Initially, they plan to start with Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. For the time being, the service will be available to PayPal account holders in the US, with the possibility of expansion to international markets in the first half of 2021. As established by PayPal, cryptocurrencies will not initially be transacted as such, instead, at the time of transfer or payment, these will instantly be converted to fiat money (legal tender), and this will be transacted. In such conversions and transfers, neither users nor merchants will have additional fees for using cryptocurrencies. As it can be seen above, the user who has cryptocurrencies in his account does not own each one specifically but has certain rights over the global cryptocurrency account in the name of PayPal.
THE UNITED KINGDOM FINANCIAL CONDUCT AUTHORITY (FCA) PROHIBITED THE INVESTMENT IN CRYPTOCURRENCY DERIVATIVES TO RETAILERS.
The FCA prohibited the sale of derivatives (such as options, futures, and publicly traded notes) of cryptocurrencies to retail consumers, that is, to private clients who wish to invest. This applies to transferable crypto assets not regulated by companies operating in or from the UK. This regulatory measure will come into effect from January 6, 2021. Nevertheless, customers will be able to continue buying cryptocurrencies normally and directly. Even this rule does not affect those who already have investments of this type, it will only be limited to new investments.
The motivation behind this regulation was the possibility of serious harm for small investors, since, according to what the FCA established, cryptocurrency derivatives cannot be reliably valued by retail consumers. Likewise, the FCA went on to point out that the general public does not have a reliable basis of valuation, they cannot anticipate market abuses and financial crimes in secondary markets, as well as the threat of market volatility and lack of legitimate investment. For this, as estimated by the FCA, retail consumers will be able to save a total of 53 million pounds.
RUSSIA IMPOSES LIMITS ON THE PURCHASE OF DIGITAL ASSETS.
The Central Bank of Russia published on October 14, various proposals to regulate the acquisition of digital assets by unqualified investors. These proposals indicate that unqualified investors could buy up to 600,000.00 rubles in digital assets for one year (approximately 164,000.00 MXN or 7,500.00 USD). Nonetheless, qualified investors will not have to comply with this limit. Until October 27, this Central Bank will accept proposals and comments on the published restrictions.
It is important to note that, to be considered as a qualified investor, the Russian Central Bank evaluates the following criteria:
(i) have a net worth of not less than 6 million rubles (approximately 1,640,000.00 MXN or $74,500.00 USD);
(ii) have work experience in a financial organization for at least two years;
(iii) regularly trade large amounts of securities;
(iv) have a degree in economics.
CENTRAL BANK OF VENEZUELA ORDERS NATIONAL BANKS TO SUSPEND SERVICES AND PRODUCTS THAT INVOLVE PAYMENTS IN FOREIGN CURRENCIES
The Central Bank of Venezuela issued, to all non-banking institutions that operate in the country, a circular that orders that they immediately cease any product or service that they offer to their clients or users that has to do with accounts in foreign currency and the payment in foreign currency of goods and services in the territory of the Republic.
The reason was that no company has been authorized to operate as a Non-Bank Provider of Payment Services in foreign currency, therefore, no FinTech and/or non-bank companies can operate payments in foreign currency within the country.
VENEZUELA LEGALIZES AND INCENTIVES BITCOIN MINING.
The National Superintendency of Crypto Assets and Related Activities (SUNACRIP) of Venezuela, formalized the regulation of digital mining and associated processes. Everything related to the importation, marketing of mining equipment, its parts and pieces will be regulated. Likewise, regarding the equipment for this activity and the proper conditioning of the spaces that allow the accommodation of the necessary equipment to carry out this task will also be regulated. Similarly, the manufacture, assembly, repair, or improvements, if necessary, of the machinery that provides the digital mining service in the cloud is contemplated.
Likewise, the government announced that a “National Digital Mining Pool” will be created, an online platform that facilitates the grouping of digital mining machines or miners that, working together, are capable of accumulating high processing power. At the same time, they must agree to share the “reward” in proportion to the computing power provided.
Finally, those interested in engaging in activities inherent to “Digital Mining and associated processes” may process the due authorization through the Comprehensive Registry of Miners (RIM), a database that facilitates the delivery of the respective document through the web.
CONGRESS OF SPAIN APPROVES REGULATORY SANDBOX FOR INNOVATIONS IN FINANCIAL TECHNOLOGY.
The Bill for the Digital Transformation of the Financial System has been approved unanimously, with 37 favorable votes, by the Commission for Economic Affairs and Digital Transformation. This project contemplates the creation of a sandbox, or controlled testing space, to accompany the digital transformation of the financial system that will allow the implementation of technological innovation projects in the financial system with full accommodation in the legal and supervisory framework. For this, it establishes an appropriate legal environment and thus guarantees that the innovative process is carried out efficiently and safely for users.
GOVERNMENT OF SPAIN APPROVES ANTI-FRAUD LAW PROJECT THAT IMPLIES GREATER CONTROL OVER CRYPTOCURRENCY.
It is an anti-fraud bill that seeks to limit the use of cash and control technology firms, as well as have more control over cryptocurrencies. This project requires cryptocurrency owners to disclose their holdings and any recorded gains on the assets. Likewise, it will limit the cash payment for transactions between companies from 2,500 to 1,000 euros.
CENTRAL BANK OF SOUTH KOREA WILL TEST ITS CENTRAL CURRENCY IN 2021.
The South Korean Central Bank (BoK) intends to start testing the possible uses of its CBDC in 2021. The BoK wishes to study the practical distribution and circulation of its CBDC in the final part of the pilot program, which will consist of three steps.
The regulator has already analyzed the potential circulation process and discussed the design of the asset in the past. The BoK will also use Blockchain technology to track digital currency transactions. However, just because the bank is going to test the practical uses of its CBDC does not mean that the bank is ready for the public to launch it.
CENTRAL BANK OF THAILAND ISSUED THE WORLD’S FIRST BLOCKCHAIN-BASED GOVERNMENT BOND PLATFORM.
The Central Bank of Thailand announced the issuance of USD 1.6 billion in government bonds on the IBM Blockchain.
The entity ensures that it is the world’s first platform for issuing government savings bonds based on Blockchain using IBM’s Blockchain technology.
THE CENTRAL BANK OF CHINA WILL FORCE TO ACCEPT THE DIGITAL YUAN AS CURRENCY OF LEGAL TENDER.
The Central Bank of China, the People’s Bank of China intends to force acceptance of the digital yuan as legal tender once it passes the tests and is issued as a Central Bank Digital Currency (CBDC).
NIGERIA WILL REGULATE THE TRADING OF CRYPTOCURRENCY TO HAVE A FAIR AND EFFICIENT MARKET.
The intention of regulating the market for digital assets is not to hinder technology or slow down innovation, but to create regulations that promote ethical practices in a fair and efficient market. Investments in cryptocurrencies will be regulated when they are considered as securities transactions.
For more information on this or any related topic, please contact the members of our FinTech & Cryptoassets teams.
Diego Ramos Castillo. firstname.lastname@example.org
Antonio Casas Vessi. email@example.com
Rodolfo Ramos Ortiz. firstname.lastname@example.org
Arturo Canseco Álvarez. email@example.com
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 — Link to the FATF REPORT Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing: http://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf
 — Link to the official Kraken statement: https://blog.kraken.com/post/6241/kraken-wyoming-first-digital-asset-bank/
 — Link to the Interpretative Charter:: https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf